Taiwan Today

Two local online gaming companies have found that selling virtual accessories in virtual malls generates real cash.

Last May, as students were buckling down to study for final exams, Taiwan’s TV channels were inundated with commercials for computer games. Typically, the art direction was a barebones affair. Most were simply video grabs of a PC screen with a game in play, followed by its name and release date. In some, human actors donned ancient Chinese costumes, sword at the ready. In others, cloyingly cute pop stars, both real and animated, invited viewers to get up and dance or sing. The barrage lasted well into summer.

Equally curious was the roster of advertisers. Missing were names like Electronic Arts, the US behemoth that generates US$4 billion in annual revenues from games such as Need for Speed, Medal of Honor and The Sims. Also oddly absent was the console game triumvirate—Sony, maker of PlayStation, Nintendo with its Wii and Microsoft with its Xbox—which earns billions with their vast game libraries.

Instead, last summer’s advertising blitz was led by Taiwan game publishers seldom heard of outside of Asia, including industry leaders SoftWorld and Gamania, along with their numerous subsidiaries. Even more surprising was the fact that these Taiwan companies were booking expensive TV time to promote games they were giving away. This business model, known as free-to-play, came to Taiwan from South Korea around 2004 and has slowly but surely become the income mainstay for local game publishers.

How do free-to-play games generate income? First, most of them are MMOGs—massively multiplayer online games—built around an evolving novel-length story that offers participants a seemingly endless playing field. Most are role-playing games, dubbed MMORPGs in industry lingo, with users adopting avatars. In a typical session, informal teams of users embark upon a quest, which might consist of capturing a castle or slaying a troublesome demon in an MMORPG. Or, if the game belongs to the casual genre, a handful of players might duel at poker, mahjong or karaoke. Users download games for no charge, or purchase them for a nominal NT$40 (US$1.21) at one of the island’s ubiquitous convenience stores.

For users, all of this is essentially free. Yet free-to-play games do generate revenue by hosting virtual malls that sell virtual items. For a fantasy MMORPG that might mean tools that boost a player’s power—a deadly sword in a marital arts game, for example—while for casual games it could be fun stuff, like a cute disco outfit for a dance game avatar. Prices are as low as NT$10 (US$0.30), yet the tiny virtual purchases add up to real money.

“With the free-to-play business model, hardcore gamers spend more money than if they purchased the software outright,” says Luke Hsieh, an analyst at the government-run Market Intelligence & Consulting Institute (MIC).

Hsieh forecasts revenue of NT$11.6 billion (US$351.5 million) for 2009 for Taiwan’s online game industry. Income from free-to-play games has already surpassed annual revenue earned in Taiwan by “shrink-wrapped” and console games, which in 2009 had sales of NT$10.8 billion (US$327.3 million)—NT$7.3 billion (US$221.2 million) for hardware and NT$3.5 billion (US$106.1 million) for game software—according to Euromonitor, a global market researcher.

Last summer’s advertising blitz affirmed the maturity of the free-to-play business model. Taiwan’s online game publishers were earning big bucks one micro-payment at a time and had reached a level where they could afford old-fashioned TV commercials.

At a time when most industries are bogged down in the worst recession in memory, Taiwan’s two largest game publishers—SoftWorld and Gamania—are registering double-digit sales growth. The financial news services, struggling to explain how local consumers could increase spending on entertainment during bleak economic times, postulated in print that the unemployed were hiding in their homes and consoling themselves with free online games.

“Nonsense,” says William Chen, chief strategy officer of Gamania Global. “What’s the correlation? Is there even evidence that such a correlation exists?”

What is certain, however, is that Gamania played a key role in bringing Korean gaming culture to Taiwan. Founded in 1995 as Fullsoft, it was a modest-sized game developer that, like its rivals, initially thought of games in terms of selling software CDs. One of its first hit titles was Convenience Store, and it had good sales in South Korea.

“Our founder, Albert Liu, had met the owner of NCSoft, which today is Korea’s biggest game company, but was then also very small,” Chen says. “Both Albert and NCSoft’s founder believed online games were the future. NCSoft was releasing a new game, and Albert brought it to Taiwan. It was called Lineage.”

Lineage was an MMORPG, and it would make both companies rich. While Lineage was not the first online game to be marketed in Taiwan, it was the first online game to be given away for free, with users charged a monthly subscription fee instead. “In the old business model, the CD was valuable, and customers paid for it,” Chen says. “But we changed that. We gave away tons of free CDs, so more people could access the server.”

Lineage was an overnight sensation in Korea, and Liu hoped to replicate that success in Taiwan. To do that, Liu gambled everything, pouring money into what company legend purports to have been the largest server farm in Asia to handle the hundreds of thousands of gamers expected to play Lineage concurrently online.

“Service quality would depend on how well the IDC—the Internet Data Center—handled gamer traffic,” Chen says. “Albert had talked with Chunghwa Telecom, but it wasn’t familiar with this kind of service. Albert decided to handle this in-house.”

Sudden Crash

Prior to the launch, Fullsoft rebranded itself as Gamania, and when Lineage finally went live in July 2000, the entire staff crammed into the server room. “A PC screen showed how many users had logged on, and the number climbed and climbed, then suddenly crashed,” Chen says. “I’m told that people started crying. More than NT$200 million (US$6.1 million) had been spent on the IDC, not to mention the marketing dollars. If Lineage failed, then Gamania failed.”

But fate was kind and the server problems were soon resolved. As it had in Korea, Lineage took Taiwan by storm. Chen had not yet joined Gamania at the time, but he recalls the buzz. “If you went to an Internet café at that time, no other game was being played,” he says. “Walking down the street, you would hear people at noodle stands talking about it.”

Industry statistics tell the story. In 1999, the year before Lineage’s launch, online games generated only NT$90 million (US$2.7 million) versus NT$3.4 billion (US$103 million) for traditional PC games, console games excluded, according to MIC. By 2004, however, online games had earned NT$7.2 billion (US$218.2 million) versus NT$1.8 billion (US$54.5 million) for PC games. With Lineage, Gamania ruled the roost, taking 40 percent of online revenue.

For Lineage, monthly subscriptions still generated the cash, but in 2005 Gamania licensed a new game, Maple Story, from Nexon of South Korea. Maple Story was neither a typical MMORPG, nor was it a classic casual game. Instead it was a hybrid, and appealed to both males and females, young and old—a much wider gamer demographic. Maple Story would be given away for free, with Gamania forgoing even subscription fees for the first time. “Maple Story wasn’t the first free-to-play online game published in Taiwan, but it was the first to demonstrate that this business model could produce sustainable monthly income,” Chen says.

Lineage and Maple Story remain Gamania’s flagship titles today, but its current catalog includes 17 MMOGs and 16 casual games. Company founder Albert Liu’s hunch has proven correct—in Taiwan, South Korea, mainland China and other Asian markets, online is the future of gaming.

SoftWorld, which was founded in Kaohsiung in 1983 by Wang Chin-po and is the oldest of Taiwan’s surviving PC game companies, would counter the challenge posed by Gamania and online gaming by reinventing itself. “We watched Gamania’s rise and we realized the potential,” says Chung Hsing-po, vice president and chief finance officer of SoftWorld. “In 2000 and 2001, everyone was jumping into online games. Fifty or 60 licensed titles were trying to topple Lineage.”

In response, SoftWorld acquired a 100-percent stake in a small Taiwan game developer, Chinese Gamer, which was founded and led by the former development team who a decade earlier created SoftWorld’s—and Taiwan’s—most popular PC game of all time, Romance of the Three Kingdoms. “This PC game was the first to be created by a Chinese development team,” Chung says. “SoftWorld created it in-house and released it in 1990. Before that SoftWorld had licensed and published games from the West, but had always thought they fell short of local tastes.”

In 2000, although SoftWorld’s annual sales had hit NT$975 million (US$29.5 million), the company decided to task its former development stars with the chore of developing an online game that was entirely new, but would bear the name of its old hit. “The idea was that local development would sell games,” Chung says. Romance of the Three Kingdoms Online flopped, however.

Within a year, Chinese Gamer did manage to release an online hit, this time named after its popular PC game series, JinYung. The problem was, however, that Chinese Gamer could only produce one game a year, while Taiwan was being inundated with licensed online titles.

This led to SoftWorld establishing Game Flier in 2003, a company that would license foreign titles, run their backend operations and manage their servers and customer service. “Lineage and JinYung were the two big games at the time,” Chung says, “the first being a magical fantasy and the other Chinese sword fighting and chivalry.” So Game Flier licensed something fresh, Ragnarok Online (RO), a game loosely based on Norse mythology that was developed, oddly enough, by Gravity of South Korea. “RO was easy to play, and appealed to both males and females,” Chung says. “Peak play topped 300,000 concurrent users.”

In subsidiaries Chinese Gamer and Game Flier, SoftWorld had what it needed to compete in the online game world, while its two decades of experience in PC games gave the parent company a deep understanding of Taiwan’s retail patterns. This paid off handsomely when Blizzard Entertainment came to Taiwan looking for a partner for its global online sensation, World of Warcraft (WoW).

“Every company wanted to be Blizzard’s partner,” Chung recalls. “But by 2005, the market had matured. Earlier, when Lineage had launched, the challenges were technical, and Lineage totally dominated until we launched RO. But when WoW arrived there were entrenched online games in all genres—Western fantasy, Taiwan-developed Chinese chivalry, casual games, Korean and Japanese games.”

In seeking a partner, Blizzard could set terms for licensing fees, but it was also concerned about scalability. WoW would need support for big numbers. “This eliminated most potential partners,” Chung says. “Blizzard also wanted a separate, dedicated company for WoW. For that, we established Game First, and we put a lot of money into it. But we did the right thing. Within the Blizzard family, Game First has often ranked first in customer service.”

Today, WoW remains the world’s top online game. In Taiwan, WoW is popular enough to demand monthly subscriptions, but few other games have such clout. “In 2005, the shift began towards free-to-play, and that is where the market is headed,” Chung says.

Taiwan’s game market has matured, which is why so much is being spent on offline advertising for online games. SoftWorld, Gamania and dozens of smaller companies continue to turn out new games every month, and the advertising battle last summer was really an indicator of their contest for market share.

In the late 1980s, SoftWorld founder Wang Chin-po perceived the shortcomings of imported Western games in the Taiwan market and decided that the future lay in locally developed titles. In the late 1990s, Gamania founder Albert Liu saw ever-rising household broadband penetration and intuited that online games would be the next big thing. Now, at the beginning of 2010, both company leaders have proven prescient, as they accurately predicted where the market would go and then figured out how to profit from it. What neither may have seen coming, however, was that their companies would someday earn a fortune by giving away games for free.      

Glenn Smith is a freelance writer based in Taipei.

Two Professors Look at Taiwan’s Gaming Culture

What secrets lurk in the hive mind of Taiwan’s gamers? What motivates them? Two people who have pondered such questions are National Taiwan University professor of sociology Holin Lin and National Chiao Tung University professor of computer science C.T. Sun.

TR: What prompted the two of you to collaborate in gaming research?

Lin: “Originally we had our own fields of study, and digital games weren’t part of it at all. Back in the 1990s, MUDs—short for a multiple-user dungeon game—were popular and we thought a MUD could be designed to allow students to understand gender inequality.

So with the help of some of Sun’s students, we created a MUD that modeled Taiwan society, incorporating parameters like parents investing 60 percent of their income in a son’s education, but only half that amount for a daughter’s. But the effort failed because players didn’t want to participate in an unfair game.

Sun: The male players who were randomly assigned female game roles would commit “suicide” in the hope of restarting the game as a male.

TR: What qualities make some games so popular?

Sun: The game publishers know the formula. First, you need a close-knit community to make a game “sticky,” so the question becomes: How do you encourage a community to “spontaneously” come to life and afterwards how do you maintain it? For free-to-play games, everyone tries out new games, but most quit after a month.

Lin: It’s no accident that online games are difficult to play alone, as most tasks require more than one person. To accomplish this, players band together as groups. These groups must have players with the right combination of occupations, skills and talents.

TR: Is this just another way to say the games are addictive?

Lin: Not the game … the friendships. No one becomes addicted to games. They are addicted to their friends.

You will never see this reported in the media, and that is something that dumbfounds us. All you read about is how games diminish one’s life … how gamers get bad grades, perform poorly at work … But with online games, the game isn’t the entirety of the experience. During play gamers chat. One might say, “My girlfriend won’t talk to me.” Another will ask, “What did you do wrong?” They will discuss possible remedies. Or if someone says “I have a big test tomorrow,” the others will tell her to quit playing and study.

TR: Some players race to be the first to master a game and then post write-ups of clues and tips called “walk-throughs.” What motivates gamers to do this?

Sun: We call this tip-sharing. On the surface, this appears purely altruistic, but actually there are three categories of behavior: pure altruism, reciprocal exchange and prestige. The last category—players laboring in order to earn recognition—explains this behavior better than altruism.

The game format influences this behavior. When players accomplish something in an online game, it is witnessed by other players. But console games are played alone, with no audience to witness a gaming achievement. An effective way to advertise one’s achievement [for console players] is to write a walkthrough and post it on a game forum so that the gaming community acknowledges the feat.

TR: Do young people acquire valuable skills from gaming?

Lin: If you ask me if specific game knowledge can be transferred to other skills, I’d say, “No, I don’t think so.” But online games teach kids multitasking skills. They also learn how to find help. With online forums, they learn there is a particular place for every kind of information. If you have this mentality, you can apply it later in life.

Studying digital games has really given us insight into younger generations. How they think and act is not much different from our generation. They need a group so that there is someone to listen to them.

—Glenn Smith

Copyright © 2010 by Glenn Smith