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1 To purchase this report or receive an excerpt, please or call (+1) A Pearl Research Exclusive Report China: Games Market/Games Development and Outsourcing Ver KD0406

2 Free Mailing List For free research updates, please sign up for our newsletter at pearlresearch.com or send an to Copyright and Legal Notice This report is intended only for the person or entity that have purchased this report and signed a service agreement with Pearl Research. Any review, retransmission, dissemination or other use of this information by persons or entities other than Pearl Research's paying subscribers is prohibited. Redistributing and unauthorized reproduction of this document is considered breach of copyright and in violation of the terms and conditions set forth in the licensing agreement with Pearl Research. About Pearl Research Based in San Francisco, Pearl Research is a business intelligence and consulting firm that specializes in the interactive entertainment and games industry. The company publishes in-depth market research reports in addition to providing customized research and consulting services. For more information, please visit research@pearlresearch.com Phone: (+1) Other Available Studies Online Games Market in India Games Market in Taiwan - Q Games Market in Korea This exclusive research document by Pearl Research provides an analysis of the games market in South Korea (online, console, packaged PC and mobile) and includes: An executive summary highlighting major takeaways and key points Socio-economic overview including unique characteristics of South Korean society Robust discussion of inhibitors and drivers to market growth in the games industry Internet cafes and their role in the online games market Key metrics including top titles and publisher market share Examination of games currently in the market Online games pricing strategy Billing and payment methods Language and localization Profiles of key players Conclusions PearlResearch.com Ph:

3 TABLE OF CONTENTS METHODOLOGY GLOSSARY OF TERMS AND ABBREVIATIONS VII VIII I. EXECUTIVE SUMMARY 1 II. SOCIO-ECONOMIC OVERVIEW 3 ECONOMY 3 POPULATION 3 Per Capita Income 4 REGIONAL DIFFERENCES 5 ONE-CHILD POLICY 6 GAMING CENTERS 7 UNIQUE CHARACTERISTICS OF CHINESE SOCIETY 7 GUANXI 8 FLOATING OF THE YUAN 8 TRANSPARENCY AND CORRUPTION 9 III. PC HARDWARE, INTERNET AND BROADBAND 11 PC HARDWARE 11 INTERNET AND BROADBAND 13 Speed and Price of Broadband 14 The Great Firewall of China 14 IV. INTERNET CAFES 16 V. GAMES MARKET OVERVIEW 19 MARKET FORECASTS 19 VI. ONLINE GAMES MARKET 21 DEFINING ONLINE GAMES 21 ONLINE GAMES MARKET FORECASTS 23 DRIVERS TO GROWTH 26 INHIBITORS TO GROWTH 28 UNIQUE CHARACTERISTICS OF ONLINE GAMES 30 ROLE OF THE GAME OPERATOR 32 TOP GAME OPERATORS 33 TOP ONLINE GAMES 35 First versus Second-tier Titles 36 Internally versus Externally Produced titles 37 Games Market/Games Development in China 1/21/2007 8:17 PM i

4 MARKETING OF ONLINE GAMES 39 MMORPG MARKET 40 CASUAL GAMES 41 Casual Games Revenue Models 42 VII. PROFILES OF SELECT ONLINE GAMES 43 FANTASY WESTWARD JOURNEY 43 WORLD OF WARCRAFT 44 Low cost to play WoW 44 Rapid Adoption of WoW 44 Growth Potential of WOW 45 The9.com s Royalty Obligations 45 YULGANG 46 CDC Games 46 ZHENGTU 46 ZT Network 47 FREESTYLE 47 T2CN 47 AUDITION 48 9you 48 VIII. BILLING AND PAYMENT METHODS 50 IX. ONLINE GAMER CONSUMER SURVEY 53 X. GOVERNMENT REGULATION 55 Government Agencies Involved in Regulating Games 56 Fatigue System 58 XI. SOFTWARE PIRACY 59 Forms of Piracy 59 Factors Contributing to Piracy 60 Strategies to Counter Piracy 62 XII. CONSOLE AND HANDHELD MARKET 63 CONSOLE MARKET OVERVIEW AND FORECASTS 63 Gray versus Legitimate Market 64 Inhibitors 65 Drivers 66 Sony 67 Microsoft 68 Nintendo 69 Seasonality 70 Games Market/Games Development in China 1/21/2007 8:17 PM ii

5 Console Demographics 70 Conclusions 70 XIII. PACKAGED PC GAMES MARKET 71 PC GAMES OVERVIEW AND FORECASTS 71 RETAIL PRICES 73 PUBLISHERS 73 XIV. CHINESE DOMESTIC GAMES MARKET: CONCLUSIONS AND STRATEGIC RECOMMENDATIONS 74 Conclusions 76 XV. GAME DEVELOPMENT/OUTSOURCING TO CHINA 77 EXECUTIVE SUMMARY 77 WHAT IS OUTSOURCING? 78 REASONS FOR OUTSOURCING TO CHINA 78 Need for lower costs 78 Search for talent 79 Resource flexibility 80 Competition from Other Regions 81 WHAT IS BEING OUTSOURCED? 82 Art 82 Testing and Quality Assurance 83 CURRENT MARKET SITUATION - OUTSOURCING IN CHINA 84 Consolidation in the Future 85 International Publishers Expanding to China 85 STRENGTHS: OUTSOURCING TO CHINA 88 WEAKNESSES: OUTSOURCING TO CHINA 91 OUTSOURCING CONSIDERATIONS 99 Process and internal management 99 Morale 99 Security /Asset management 99 SELECTING AN OUTSOURCING PARTNER 102 XVI. GAME DEVELOPMENT/OUTSOURCING: CONCLUSIONS AND STRATEGIC RECOMMENDATIONS 104 XVII. COMPANY PROFILES Games Market/Games Development in China 1/21/2007 8:17 PM iii

6 TABLE OF FIGURES Figure 1: Chinese Games Market Forecasts 2006 to 2010 Data Table, $m...1 Figure 2: Key Country Metrics...3 Figure 3: China s Population by Age Group...4 Figure 4: Map of China s Provinces...5 Figure 5: Major Cities in China (Population in millions)...7 Figure 6: Number of PCs in Use - Top 7 Countries...11 Figure 7: Budget for New Desktop PC Purchase...12 Figure 8: Number of Broadband and Dial-Up Connections in China...13 Figure 9: Reasons to Use the Internet...13 Figure 10: Age of Internet Users...14 Figure 11: Activities at Internet Cafes...16 Figure 12: Location for online gaming (multiple-choice)...16 Figure 13: Age of Chinese Internet Café Users...17 Figure 14: Most Installed Online Games at Internet Cafes...18 Figure 15: Number of PCs at Internet Cafes...18 Figure 16: Chinese Games Market Forecasts 2006 to 2010 Graph, $m...19 Figure 17: Chinese Games Market Forecasts 2006 to 2010 Data Table, $m...19 Figure 18: Chinese Games Market by Segment 2006, $m...20 Figure 19: Tencent s Web site Screenshot...21 Figure 20: Matrix Comparing Casual and MMORPG Games in China...22 Figure 21: Online Games Market Forecast Graph, $m...23 Figure 22: Online Games Market Forecast Data Table, $m...23 Figure 23: Legend of Mir screenshot...24 Figure 24: Advertisement for Pop Kart (Kart Rider)...25 Figure 25: Online Publisher Market Share November Figure 26: Top Online Game Publishers...33 Figure 27: Select Top Online Games, November Figure 28: Most Anticipated Online Games (in descending order)...35 Figure 29: Advertisements for Zhengtu...36 Figure 30: Screenshots from Perfect World s MMORPG...36 Figure 31: MMORPG Market Share by Publishers, November Figure 32: O2jam advertisements...41 Figure 33: Favorite genre for online games (multiple-choice)...41 Figure 34: Logo for Fantasy Westward Journey...43 Figure 35: Netease Fantasy Westward Journey screenshot...43 Figure 36: Photos from The9 s WoW promotional events...44 Figure 37: Characters from CDC Games Yulgang...46 Figure 38: Zhengtu Screenshots...47 Figure 39: Freestyle Screenshot...48 Figure 40: Audition Screenshots...49 Figure 41: Examples of prepaid cards...50 Figure 42: Shanda s Distribution Channel for Prepaid Cards Figure 43: Usual place for purchasing online games credits (multiple-choice)...51 Figure 44: Percentage of games that first started playing online games in a given year 53 Games Market/Games Development in China 1/21/2007 8:17 PM v

7 Figure 45: Main reason for playing online games (multiple-choice answers were acceptable)...53 Figure 46: Main factors in choosing online games (multiple-choice answers were acceptable)...54 Figure 47: Reason for quitting online gaming (multiple-choice answers were acceptable)...54 Figure 48: Console Ownership Rates Figure 49: Console Projections...64 Figure 50: Sony s booth at the ChinaJoy show...68 Figure 51: Ad for Nintendo DS...69 Figure 52: Packaged PC Games Forecasts 2006 to 2010 (in $m)...71 Figure 53: Next-generation Console Photos...79 Figure 54: Comparison of Salaries, US versus China...88 Figure 55: Characters from Yulgang, the most popular game China.com offers Figure 56: Logos for three of NetEase s MMORPGs Westward Journey Online II, Fantasy Westward Journey, and Fly for Fun Figure 57: NetEase s Online Game Service Revenue from Q Q Figure 58: EZ pod and EZ Mini from Shanda Figure 59: Shanda Online Game Net Revenues from Figure 60: Sina Mobile Games Figure 61: Sohu s Knight Online Logo and Screenshot Figure 62: Tencent Penguin Mascot Figure 63: Characters from The 9 s in-house developed Joyful Journey West Figure 64: The9 Limited s Net Income from Figure 65: Online Game Service Revenues from Q Q Games Market/Games Development in China 1/21/2007 8:17 PM vi