The online gaming business is now becoming the major profit source for China's leading online portals such as NetEase and Sohu. Last year, NetEase's total revenue reached $440 million, 80 percent of which came from its online gaming business.

While people like Zhou choose to play video games at home, many gamers prefer the Internet cafes where players can socialize and compete with their friends.

A typical Internet cafe in China could have 50 to 200 computers in use at the same time. In some rural areas and smaller cities where home PCs are not as common as they are in cities such as Beijing and Shanghai, Internet cafes may provide the only Internet access for gamers.

China's Internet cafe industry, representing a US$20 billion market, is becoming an important revenue source for Chinese online game operators, who generate approximately 40 percent of their total revenue through it, according to a recent report by market research firm iResearch.

"As video game publishers look to break into and successfully compete in the burgeoning Chinese market, it is critical that they understand the underlying consumer behavior and how Internet cafes are a critical component of China's online game market," said Lisa Cosmas Hanson, the managing partner of Niko Partners, a consultancy firm providing market intelligence on China's video game industry.

The potential of the Chinese market lies in its fast-growing consumer base. The growth of online game subscribers in China is now matching the growth of the Internet and mobile subscriber markets.

The number of online gamers in China totaled 49.36 million last year, an increase of 22.9 percent from the previous year. The number is expected to grow to 94.53 million by 2013, with industry sales revenue hitting US$5.85 billion, according to a report by research firm IDC and the game committee managed by China's Publishers Association.

Some Chinese game companies are also seeking to further broaden the market by introducing games that appeal to women, parents and middle-aged players, who are typically resistant to their allure.

With a share of 27 percent and rising, China is currently the world's second largest online gaming market after the US, and is likely to overtake it soon, according to a recent report from iResearch.

The report predicted that the Chinese online market would be worth more than US$10 billion by 2012, which would account for almost half of the global market by then.

While the home market is growing at a fast pace, some Chinese gaming companies are expanding into foreign markets. Perfect World, a Beijing-based online gaming operator, and one of the largest game exporters, set up a subsidiary in North America last April to better understand the local market and further intensify its overseas expansion.

The company's exports for the first three quarters of 2008 amounted to US$19 million, nearly doubling export revenue compared with the same period the previous year.

Last year, a total of 33 online games, developed by 15 Chinese companies, were exported to 40 overseas markets, generating an income of US$70.74 million, a 30 percent increase from the previous year. The export volume of China's original online gaming programs is likely to exceed $100 million this year.

But one problem that faces the industry is polarization among domestic game operators. On the one hand, led by a few leading game companies, the industry as a whole maintains a high-speed growth of 50 percent year-on-year. On the other hand, 70 percent of companies are losing money.

"The negative impact of the financial crisis on venture capital investment and bank loans has resulted in great financial difficulties for many small and medium-sized companies," said Qiu Bojun, CEO of Kingsoft.

"The online game industry will undergo a revolution soon."

The fact that the online gaming industry is technology intensive with high added-value products and relatively low energy consumption has attracted many companies into the business in recent years. But a lack of innovation and research and development is problematic and holding it back, analysts said.

"Some companies entered the industry just to make a quick buck," said Xie Wen, an Internet analyst in Beijing. "Therefore you see a lot of cloning and repetition in the theme and content of games."

Chinese gaming companies also need to reduce their reliance on the licensing of foreign online games as their main source of income and focus on producing their own high quality games, experts said.

"They have to learn to walk on two legs - licensing and research and development - in order to maintain the current high-speed growth," said Wu Jun, vice-president of 9you, a leading game developer in China.

(China Daily May 25, 2009)