China New Culture Business Brief

How to dominate China Next Generation New Culture Business ?

HUGE OPPORTUNITIES IN CHINA KIDS ENTERTAINMENT BUSINESS INDUSTRY.

There is a huge growth in the Chinese kids entertainment and culture industry involving animations, toy, children clothing and online games. A selected handful of companies that understand this industry had been steadily growing China next generation kids companies on the same path as Disney, Nickelodeon, Cartoon Network, Hasbro, Mattel, Bandai and Mega Bloks. In 2009 Guangdong Alpha Animations (*SHE 002292) successfully listed on the Shenzhen GEM board and raised RMB 860 million, Alpha immediately acquire 60% stake in Guangdong JiaJia cartoon channel for RMB 90 million. Following Alpha in 2010 3 more toys companies got IPO on the Shenzhen board – XingHui Auto (*SHE 300043), Goldlok Toys (*SHE 002348) and Guangdong Huawei (*SHE 002502).

There is a huge opportunity in China as well as worldwide for Chinese toys companies to grow. Taomee a kids virtual world and online games company in Shanghai will be making an impressive USD 1 billion IPO on NASDAQ in early 2011. Taomee had proven that the kids online space in China is indeed a very lucrative market space. In next 2 years we shall see more kids companies in China getting IPO and a lot of M&A (mergers and acquisition) will be happening within China and probable also outside of China.

LET’S PEAK INTO CHINA TOYS COMPANIES.

Below are 4 listed toys companies on Shenzhen GEM board.

Company 2009 Revenues Market Cap Remarks

ALPHA
600 million
PE : 61
90% of revenues – China
10% of revenues - International

XINGHUI AUTO
250 million
PE :
RMB 3,000,000,000
90% of revenues – International
10% of revenues - China

GOLDLOK TOYS
300 million
PE : 21
Raised RMB 800 million
90% of revenues – International
10% of revenues - China

GUANGDONG HUAWEI
300 million
Raising RMB 207 million
15% of revenues – China
85% of revenues - International

o Xinghui Auto Model Co.,Ltd. is principally engaged in the research, development, production and sale of model cars. The Company's model cars include static model cars and dynamic model cars. The Company's model car series include BMW X5, Benz GL-CLASS, Nissan 350Z, Lexus, Hummer, Lincoln, Land Rover, Mini Cooper, Lamborghini and Fiat, among others.

o Goldlok Toys Holdings (GuangDong) Co., Ltd. is principally engaged in research, development, manufacture and distribution of electronic and electrical plastic toys. The Company’s major products include electric trains, remote control simulated planes, robot toys, electrical automobile toys, dolls and magnetic word pads for learning, among others. The Company also
involves in trading business. It distributes its products in domestic and overseas markets, such as the United States, Latin America, European Union (EU) and other Asian regions.

From the previous report *CHINA TOYS AND ANIMATIONS INDUSTRY 2010 and from the above sales we can see that China still have much room to grow for the local market. 90% of ALPHA sales are from the local Chinese market and this year ALPHA is expected to pass RMB 800 million in sales. The business model of ALPHA is simply – using animations to create brands and characters then use these mechanics to sell toys. The gross margin in toys range between 40% - 45% makes it an impressive business to be in.

International Toys Companies 2009 Revenues Company 2009 Revenues *USD

MEGA BLOKS
340 million

WALT DISNEY
36.1 billion

MATTEL
5.4 billion

HASBRO
4.07 billion

Chinese company like ALPHA is learning the trick of the industry quick. Building key brands and characters via animations, setting new standards in the Chinese animation quality allows ALPHA to move into new markets internationally. In the next 3 years Chinese animations will be on par with Korea and many western animation studios, if not already !

THE KIDS BUSINESS MODEL.

If the formula of copying the west is right to get huge success in China such as the case of Baidu (*Google), Sina (*Yahoo), Taobao (*EBay) and QQ (*ICQ) then let’s look at Disney, Nickelodeon and Cartoon Network business segments:

*US top cartoon company business segments are almost identical.
Related to the China situation would be the following sectors:

a.) Animations.
b.) Toys.
c.) Kids Portal.
d.) Kids virtual worlds and online games.

If we study closely on the models and key business sectors we will see similarities to the current Chinese animations and culture business development especially for companies that have grasp the know-how and understanding. Notice that in the kids space there is no escaping – animations + licensing + toys + kids online games as key sectors. In fact these are the segments that Disney, Nickelodeon and Cartoon Network specifically own either via acquisition or as key internal division.

CHINA COPY THE WEST KEY STRATEGY FOR TOYS

Hasbro *BEYBLADE toys is supported by BEYBLADE V-FORCE animation series. In China TEENBO and ALPHA had done similar “GYRO” toys and launch its TV animation series as well in 2008. TEENBO ‘Gyro’ toy is a big winner with sales of above RMB 100 million. However we can’t say that China copies the product as ‘GYRO’ is a traditional toy just like ‘YoYo’ and there are many toys companies that produces ‘YoYo’ toys worldwide. MEGA BLOKS have a similar popular ‘GYRO’ toy called – BATTLE STRIKERS too.
The most important element here to learn is the know-how of how to design a ‘Brand’ and ‘Characters’ that kids can relate towards and purchase the toys. China, Japan, Korea and the West had done so via animations specifically designed to sell toys, we call these animations – Product Animation. Japan was
the innovator of this concept, super popular GUNDAM was the best example of “Product Based Animation” where the animation is written and produce specifically to sell and license products. Today Chinese companies like ALPHA, LINGDONG, TEENBO and a few others had mastered this formula for the Chinese market.

CHINESE SUPER HEROES AND ICONS

“Pleasant Goat and Big Big Wolf” is the first of many to come locally produce Chinese animation ICON characters that is not just popular but is widely recognized China-wide among all ages and generation. In the coming next few years China will have its very own home-grown Super Heroes like Spider-Man and it won’t stop here for key Chinese companies are already planning to be the next China Hasbro, Bandai and Disney. When quality of Chinese animation reached the international level plus the current production and development capability of Chinese toys makers and kids online games studio, we will see Chinese companies dominating a niche worldwide in the kids space.

KIDS ONLINE GAMES A MUST HAVE COMPONENT IN KIDS STRATEGY.

Video Games vs. Traditional Toys
Toy sales in the U.S. have been growing at a very low rate for the last few years. In fact, in 2008 toy sales in the U.S. fell 3%. This is mainly because of the shift from traditional toys towards video games. In 2008, sales of video game software units (actual games as opposed to consoles) grew 15% in the United States and 26% in the United Kingdom. Without a major foray into video gaming, toys companies could stand to lose significant market share as youth turn to digital entertainment over traditional toys. We can see this in the strategy by the major players such as Warner Bros, Disney, Nickelodeon, Cartoon Network, Hasbro, Mattel, Lego and now even Dreamworks is investing significantly into kids online games.

China is still a virgin marketplace for – animations, toys and kids online games. But the market will pick up next year at a great speed and there will be new winners and new players emerging. The ultimate winner would belong to the company that manages to master all 3 areas:

a.) Animations
b.) Toys
c.) Kids Online Games

Once the above 3 areas is captured and interlinked then only we will start to see the emerging Chinese Disney or Hasbro which capture the key essence of kid brands creation, development of toys and control of the kids online space. This makes the complete dragon triangle for kids entertainment business in China. Next year we will start to see more Chinese animations + toys moving side by side into the West which will include the US market as well.

Kids MMO will be an area that every toy and animation company can’t ignore and will become a “MUST-HAVE” strategy within their plan for the kids space.

KEY TOYS CATEGORIES

The following are the key toys categories that are being repeated almost every year in different format and brands. It is said that there is a success formula for kids entertainment …

1.) CARS - Model - Remote control
2.) YOYO
3.) HANDHELD GAMES - Digital games
4.) GYRO (tuo lou)
5.) TRANSFORMATION TOYS - Toys like Transformers
6.) CARD GAMES
7.) ACTION FIGURES - Figurines
8.) GUNS AND SWORDS
9.) BLOCK BUILDING - Lego
10.) ACCESSORIES - Accessories toys from animations
11.) PLUSH TOYS
12.) DOLLS

In the West there are slightly more categories than China such as train sets for the European market and planes for US. The above categories did not include Toddlers toys, video games and girl toys in a more specific manner. Boy toys dominates more than 70% of the market in China currently.

CHINA KIDS HANDHELD GAMES DEVICES A MISSING AREA

In the previous report we have touched a lot on animations and toys, in the report we have also highlighted an important missing area in the Chinese toys segment – electronic games and gadgets. While Nintendo DS and Sony PSP held huge market share worldwide in China these handheld games did not become a key trend for kids like in the West. Their market share has recently been pressed by Apple iPod TOUCH and iPAD. This market segment in China is missing and new technology today enable new locally produce handheld devices to prosper if the right mechanics are applied correctly.

THE FINAL WINNER WILL COMBINE ALL 3 KEY ELEMENTS

The company that manages to combine all the 3 key components ( *Animations + Toys + Kids Online Games ) seamlessly integrated together will be the next Disney or Hasbro of China. Like Chinese online games moving worldwide, Chinese animations and toys will follow suit this path only stronger and meaner than the competitions. Watch-out here comes China again !

CHINA ANIMATIONS AND TOYS MARKET OPPORTUNITY REPORT

2010

BY CALVIN NG
APPLE TOON.com

China Animations and Toys Market Opportunity Report
China animations industry is growing steadily …

Animation Market is an emerging sector in China and is expected to grow steadily. Favorable policies framed by the Government and allocation of funds by the provinces are benefiting the players today. The market trends reveals that players in the market are forming joint ventures, mergers and acquisitions are taking place while private equity and venture capital firms are investing in the business of the animation companies.

The Chinese-made animated movie industry is also booming, “The Pleasant Goat and Big Big Wolf” an animated movie base on the same IP TV series launched at the beginning of 2009 and hit a box office of above RMB 80 million with a production cost of just RMB 6 million. In addition to children, many white-collar workers liked the film. "How to marry a husband like the Big Big Wolf" became a hot topic on the Internet.

China's cartoon industry has been expanded to more than 170,000 minutes of animation last year and half of this year had already shot pass this figure. The continuous efforts of the government, which set up supporting policies to boost domestic animation industry, will spur continuous growth. During the first five months of this year, 221 Chinese-made cartoons (more than 270,000 minutes) were produced for domestic television channels, according to the State Administration of Radio, Film and Television (SARFT).

In 2000, the State Administration of Radio, Film and Television (SARFT) required local TV stations to get approval from the administration and set quotas for imported cartoons to air on TV. In 2004, it issued another regulation, stipulating that at least 60 percent of cartoon programs aired in any given quarter had to be domestic. In September 2006, the SARFT banned all foreign cartoons from 5 p.m. to 8 p.m. Last February it extended the ban to 9 p.m. Additionally, the Chinese government has made an annual investment of 200 million yuan in the animation industry since 2006. Last year July, the Ministry of Finance and the State Administration of Taxation jointly issued a favorable taxation policy to support the development of comic and animation industry.

China currently has above 6,000 companies making cartoons and comics. According to a report from the Ministry of Culture (MOC) and the industry now employs more than 400,000 workers. However, besides the lucky "The Pleasant Goat and Big Big Wolf" whom hit it big time on the silver screen others such as the Hong Kong co-production “McDull”, Kung Fu Kindergarten, other animated films, including The Magic Aster, Happy Running, and the 3D Prequel of the Monkey King didn't do so well at box office.

China’s growing ambitions coincide with an ominous industry-wide slump in Japan.
After peaking in 2006, the number of anime minutes made for television fell 20 percent to 108,342 in 2009, according to the Association of Japanese Animations. Overseas anime revenue fell 21 percent between 2006 and 2009. The world’s hunger for anime accelerated around 2000, with Hollywood incorporating anime scenes into films and children clamoring for Pokemon.

Since 2006, however, a trend toward adult-oriented (and often sexually explicit) niche titles has turned off the general audience. Moreover, the industry is losing young talent due to persistently low pay and poor working conditions, forcing Japanese animation companies to outsource much of their work.

“The Japanese anime industry basically gave China, Korea and all these countries the keys to the candyshop, by outsourcing so much work to them, they trained this work force of people who are now far more ambitious and far more hungry than a lot of Japanese animators are.”

Japanese anime industry is beginning to realize that it cannot ignore China — as an emerging rival or a potentially lucrative new market. For both countries, cooperating appears to be the best option for now.

One of the most successful joint projects so far is the “Romance of Three Kingdoms,” a historical animated series currently airing across China. The program, produced by Japan’s Takara Tomy and a subsidiary of China Central Television ( CCTV ).

China toys market

In 2009 due to the financial crisis global toys sales hit US$80 billion, an increase of 3.6% compared with 2007 US$ 77 billion in 2008. As the global economy recovers gradually in 2010, the toys market is forecasted to increase by 5.4% hitting above US$ 85 billion. The USA, Japan and China rank top 3 of toys sales worldwide respectively hitting – US$ 21.5 billion, US$ 5.8 billion and US$ 4.9 billion, while UK, France, Germany, Brazil, India, Australia and Canada take the 4th to 10th position. These top 10 countries occupy 66% of global toys sales.

China is the world’s largest toy manufacturer and exporter, and over 2/3 of global toys are made in China; the export value of Chinese toys in 2009 reached US$7.8 billion. Guangdong, Jiangsu, Zhejiang, Shanghai, and Shandong are the foremost production and export bases of toys in China, accounting for
more than 90% of the annual sales of Chinese toys, of which, Guangdong gives priority to electric toys and plastic toys; Jiangsu and Shanghai are mainly engaged in plush toys; Zhejiang gives first place to wooden toys.

From the perspective of annual average consumption of toys by children worldwide, China sees only US$20, while Australia and the USA reach respective US$401 and US$280. At present, the population of Chinese juvenile and children has hit above 300 million, so, there is huge potentiality of toy consumption in domestic market especially so since China have its one child policy creating even stronger bond to the child. On the other hand, as we entering 2010, the Echo Boomers born in 1980s will become the main force of toy consumption. It is predicted that the demand of domestic toy industry will increase dramatically in the following several years.
Facing the rising market demand, major toy enterprises in China have worked out ambitious development plans.

Guangdong Alpha Animation and Culture Co., Ltd. raised RMB860 million from the IPO in 2009, which enables it to carry out integrated operation of animation industry chain through merging and acquiring excellent domestic enterprises. In March 2010, it invested RMB90 million to acquire a 60% stake in Guangdong Jiajia Cartoon Film Co., Ltd. in an effort to obtain rare media channel resources and promote the release of animated films and the selling of cartoon toys.

Based on the current 21 brands and 190 models of model cars, Xinghui Auto Model Co., Ltd. plans to get the model car authorization of foreign brands including Porsche, and domestic brands including Hongqi, Chery and BYD in the coming three years, striving for the authorization of 26 brands and over 300 models. Restricted by output capacity, the products of Xinghui Auto Model Co., Ltd. are mainly sold to foreign countries and first-tier domestic cities like Beijing and Shanghai; the company will further expand its market in second and third-tier domestic cities after the improvement of its output capacity in the future.

China existing key toys players :

 Guangdong Alpha Animation and Culture Co., Ltd [] SHE 002292 *2009 IPO
 Xinghui Auto Model Co., Ltd [] SHE 300043 *2010 IPO
 Goldlok Toys Holdings (Guangdong) Co., Ltd [] SHE 002348 *2010 IPO
 Lung Cheong International Holdings Limited [] HKG 0348
 Jiangsu Goodbaby Group
 Guangdong Huawei Toys Craft Co., Ltd [] SHE 002502 *2010 IPO
 Guangzhou Teenbo
 Guangzhou Starjet Toys Co., Ltd
 Guangzhou M&D
 Guangzhou Wangtong
 Guangzhou Kaleeto
 Guangzhou Toys & Wonder Ltd
 Shanghai Toonmax Media Co., Ltd [] Pending IPO 2011
 Beijing Kaku Cartoon Culture Co., Ltd [] Pending IPO 2011
 Camino Trading (Huizhou) Company Limited

International toys players in China :

 Mattel
 Hasbro
 Takara Tomy
 Lego
 Bandai Namco

Local toys dominate the market today …
China's toy market has huge potentials for development. Since 2006 the tide of toys sales have changed in China, local toys IP and brands dominates the market today. Back in 2005 and 2006 overseas toy brands in China dominate the markets and toy stores, various sized Mickey Mice and Donald Ducks have occupied the most eye-striking positions. Blond Barbies are sold in special counters. Transformer, Spiderman, Robot Cat, Ultraman are almost all imports, and there are few toy products with a Chinese brand. In the great consumption market with a scale of tens of billions of RMB, domestically produced toys only seize 16 percent of shares.
This is not true today, thanks to animations and the smart use and development of local IP, characters, stories and brands via animation being continuously screen on hundreds of TV stations in China had help companies like Guangdong Alpha IPO with a PE of above 50x.

A good example would be the overseas “POWER RANGERS” versus “ARMOR HERO” ( by Alpha ), kids in China chooses Armor Hero over Power Rangers toys. This is the key trend today and with effective use of the power of animations as a key media promoter to push brands, IP’s (intellectual property rights) and cartoon characters across to Chinese kids and teens, China very own toys companies is dominating the new toys market. With proper implementation of brand strategy and marketing techniques plus a deeper understand of the Chinese culture China’s toy enterprises can win the upper hand in the market. “The Pleasant Goat and Big Big Wolf” is a good example of an animation whom brings in the local culture into play, the animation rights is rumor to be acquired by DISNEY for above US$ 100 million.
The future will lies within brand and IP building as well as innovating development of electronic and dynamic toys based on China home grown animation stories and characters to have the added values raised.

The Digital handheld game trend

Once dominated by Nintendo and Sony PSP a new player had emerged … Nintendo still dominates with kids in the portable space, however Apple is becoming a significant player. 44% of tween girls (8-11) and 58% of teen girls (12-15) use an Apple device to play games. iPod Touch has sold 130 million units, near the same sales as Nintendo Co.’s DS handheld game system. Additionally, while the DS has sold more than 700 million games, Apple has sold 1.5 billion games for its iOS platform.

The fastest growing model is the iPod Touch, which represents 40 percent of the "iPhone platform". BusinessWeek quoted, "Apple could be on the cusp of claiming the crown as the world's leading in pocket gaming,", referring to the use of an iPod Touch as a portable games device. To emphasize the company's point further, it touted that the PlayStation Portable has 607 games available, the Nintendo DS has 3,680 games available, and the prices of the games for both platforms are easily higher than games sold at App Store. 2009 Stats
Technically, there are more than 30,000 games are now available from the App Store. iPod Touch is fast becoming an MP3 player and a high-end pocket games device in the US.

Many industry professionals do argue ( *especially Sony and Nintendo ) that the games on APPLE App Store are too basic and simple as compared with what’s available on the Nintendo DS and PSP. This same argument can take a note from the “Social Games” versus “Casual Games” arena whom social games is winning the market by miles ahead of the latter and creating an entire new games segment.

However at RMB 1,500 to 2,500 the iPod Touch is still too expensive to Chinese kids. Another key winning point for handheld gaming device is the games available for that particular platform, as in Nintendo DS, it is the “Super Mario” franchise that’s matters most to kids buying the device.

These points’ gives an opportunity for a local specific Chinese handheld game device designed specifically for the Chinese market embedded with key Chinese games IP such as those from famous animations. From 2008 to 2009 Bandai sold more than 150 000 units of “Tomogotchi” handheld games in China with a retail price of between RMB 129 to 259 each.

How the business works ?

Huge market opportunity still exist in China
The Pleasant Goat and Big Big Wolf - has come out and created a miracle for the Chinese local animation films with a box office of up to RMB 90 million since it was screened around the Spring Festival of 2009 and above RMB 100 million in 2010 box office. The animation film with more than 500 episodes has also successfully expanded its audience from children aged below 6 to all the age groups.

US, Japan and South Korea are three major countries with a relatively large animation industry in the world. US, the originator of the animation industry with an output of more than US$200B, the animation industry is the second largest industry by export, just next to the computer industry. Japan has become the world's largest producer by combining animations, cartoon books and electronic games, representing 65% of the world market and 80% of the European market. The animation industry has grown into the third largest industry in Japan, accounting for 10% of GDP. Even South Korea, a late-comer in the industry, takes 30% of the global animation output, just after America and Japan, and 30 times that of China.

All these above-mentioned data are enough to spur the optimism of the Chinese animation insiders although investment and M&A in the Chinese animation sector is still relatively small it is growing today as investors begin to understand why a handful of entrepreneurs are the one that is making the big bucks. Guangdong ALPHA IPO and the huge success of “The Pleasant Goat and Big Big Wolf” provided an eye opener to many whom had neglected this industry in the past and also highlighted the secrets towards making money from the animation creative and culture industry.
The animations and toys industry chain
The industrial chain of animation industry seems simple and is composed of the following links including creation, production and distribution of animation works and development, production and sales of derivative products. Every link is far-reaching. Compared with the established complete industrial chain and profit mode in the United States and Japan, domestic enterprises are still exploring a suitable road and attempt different "portfolios" in this aspect.

Some attempt to create and distribute animation works at first, and then launch derivative products according to market reaction; some attempt to pay equal attention to both animation works and derivative products and pave the way for derivative products early in creation link to make and launch derivative products in synchronism with animation works. In comparison of the said two attempts, the former needs relatively small investment in early stage and faces low risks in late stage.
The reason is that derivative products are developed on the basis of feedback of target group to ensure minimum risks at the cost of a prolonged investment pay-back period. By contrast, the latter needs relative large investment in early stage and faces high risks in late stage accordingly. However, the investment pay-back period is short. Furthermore, launching derivative products in synchronism with animation works reduces the risks of losing initiative opportunities for copyright piracy.
Presently, Chinese animation industry lacks harmony among links and fails to establish sound win-win mode among them. The decisions of links in this business may defer from companies to companies each with its own agenda. Therefore, a mature industrial chain must be built, the exchanges and cooperation among the enterprises of each links shall be unified and promoted where each efforts are done to perfect the industrial chain in order to develop animation industry.

Three Drawbacks of China's Animation Industry

The followings are the three current drawbacks of the Chinese animation industry which directly reflects the towards the toys industry as well.

1. Creative industry needs to upgrade its creativity
The domestic animation works lack innovative design concept. Instead, many have kept to the beaten track of producing low budget production simply to get government funds. Most of the images are borrowed from foreign works. The movements of the cartoon figures are also very similar, and lack fresh innovations. Kung Fu Panda, a Disney animation has achieved a great success in China market. The animation easily hit a box office of more than RMB100M during a ten-day show. Chinese animation companies are good at producing teaching-oriented animations, such as 3,000 Questions of Blue Cat and Naughty and Mars Baby Learns Chinese Characters. These animations always lack the space for expansion, and do not generate a high profit, despite a high audience rating.

2. Poor marketing ability
Many animation producers lack the market awareness and know-how needed. Durniok, a little merchant who bought the 20-year copyright of Nezha Conquers the Dragon King from China ten years ago, has built the envious Durniok Mansion by distributing the modified version in Europe, and become a major producer and publisher in Europe. When Nezha Conquers the Dragon King was played in Japan tens of years ago, a Japanese garment company worked overtime to produce a lot of T-shirts printed with the Nezha image. When the audience walked into the theater in the T-shirts, the boss of the garment company was also overjoyed. In China, both films and TV series lack sound marketing and promotion strategies - As a result, they cannot attract the attention of the audience in the early stage, catch the eyeballs of the audience in the middle stage, or find derivatives favored by the audience. Therefore many fail in this industry.

3. Incomplete industrial chain
Japan has developed a mature animation industrial chain, a complete cycle from animation publishing, animation production, broadcasting, copyright licensing, derivative production and sales to export licensing of some animation products, deep development of successful animation products and development of new animations. This mode is relatively sound, as every link is very professional and has formed a scale, and different links are well connected. The matrix of responsibilities along the industrial chain is very clear. In comparison, the industrial chain in China is far from mature, and relevant links are short of collaboration. Consequently, many animation companies have become part of the industrial chain of others, and earned the fame of OEM for the Chinese animation industry.

In reality, the Pleasant Goat and Big Big Wolf is not a heavy-investment production. Usually, the unit investment of local animations ranges from RMB3,000-5,000 per minute and even RMB10,000, if the 3D technology is used. With an even lower cost of RMB2,000 per minute, the Pleasant Goat and Big Big Wolf has triggered such a large market response, which has definitely given us a good lesson. In content, the animation has abandoned the teaching-oriented route, but introduced some very popular elements at present to deliver a vivid and lively style. In addition, the broadcasting fees paid by TV stations are far from enough to cover the production cost, which is also a headache of many local animation companies. Now, the derivatives of Pleasant Goat and Big Big Wolf can be seen everywhere, which have entirely benefited from the company's forward-leading practice of reserving the space for future derivatives before the project started. At the same time, the Pleasant Goat and Big Big Wolf has also broken the mode that the animation images are applied to toys, stationery and food, and expanded the image licensing to more extensive industries.

The success of the Pleasant Goat and Big Big Wolf has set a very good example for local animation enterprises. How far this outstanding animation will go still depends on the overall strategy and new creation of the producer.
The special few companies that understand these drawbacks …

These drawbacks actually created opportunities for a special handful of companies whom fully understands the market and its mechanics towards managing the limitations today and creates success from it. The animations coming from ALPHA are world-class quality with equipments and story-board written from Japan. LingDong hires Japanese and Hong Kong designers to design its characters for its toys and animations.
The other hidden secrets unknown to many are:

1. The ability to create “Toys Animations” that’s purely designed to sell products.
2. The ability to design toys for the local market as well as international market.
3. The ability to understand the local market needs and culture.
4. The ability to network and distribute to a mass audience base in China.
5. The ability to connect all the industry chain and links together.
6. The ability to get the animations on to top TV stations at prime time and across as many provincial TV stations as possible.
7. The ability to grasps, creates, develop and manage brands and IP’s.

The Chinese animations industry is set for a big change in the coming next 3 to 5 years as these companies expand their market share in China and abroad to Asia and eventually worldwide. We will also be seeing more IPO, mergers and acquisition happening in 2011 and 2012 as key leaders expand their grasp on the market. The new growth area in 2011 will be the kids online games and portal sector, where we will see the world first kids online games company goes IPO on NASDAQ *Taomee USD 1 billion IPO will spur the industry to grow further.

Expect China very own Hasbro, Mattel, Disney and Cartoon Network in a years time!

The Next Niche in China Kids Entertainment

When we look into animations there are 3 main focused categories basically:

 Hero
 Friendship
 Funny

“Hero” style animations are the most popular and successful worldwide, IP such as Gundam, Ultra-Man and Power Rangers are in this category. “Friendship” animations are the hardest animation to be produced’ Doraemon is an example of such animations. And lastly in the “Funny” category we have Smurf, Popeye, Tom and Jerry but writing and producing such scripts is hard.

In China the “Hero” category is heavily hit with many animations IP but none know the secret towards building a lasting brand, image and character till the emergence of the “Pleasant Goat and Big Big Wolf” which showed that a constant broadcasting of a single animation can leads towards a much bigger success than having multiple animations IP projects. “Pleasant Goat and Big Big Wolf” showed it with more than 500 episodes and still in production, it is rumored that the price Disney paid above USD 150 million but announced a signed a licensing deal for 10 years in China for RMB 100 million instead.

Alpha quickly adopted this strategy on to all its key animations IP and do 2nd round of production for ARMOR HERO 2, FRUITY ROBO 2 and BLAZING TEENS 3 live TV action series for 2011. Blazing Teens animations was a huge success in China with more above RMB 600 million in retail sales of their “YoYo” toys.

In the “Funny” category there are Pleasant Goat and Big Big Wolf, Fruity Robo and Kaixin BaoBei. It is said that in China the talent for producing such animations is rare.

The Age Groups

Basically we are looking at kids of 5 years old to 12 years as the key target audience simply because these are also the key age where toys sales are most apparent. While there is a niche for the teenagers segment of above 12 to 16 there are no serious toys sales here in China as yet. However as China economy grows this market will open up eventually for a higher quality toys such as “collectables”. In the US comics characters and replica items from the animated movies and comics are popular among the teens.

The Missing Niche

Pre-school market in China will be the next key target market for certain. The company that moves into this area first will get the first mover advantage for certain. Babies products is already a key hot item today and in the West pre-school series like “Tele-tubbies” are super popular. Here we are looking at kids between 3 to 5 years old. However in this area you will need to be addressing a different market segment and making the series for an entirely different audience “babies”.

China Next Kids MMO Reinvented

We will be seeing a huge numbers of ‘Club Penguin’ copycats sprouting out next year very fast once Taomee China 1st ‘Club Penguin’ goes IPO in NASDAQ next year *1 billion IPO. Kids MMO online games will be a new sector of growth in China and worldwide. The trend is already building up in the States as we speak with new giant players like LEGO and DREAMWORKS.

To Succeed Look for the New Genre

One thing to note is that just like any games categories it will be split into different ‘genre’ and age group again. Club Penguins style kids virtual worlds are great for kids aged 4 to 8 and this is also an area where majority of the cartoons (animations) and toys are centered and design for in China. Then there will be the demographic for male / female audience, in the States there is Barbie.com and in Europe there is Stardoll.com whom fills this gap.

The Huge Genre that’s basically Untouched.

There is an age group genre in China that is currently untouched the 8 to 16 years old teenagers. The Chinese animations sector had been concentrating mostly on the 4 to 12 years old segment and had been very successful such as ‘Pleasant Goat and Big Big Wolf’, ‘Fruity Robo’ and ‘Kaixin Bao Bei’. On the animations side only a handful of experts in China had noticed this empty slot and ALPHA in 2011 will come up with ‘UTRA FORCE’ an animation similar to their Live action TV series ‘Armor Hero’ to tap this age group.
On the online games side we will see THE 9 moving into this gap too with FREE REALMS by SOE and Giga Media with SPONGE BOB world. FREE REALMS in the States had been very successful indeed with more than 12 million users so far.

FREE REALMS is actually going after the RUNESCAPE market and not the Club Penguiners. Runescape have been super popular for the teens MMO segment since 2006 attracting millions of players. Runescape still has over 10 million monthly unique users. Nine million of those play the game for free; 1 million of them subscribe each month. RuneScape's users pay $5 a month for access to extra playing levels and better customer support. That suggests more than $50 million in annual subscription revenue for Jagex.

In the 12 months to March 2009, Jagex generated revenues of £38.4 million and profits of £18.0 million (approximately $58m and $27mm, respectively). That’s an operating margin of 47%, despite spending “tens of millions of pounds” on the failed Mechscape project. 94% of that revenue comes from subscriptions and slightly over £2 million every year in ad revenue.

Runescape users range from 7 to 15 years old as the key target group.

The 89/10/1 Revenue Rule for Kids MMO

The 89/10/1 rule says that 89% of your players won't spend anything, 10% will spend the bare minimum, and the remaining 1% will spend extravagantly. In the case for FREE REALMS it would account to be for their 12 million users:

• 10,680,000 spend nothing ($0 total)
• 1,200,000 spend $5/month ($6,000,000 total)
• 120,000 spend $30/month ($3,600,000 total)

Not bad revenues for a kid MMO!

Groupon coming to China

Lets look at some facts about this business …

Twitter took 3 years to hit a USD$ 1 billion valuation, Facebook with 2 years and Groupon broke the record with a year and a half. Groupon was the craziest Internet companies in history and its simply because it has a damn good business model where revenues come in from almost day one.

There are many Groupon copycats in China. Market resource said there were already over 100 but I think the number exceeds 500 personally. The market is already overheated and going much crazy than anyone had expected, I have staff that do “grouponing” ( tuan gou ) daily looking for good offers and asking everyone at the office to buy along. Even my expat partner is doing the “tuan gou” looking for top spa to take his girlfriend every month. Some have raised a large amount of money from VC and is preparing to forge ahead into every big city in China. The Chinese market is big enough for “tuan gou” style of business given the many cities each company would need to cover so there are many opportunities available especially when the business model is basically about:

1.) Cheap price
2.) Best and variety of offers
3.) Ability to ensure that vendors honors the package

However we cant say that “Grouping” is a copycat business model from the West like YouTube and Twitter as “Group Purchase” ( Tuan Gou ) is hugely popular in China especially in Home improvement/Home decoration market where thousands of people got connected online and buy the same products together in street shops in order to get a good bulk-discount. TG.com.cn is reaping as much as RMB 50 million after-tax income and is already getting ready for IPO next year.

Groupon style represents a new method of the old method in the “tuan gou” system.
There is a news on Donews - http://www.donews.com/original/201010/236202.shtm ( Chinese ) which state that Groupon’s business development director have held several meetings with five popular Chinese Groupon clones, Meituan, FTuan, Lashou, Aibang and QQTuan. The news says Groupon met these clones one by one and the detail of each meeting can not be disclosed due to an NDA signed by each party.

An insider said Groupon’s visit to China this time had two purposes, firstly to understand the local market and local regulation; secondly to look for the right local partner. Groupon will likely follow the same strategy when it entered Japanese market - acquire one local clone.

Which one will be the super lucky clone to be acquired by Groupon?

However if Groupon decides to kick start the business themselves in China and send in a group of Western professionals that will almost equals to digging their grave here in China.

*NOTE : Love this business and was infact looking at it since Groupon started but did not proceed as I still believe in being professional and an expert in a field I'm more familiar with. However I had a friend whom just keeps starting what-so-ever that is hot in the US in China by just mimicking exactly the business concepts. He did pretty well too so far !

eCommerce is huge in China

DangDang the largest Chinese online book retailer, will be going public in Nasdaq. As one of the first major Chinese ecommerce sites going public, it will create a lot of noise especially today when China “ecom” business is booming.

It’s rumor that Dangdang will have a valuation of about US$ 1 billion base on about only US$ 5 million in profit last year, it provides a PE of 200 times. Growth of the company’s core business ( selling books ) is slowing down. DangDang have a new business line - which sells everything from electronics to linens, slipper, home decor, milk powder, etc … This new line grows fast with over 230% last year tho’ currently only account for a small portion of the company revenues.
The brand name DangDang is famed for books in China as with its main rival JOYO ( Amazon’s China Subsidiary ).

Apart from Taobao which we could say resembles a huge shopping mall online whom have everything from A-Z from thousands of sellers the ecommerce industry is moving “vertical” specifically targeting a specific segment or niche’. Such companies in China - for electronics, 360Buy, for milk powder and other baby products Red Baby tho’ a host of many others baby sites are mushrooming including a friend of mine whom had just paid a hefty 1 million for the domain Baby.com.cn to launch his ecommerce baby line after acquiring more than 100+ baby stores across China. And for garments products there is Vancl whom I had to mention since their advertisements had been popping up on my screen daily every time I start my MSN. And there is Moonbasa and Rutisher too for clothing whom is VC backed today and is doing extremely good. Not forgetting Gilt.com Chinese version – VipShop and VipShangpin is fast shaping its business in China.

360Buy IPO is also in the pipeline and the company business is growing leaps and bounce so we be expecting another huge ecommerce IPO soon around the corner.

According to industry insider online book stores has gross profit margin of about 5-10%. Electronics : 3-5%. Garments : 20-50%. But eventually as predicted every ecommerce site that goes IPO will be opening up to sell almost everything to tap onto more categories to expand their market share and to increase revenues.

*NOTE : Had always wanted to be in this business but never had the chance or opportunity. Who knows maybe one day I will.

Facebook controls who you connect with ...

Not many of us may know ...

You might think that you have shared all your photos of your trip to Hangzhou, posted your "What's on your mind ?" and shared your videos with all your friends on Facebook but you are wrong as not all your friends gets to see your news feeds and updates. Facebook decides who gets to see it and who don't !!!

Facebook also keeps the details of its logics discreet and a secret.

Facebook practically decides what;s important for you in their very own framework. So in order to get more connected it is not about just posting news feeds and updates but take sometime off to visit the Facebook pages of friends you want your news feed to appear. This is one way to get into the system but may not be the best way to break the logic.

This is bad news to "Marketers" whom actually thinks they now have thousands of fans and their news feed is reaching and connecting with each individual one of them.

So next time you think you are in control ... think again !

2011 Crystal Ball

Lets look into the Crystal Ball and check what's installed for the future in the online games market ... Madam X predictions and advice are as follows ...



THE SOCIAL GAMES MARKET



Consolidation, M&A will continues as the market can only sustain a few heavy weight players. However an occasional unpredicted success will come from the unexpected new players. Majority of new players will fail. More venture money will be pouring on to this area as there maybe an eventual IPO sooner than Facebook. Branded social games will be the next big hit thing in 2011, lookout for something from EA and Disney.

Social Games will become more sophisticated replacing repetitive game play and mechanics. Eventually "Viral Game Play" will need to blend in with true "PLAY VALUE".

Sorry Alex of Hi5 hard core MMO will not be replacing social games this coming year. We wont see players of Farm Ville playing ULTIMA ONLINE too on Facebook so sorry Richard Garriot !

BUT we will see some smart companies and studios blending the following together to create the next generation of social games on Facebook :

1.) Play Values
*ignore viral but put in more play values.

2.) Casual Game Play
*not hard core as casual play still rules.

3.) MMO elements
*it will be real multiplayer.

4.) Social Graphs
*never leave this one out.

WEB BASED MMO MARKET

2011 and 2012 will be the year of 3D WEB MMO online games.
UNITY engine and others will be a big hit next year, revenues on web base MMO will grow while client base MMO may slowdown. However for kids MMO and virtual worlds the Flash base world will still be the No.1 choice as a plugin is still considered an entry barrier for kids world where they are told not to install anything from the web.

VIRTUAL WORLDS MARKET

Forget about the teens and adults market as these are for MMO.
The kids market is the only market for virtual worlds but competition will be heavy certainly. China will be a new market arena for kids world and will boom sometime next year.

TBC ...

Taobao versus Ebay in China

This is a classic case study of how to fail in China ...

*Courtesy of Forbes.com ( I'm too lazy to write the story as Forbes Helen Wang wrote such a good story here ).



In 2004, eBay had just entered China and was planning to dominate the China market. Alibaba was a local Chinese company that helped small- and medium-sized enterprises conducting business online. Most people in the West had barely heard about it.


When eBay entered the China market, Jack Ma, founder and CEO of Alibaba, was alarmed that “someday, eBay would come in our direction.” He knew too well that there was no clear distinction between small businesses and individual consumers in China. As a defensive strategy, Ma decided to launch a competing consumer-to-consumer (C2C) auction site, not to make money, but to fend off eBay from taking away Alibaba’s customers.


A new Web site named Taobao—meaning “digging for treasure”—was launched free of charge for individuals buying and selling virtually any consumer goods, from cosmetics to electronic parts.
In 2004, I visited Alibaba at its headquarters in Hangzhou. It is located on a campus of three ten-story buildings in the northeastern part of Hangzhou, about a ten-minute taxi drive from West Lake. In the lobby, a flat panel TV was streaming video clips of Jack Ma speaking at various public events where his admirers, most of them in their twenties, were cheering him like a rock star. While visiting Alibaba’s headquarters in Hangzhou, I felt the same “insanely great” energy of entrepreneurship as I felt in Silicon Valley. When I asked a senior manager at Alibaba whether the company was worried that it would be bought by eBay, I was blown away by the answer: “We will buy eBay!”


EBay, on the other hand, began its most aggressive campaigns to dominate the market and thwart competitors. Soon after Taobao was launched, eBay signed exclusive advertising rights with major portals Sina, Sohu, and Netease with the intention of blocking advertisements from Taobao. In addition, eBay injected another $100 million to build its China operation, now renamed “eBay EachNet,” and was spreading its ads on buses, subway platforms, and everywhere else.


Ma fought back cleverly. Knowing that most small business people would rather watch TV than log on to the Internet, Ma secured advertisements for Taobao on major TV channels. In 2004, one could easily feel the heat of fierce competition between eBay EachNet and Taobao. When I was taking a taxi in Shanghai, I noticed the ads of eBay EachNet on the back of the driver’s seat; when I checked into my hotel, I heard the ads for Taobao popping up on TV almost every half hour. Since its name means “digging for treasure” in Chinese, it attracted a lot of attention by a smart play on words. While most people in the West had never heard of Taobao, its name was heard loud and strong in China.


Nevertheless, most industry observers were suspicious about Taobao’s future, particularly its sustainability. Unlike eBay EachNet, which charged its sellers for listing and transaction fees, Taobao was free to use. Neither Ma nor any members from the management team gave a definite timeline as to how long this “free period” was going to last. “Free is not a business model,” the doubters said. Some thought Ma was crazy and nicknamed him “Crazy Ma.”
No doubt Crazy Ma was changing the game. Taobao got a quick start with its free listings and continued to gain momentum as more and more users switched from eBay EachNet to Taobao.



According to a Morgan Stanley report, Taobao was more customer focused and user friendly than eBay EachNet. With most users not sophisticated about auctions, the majority of Taobao’s listings were for sales. Only 10 percent of its listings were for auctions, while eBay EachNet had about 40 percent of its listings for auctions. Taobao had also better terms for its customers: it offered longer listing periods (fourteen days) and let customers extend for one more period automatically. EBay EachNet did not have this flexibility.


Taobao’s listings appeared to be more customer-centric while eBay EachNet’s listings more product-centric. For example, Taobao’s listings were organized into several categories, such as “Men,” “Women,” and so on, while eBay EachNet stuck to its global platform, grouping users into “Buyers” and “Sellers.” At that time, China had about three hundred million cell phone users versus ninety million Internet users. Taobao offered instant messaging and voice mail to mobile phones for buyers and sellers because Chinese users were cell-phone savvy rather than computer savvy.


It was clear that Taobao had an upper hand against its global counterpart because it really understood Chinese customers. As a result, Taobao had higher customer satisfaction than eBay EachNet. According to iResearch, a Beijing-based research firm, the user satisfaction level was 77 percent for Taobao versus 62 percent for eBay EachNet. The experience of competing with eBay gave Ma tremendous confidence. He was determined to win: “eBay may be a shark in the ocean, but I am a crocodile in the Yangtze River. If we fight in the ocean, we lose—but if we fight in the river, we win.”


By March 2006, Taobao had outpaced eBay EachNet and became the leader in China’s consumer-to-consumer (C2C) market, with 67 percent market share in terms of users, while eBay EachNet had only 29 percent market share. “The competition is over,” Ma exclaimed. “It’s time to claim the battlefield.”


On December 20, 2006, Meg Whitman, eBay’s then CEO, flew to Shanghai to take part in a press conference to announce a new joint venture with Beijing-based Internet portal Tom Online, which provides wireless value-added multimedia services. It was, in reality, a formal announcement of eBay’s withdrawal from the online auction market in China. EBay shut down its China site, eBay EachNet, and took a back seat to a company with only $173 million in revenue and no experience in the online auction business.


Jack Ma represents a new generation of savvy Chinese competitors who should not be underestimated. They study their markets and bring to bear their local knowledge. They learn from their competition and from their own mistakes as they move up the competitive landscape.
The case of Alibaba provides an invaluable lesson for multinationals to succeed in China market:
First, eBay failed to recognize that the Chinese market and the business environment are very different from that of the West. EBay sent a German manager to lead the China operation and brought in a chief technology officer from the United States. Neither one spoke Chinese or understood the local market. It was eBay’s biggest mistake. Second, because the top management team didn’t understand the local market, they spent a lot of money doing the wrong things, such as advertising on the Internet in a country where small businesses didn’t use the Internet. The fact that eBay had a strong brand in the United States didn’t mean it would be a strong brand in China. Third, rather than adapt products and services to local customers, eBay stuck to its “global platform,” which again did not fit local customers’ tastes and preferences.

China GOAT and WOLF cartoon success story

You cant escape without noticing China hottest animation characters the "Pleasant Goat and Big Big Wolf" on any kids retail outlets today in China from kids clothing, tricycles, toys, backpacks, candies and even Goat versus Wolf amusement arcade machines. Not since "Uproar in Heaven" in the 60's had any animations in China been so successful. Many years back there was another potential IP "Blue Cat" but due to internal conflicts, bad management and wrong business strategy they withered away to be replaced by a Goat and a Wolf.

"Pleasant Goat and Big Big Wolf" 2nd movie this year was again a huge success rivaled along AVATAR for cinema screens and ended up with the fourth highest gross of RMB 126 million, the 1st movie gross above RMB 80 million. NOTE - the movie took only RMB 10 million to make and do not feature a single celebrity or famed voice actor like many Pixar animated movies.

It was first aired in 2005 featuring a simply story about the ongoing war between a wolf and a village of goats. Huitailang ( Grey Wolf ) is determined to defeat the goats and bring home a healthy goat meat meal for his wife Hongtailang ( Red Wolf ). Its a little like Tom and Jerry for China. The humor designed into the cartoon depicts many of China daily lifestyles too such as in 2005 when Super Girl contest was hot, Hongtailang ( Red Wolf ) would enter a singing contest too in the animations. Such pop culture had help to win the show to the adults community.

The characters in the story is very well designed such as Lazy Goat is always either sleeping or eating, he'll keep his eyes closed when walking just to save extra energy. Huitailang ( Grey Wolf ) had all the 10 merits of a good husband as he loves his wife more than himself, he cooks and never argues back. It is said that girlfriends asked their boyfriends to be like Huitailang as the perfect Mr. Right.

The success of "Pleasant Goat and Big Big Wolf" had brought huge hopes for the Chinese animation industry. Almost every animation studios now wants to create the next Goat and Wolf but the success of "Pleasant Goat and Big Big Wolf" is not something that can be easily mimic overnight.

THE BIG MISTAKE

"ASTRO BOY" animation was the first casualty of the Goat Dream, the movie did not make it pass RMB 10 million and suffered a huge lost which caused the studio to close its doors in Hong Kong. More casualties will come as time past many will learn that the Goat Dream needs proper planning and strategic move to get success.

When the 1st "Pleasant Goat and Big Big Wolf" movie hit the screen they already have more than 300 episodes broadcasting in more than 100 channels. When the 2nd movie hit the screen there were 500 episodes that had been broadcasted Chinawide. The promoter SMG had used a huge marketing budget to push the movie months prior to its release (*it is a PUSH MARKETING effect that helped in its box office) without this no animated movie could gain good screen time.

THE REVENUES DREAM

Its true that connected animation studios benefits from a helping hand from the government, any animation shown on domestic TV even at midnight are rewarded by the government with funds. And as part of the protection policy for domestic cartoons, the only cartoons that national TV station can broadcast between 5pm to 8pm (*golden period) are Chinese cartoons.

The key revenues from "Pleasant Goat and Big Big Wolf" are still licensing of merchandise.

TBC ...

MYSPACE China Music Focus

MySpace.cn refocuses almost 100% on music in China in their new strategy to save their social network from failing. Will this new strategy work for MySpace in China ?

It should help them to have a good start if this were their original entry strategy into China. But today MySpace China is a little too late already. In the last 12 months MySpace China had gone through many transformation which had killed their audience practically. MySpace even said "sorry" to their members after a major face change which they eventually change it back again as many were not able to understand how to use it.

Although the original audience on MySpace China was not big but there was an audience around. Today their original audience are leaving as they felt they do not belongs to this new music community. Music is huge in China but China do not have a very huge indie music industry like the US and the West. Its a different game plan. MySpace China needs a plan that can maintain their core audience while being able to scale bigger. Music is not the key answer here as on every Chinese portal music had been a key offering. A huge chunk of Baidu traffics comes from music search and downloads, is MySpace China providing this ? Can MySpace China compete with Google music ?

A Game Discussion - THREE KINGDOM

The other day I had a chat with my CEO about game designs for movies MMO that we are producing. We discussed about our current game, its design and storyline within the game. The topic of what makes a great game storyline pop up and that our current movie game story do not allow the followings:

1.) Storyline is too short and shallow.

2.) Players takes time to understand a new storyline.

3.) Our game designer have a hard time expanding the movie storyline.

Its so unlike THREE KINGDOM where both players and designers know so much about the game. It makes it easier for both sides.

This got me thinking for a few days and went on to study the THREE KINGDOM games on the market today. WOW ! In total China have more than 150 THREE KINGDOM online games. "THREE KINGDOM" in China is really a big thing and its incarnation includes films. comics, TV shows, cartoons and even food. In 2008 movie director John Woo produce "RED CLIFF" Part 1 and 2 based on the THREE KINGDOMS and broke China box office held by James Cameron "Titanic". Even iPAD have a "Romance of Three Kingdoms" game from KOEI. There is even a restaurant theme after THREE KINGDOMS in Beijing which menu offers historical delicacies such as Liu Bei favorite dish "Liu Bei Spicy Fragrant Chicken".

There were reports that say even if a player is not familiar with history they could learn about THREE KINGDOMS from the game. "THREE KINGDOM KILLS" ( san guo sha ) is a mimic of Magic Gathering card game which became widely popular in China today. I heard the guys behind this card game is also making an online card game MMO.

BUT CAUTION

Andy Lau THREE KINGDOM movie was a complete disaster despite having top artist, big budget and a good director. Critics and viewers whom knows about THREE KINGDOMS gave it a lot of thumbs down from the fashion it uses to the lead actress and the fact that CaoCao do not have a female role in history. The movie backfire despite a good plot with lots of actions.

Only no more than 10 THREE KINGDOMS is doing good and reaping money from the market today in China. The reason could be overcrowded and/or bad storyline ... Unless you have the marketing muscle of Tencent whom can push any games upwards with its huge user base. That's why as a late comer to the THREE KINGDOMS MMO QQ still manages to be on top today.

What's next after Social Games ?

When Facebook shut down the free viral channels, started charging for advertising to replace spamming and demanded a cut of social games revenues via Facebook Credits they have changed the entire games mechanics of social games and its economics. Lets look at what's the key ingredients for social games success ?


1. FREE Virality *brings you the big numbers / spams do work no matter what you wanna think !

2. The Social Network Distribution *aka Connecting info with friends.


Why did Zynga canceled its deal with MSN to carry Farmville ?

For starter maybe MSN do not have a social network for distribution, Social Games cant succeed without the viral elements. This then presents a very interesting situation - it simply means social games cant get people to play them unless they are inside a social network such as on Facebook. I have heard this from Alex St. John *President of Hi5 whom is going big on more serious game play with Hi5 social network - "The only advantage social games have currently is that the Valley thinks they are “hot” and is willing to invest lots of money in them". Being "HOT" is not a bad thing for many studio's and companies tho' ...

It is said that outside of Facebook, Farmville simply can’t hold its own against games like Bejeweled and Scrabble when it comes to monetizing a casual audience. Well it maybe true as we dont see any farm game outside of a social network that's successful except now we have farm game on iPhone and Android phones which whom are not the top games as well *"Angry Birds" beats any farm game on the iPhone. So how do a farm game compares or competes against downloadable casual games ?

Lets check out MSN to see which are the top front page games ? If Farmville genuinely has superior online economics, it will be on the top chart. But it appears that Farmville isnt but games' like "Cubis" occupy and monetizes best on MSN.

THE ARGUMENT

Alex from Hi5 believe that - "social games” as we know them will be a forgotten internet fad, ultimately consumed by the already mature online market for downloadable and multiplayer games". Richard Garriot (*Ultima Online) and many top game experts worldwide joins in this believe and had started what is deem a more serious MMO game play for social networks or "using" social networks. Some argues that the demographics of social games consist of people whom had never played a single online games before. These are my and your mom, ladies, grandmothers and even the aunties next door. And they are spending money to pass their time. Will these people be your core audience for a more hard core MMO ?

Price and cost of operating a new game on Facebook had increased so much so that now its no longer a viable business for many to kick-start new games on Facebook. Look at the cost factors:

(a.) Facebook credits 30%
(b.) Advertising cost between USD 0.30 to 1.00 per user acquisition.
(c.) Servers and bandwidth cost.

*At the end of the day operators are paying out about 60% to 85% of their revenues if they are lucky to be able to design games that monetizes on Facebook. More than 80% of games do not monetize on Facebook today. Some are used to draw audiences and numbers that are then reused to cross promote their other games.

This means Facebook social games are now designed only for the bigger players whom have a deeper pocket funded by venture capital money.

FACEBOOK & SOCIAL NETWORKS AS A PLATFORM

Ultimately social games will still have a market on Facebook certainly but its growth will not go on forever as some gamers or players will move on to more sophisticated, highly competitive MMO games. This shift is already happening now slowly a step at a time with games like Kingdom of Camelot and we will soon see more to come.

The big boys like Zynga, Playdom, Playfish and some will eventually start refocusing their games and acquisition of real MMO studio's will begin maybe as early as mid to end 2011. At the end of the day an online game requires a more in depth game play and mechanics versus repetitive play. We can notice this "change" in China on the farm game operated by QQ where its already have more features and play methods than what Farmville is offering. The game design will continue to move towards being more complicated traditional MMO style while still maintaining the "Social Elements" whom had help rocketed social games today. Who knows maybe - "Social MMO" will be the next games revolution on Facebook !!!

MMO can use Facebook and its social graphs as a marketing, advertising and promotions tool as its extremely effective and efficient method to push and promote games. However we look at it Facebook and other social networks do have its use as a "Key Promoter" of games whatever genre it maybe. MMO companies should grab this opportunity espcially via Facebook Connect while its still unchanged today as the rules maybe rewritten again tomorrow.

"Social MMO" a EUROWEB Next Change

EURO WEBSOFT

*Social MMO Company

"Social MMO" is the new tagline and position for a Flash MMO studio I invested, the company had a tough time over the last 18 months trying hard to curn out a winner in the Chinese web MMO market. The company have a strong development team and some portfolio of games on the "COMING SOON" board and a change of direction is good to enable the company to tap into a new space.

What's "Social MMO" ?

We started off about 19 months ago as a WEB MMO company specializing on web-base MMORPG online games. EUROWEB kick started with 1 studio in Beijing but quickly added another studio in Shanghai. Both studio started to develop a similar engine ( *BUSINESS TIP - In games development the 1st chance of failure is not being able to develop a right game engine that can scale and not having a game play mechanics that works. So getting 2 teams to do almost the same work is not a stupid move but buying an insurance for the company and to increase the success chances. ). We launched our 1st game but responce was slightly "cold" so we had to take the game back into the garage and tweak / cut / patch / paste / recolor / bend it and even kick it so it can take a breath of fresh air again to be relaunched.

We just launch the 1st truly Flash MMORPG online game in Facebook embedded within the frame walls of Facebook itself. It kick started in Facebook Taiwan as we can see that the market for MMO online games had already began in Taiwan where above 50% of MMO online games are linked one way or another to Facebook. Some MMO's are already hitting good success as well. Taiwan is probably the more mature Facebook MMO market for a more serious game play.

My next blog will be telling of what's next after Social Games in Facebook ?

1.) We saw that Flash MMO games development numbers are increasing as the web-base games potentials in China increased.

2.) We also knew that today if you are not part of either Facebook or the Apps store ( iPhone / iPad and/or Android ) you are outdated for certain.

3.) We knew that the Social Graphs is a new method of pushing and creating games.

We wanted to be in this space but not as another social games studio. We wanted to be running ahead of time even today we knew we were already slow in entering this market. We want to make our next product-lines in the fore front of the social graphs and tapping upon it in a new way. So we were looking for a NEW tagline for the company which will become our future direction and position.

"SOCIAL MMO"

In our initial investors pitch we mention the fact that Facebook social games is too simply repetitive games that have little entry barrier to competitions and that Facebook is a damn good games platform to launch, promote, push games and to acquire users. And that we believe the NEXT WAVE of games on Facebook would be MMO online games which have a much deeper game play and mechanics than current social games.

And we still believe in this trend to come soon on Facebook and all social networks.

Taiwan is a good example where every hard core gamer is on Facebook. In China Kaixin.com and RenRen.com top money earner are not just "Farm Game" but traditional Web-based MMO online games link to the social networks and OAK PACIFIC is betting heavily on this area. Yes ! we may argue that the Chinese SNS is just using the platform to channel huge amount of users to these games. Isnt one of Facebook key feature the "traffic" too ?

But MMO games developer is not doing enough to create the next generation MMO online games that is designed to have the winning features and the ability to tap the phenomenon success of social graphs. EUROWEB will try to enhance our MMO games from now onwards to truely tap into the social graphs and to come up with unique next generation MMO linked to social networks and become a truely unique "SOCIAL MMO STUDIO".

China Next Games Platform - iPad and Tablets

Mobile games had never been a big hit in China simply because of piracy. The same goes for PSP and Nintendo DS as well. However the arrival of iPad and Tablets will change the mobile gaming industry tho' piracy will still be a key player for its games growth we will see ads dollars and probable multiplayer games monetizing via FREE to Play virtual items sales pretty soon.

I estimate this market will come into China sometime 2011 to 2012 where a new game platform will be born.

Its a no brainer as 91Mobile had already make a big hit out of allowing users to download FREE apps on iPhones and Android phones.

WHICH ROAD TO TAKE ?

I had an interesting meeting today with my Chief of Games Operations and my game designer from UK on what's a good fair method to design our next game to be launched at the end of this year. We were presented with a competitors analysis of similar games and one of the key highlights was - what's bad about their game ? How unfair the game is designed as paying users can simply beat the hack up of non-paying users. This game happens to be from a friend studio whom is racking in above RMB 30 million + monthly revenues at the moment for the last 6 months ( *180 million ). I knew their logics behind the game play ...

My Chief of Ops and UK game designer wants a fair game for the 98% of players whom are non-paying as it is important to take care of the majority of the users. I cant say they are wrong but I knew many friends whom are doing web games from MMO RPG to RTS to SLG in China, many of them are on the edge of closing down their game simply because they are getting the revenues needed to survive. In one of the game studio that I had invested we had the best game designer and a huge team of experience game veterans but yet our 1st game failed to produce the needed "REVENUES" despite being a good game with lots of key features.

Then we meet another game investor whom had in his portfolio 3 studios and 2 games operation platform, I asked him to look at our game and tell me what he thinks ... "You guys have a good game play and mechanics but I'm sure you guys are not making money". I was shocked and asked him for his secret formula and he is nice enough to share the followings ...

1. Dont design your game to last forever for web games.
2. Design it to reap money from day one or basically grab as much money as possible.
3. Make sure the 2% of the paying are happy and let them kick the ass out of the 98% whom dont pay.

Does the above make a good game ?

Maybe not but it sure pays the bill as all 3 of his games are racking in millions while mine is only making users happy. So there is no right or wrong way of making a game. You can have a damn good game but if its FREE TO PLAY and you are not getting the revenues eventually you will need to close doors as someone needs to pay the bill.

My final advice to my team is that ... lets get a game or two that will pay the bills first then we move on towards creating a damn good game that maybe will get us an award in the future.

How to spend your funding ?

Many venture capital firms or professionals would want you to spend wisely and most importantly get break-even point before spending more. One of my VC told me recently that the next trench of money coming in will be for me to expand the company fast. While the 1st trench is for me to get the company towards break-even. This sounds logically.

Here's a real case in China.

2 similar companies in the same internet P2P download industry, both obtained a few million USD in funding. Company A upon receiving the funding move into low gear, calculate their financials and base their new business plans towards ensuring the company will survive for the next 7 to 8 years. While Company B designed their financials and business plan to only last 12 months, basically going to spend all their money away to get market share. Today Company A is still around, became a small player in the P2P download business. They still have their Series A money in the bank with a good small healthy profit margin each month. Company B on the other had become China largest P2P download site and a key player in the online games cooperative publishing business racking millions of RMB each month. VC are chasing to throw money at them everyday while Company A is seeking their Series B funding to expand its business.

I meet another VC friend based in South China and had a long chat with him after reading one of his term sheet which requires the company to pay back the investment within 5 years if the company do not go IPO or being acquired unless the company cant last 5 years. I asked him the reason why ? He said that all the money they invest into a company is for them to spend and make a success out of the company. It is not for survival so the founders shouldn't design the company for survival. If they lose all the money in the right way then be it ! But if they dont spend and slowly spend the money for survival then its better for a VC to invest in stocks.

So in theory the money is for you to either grow BIG and HUGE or just simply die and close down. I strongly believe in this method whereby the entrepreneur should plan to use the money to grow, expand and make the business huge or if he wants to do it slowly then dont take VC money.

Many may not agree with this notion and concept tho' for many reasons. Many VC wants a healthy portfolio that's alive and kicking. Some believe that survival allows a company to sit and wait for the right time and moment to come just like gambling we need patience.

Facebook will never be in China

Facebook growth is slowing down at 500 million + friends suddenly it seems everyone you and I know is on Facebook. Where and how are they going to further grow the numbers ? Many experts predicts China and possibly India or Russia.

Maybe Russia but even then Russia have its own FB version already today.

China will never happen not because MySpace failed in China but simply because the Facebook Mark Z. attitude and character will never get pass the great China firewall. Take - "Facebook Refuses To Take Down Tributes To UK Murderer" as a good example.Facebook isunder fire in the UK today for its refusal to take down tributes to UK murderer Raoul Moat, the man who killed one and shot two others in a rampage across the North of England.

Sorry I have to stamp Facebook Failed in China unless the attitude changes.

China Online Games Market 2010

China has 400 million Internet users, a quarter of them avid gamers, according to the China Internet Network Information Center. Despite that enormous market, shares of Tencent, the Chinese market leader in Web-based games, has dropped 23 percent this year. Perfect World, another major operator, is off 47 percent, and Shanda Games (GAME) is down 42 percent.

With more Internet users in China than any other country, the Chinese game market seems ripe for growth. Two-thirds of Chinese have never been online and nearly half of China's Web surfers are under 25. Gaming companies have lot to worry about : while they see plenty of potential growth in poorer regions, it's getting harder to find players who aren't already online in Beijing, Shanghai, and other big cities.

The industry's revenues are likely to grow 22 percent this year, to $4.5 billion, that's far below last year's 40 percent. All that means the search for new hit games is urgent. This year, Chinese companies will launch 400 new titles, vs. 250 in 2009, competition is getting really hot. It's hard to stand out in the market because many operators have been churning out similarly themed medieval fantasies with titles such as Battle of Immortals and Dragon Power. Just search how many "3 Kingdoms" (san guo) MMO are there in China?

The there is the Chinese government new regulations to worry about, the Ministry of Culture on June 22 announced regulations setting guidelines for the look and feel of games and requiring that social gamers register under their real names. The ministry also set limits on sales to minors of items using virtual currency, or points earned playing online. But what's most scary is the poaching of games development teams that is happening in the Chinese MMO industry now. Companies are hiring head hunters to practically steal competitors or potential game development teams with x2 the salaries sometimes. Some are using unethical techniques to WIN at the game by way of obtaining source codes illegally. Such practises are what killing the industry today.

Gameforge to publish STAR TREK Browser-Based Games

German online game publisher Gameforge announced today that it had closed a licensing deal with CBS Consumer Products to create two browser-based free-to-play games based on the Star Trek license. These games will be casual offerings designed to complement the Cryptic/Atari subscription MMO Star Trek Online.

One of Gameforge's Star Trek games will be for Facebook and developed by an unnamed external German studio. Another unnamed external studio in California will handle development of a second browser-based Star Trek game. The games will be published simultaneously in the US and Europe. One will be based on the original Star Trek series while the other will be based on Star Trek: Deep Space Nine. It is not yet confirmed what type of game either title will be or how it will monetize.

*MOVIES ONLINE GAMES is becoming a trend now and we will see its streams of successes and also failures in 2011 to come.

Movies Online Games *MOG

February 2009 was the month I initiated "EUROWEB" a Flash MMO studio whom will solely concentrate on producing Flash base MMORPG online games based on top Chinese blockbuster movies. We were the 1st worldwide to produce Flash MMORPG online games based on movie IP and to launch a playable demo before the movie goes on the silver screen.

And now 18 months later the market is moving towards exactly the vision I had ...


THE MUMMY ONLINE

If the unique yet satisfying blend of horror, comedy and Brendan Fraser are your thing, then you're probably a big fan of The Mummy movie franchise. Nothing uplifts ancient Egyptian culture like making a mockery of their dead while looting their final burial place. In any case, Bigpoint and Universal Studios are teaming up to bring The Mummy Online, an action-RPG MMO, to gamers this fall.The title will be set in the same 1930's time period as the feature films, and will feature PvE and PvP play. Interested gamers should be pleased to note that it will be both browser-based (powered by Unity technology) and free-to-play, so there's no legitimate objection to giving it a try. Unless you're a scaredy-cat, of course.Universal's Bill Kispert chimed in with the announcement: "The Mummy franchise is chock full of exotic settings, supernatural enemies, exciting quests, and over the top action. It is ripe with gameplay possibilities, and we look forward to extending our relationship with Bigpoint to bring the world of The Mummy to life for gamers."

If these movie IP franchise works on Flash MMO then we will be seeing more MOG *movie online games concept mushrooming all over the world. What next ? I believe that movie IP on Facebook social games and iPhone / iPad games will become a bigger hit to come. YOU GUESS it RIGHT ! I m working on producing a Movie IP base game for the mobile in China as a new pet project with a friend.

81 NOTES : The Successful Entrepreneurs

What kind of entrepreneurs can succeed ?
From my personal experience I can see 2 types of successful entrepreneurs :

1.) The Born Entrepreneurs Type.

*These are people whom are born entrepreneurs, they cant work for anyone and they constantly have new bright ideas almost every week on what can be done to make money. Basically they just love making money as its in their blood stream. For many the roads ahead may not be easy as born entrepreneurs strive through lots of hardship sailing through failures after failures before reaching success. But they never give up hope for success and they know it is just around the next corner. Their experience is something that even Havard or Insead cant teach, their hardship in building a success enterprise whether big or small is something no case study can really tell you to the point.

2.) The Worker Entrepreneurs Type.

*Very often we see most new entrepreneurs whom had almost immediately achieved good initial success are those from this category. They often spend many years working in a company and along the way acquired the know-how of the business they worked day in / day out. When they finally decided to throw in the towel and venture into the business world, some smarter ones will actually initiate the same business similar or an exact copy of their employer. Some would even take a client or two with them when they start. These entrepreneurs have with them the know-how and mechanics of the business so initial success will be easier. But taking a business beyond what you have already known is the big challenge to come.

Successful entrepreneurs must have the never dying spirit inside themselves to succeed. When the going gets tough the tough gets going on ...

Once a friend told me about his problems back in Malaysia about how he also want to drive a Mercedes like me and how he wished he also could do business, make money and owns several apartments. We looked into what he could do and what he knows + how much he have and whether he is suitable for the entrepreneur life of hardship and sometimes you'll probably be worse off than when you are working a stable 9to5 job.

We found that he knows only what he is doing now best and we studied his employer business model and its often not surprising that it can be mimic and his clients are more than supportive for a lower price point. And so he took the 2nd road towards entrepreneurship and made lots of money along the next 4 years, drives 3 cars and purchased 4 apartments. All great entreprenuers are not just born lucky, well some are but many are carved out by themselves or someone along the road towards success. My friend business later failed and he lost all his money, cars and apartments today. But most important of all he also lost his confidence of becoming a success again. As an entrepreneur you can lose everything but never your confidence in yourself to come back up again.

FIFA heading to Facebook with Playfish

May 11th 2010
Social gaming giant Playfish is developing a Facebook title based on Electronic Arts’ world-conquering FIFA franchise. The project – called FIFA Superstars – is the first to be unveiled since Electronic Arts bought Playfish late last year in a deal worth up to $400 million.
Playfish had in the past revealed its enthusiasm in working with EA’s most high profile and lucrative franchises on the Facebook battlefield. Yet the studio clarified it would still be working on its own IP.
EA Sports boss Peter Moore said the integration of FIFA and Facebook made sense.

“Our FIFA products connect fans from all over the world who share a common passion for the sport, and soon our partnership with Playfish will allow us to bring the FIFA brand to the growing Facebook community,” he said.
“Leveraging our football gaming knowledge and marrying it with the social gaming expertise of our partners at Playfish is sure to provide more great opportunities to bring hundreds of millions of new fans to compete against their friends to win the FIFA World Cup through an engaging interactive football experience.”
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This story originally appeared on Develop.

NOTE : Just as predicted by me in early 2009 that all big brands and games Co. will be moving into Facebook with their big IPs. And these big brand names will need probably more sophisticated game play that better reflects their existing game IP and play mechanics. Otherwise we will see a sub-brand culture appearing on Facebook such as - QFifa or FBFifa !