China Online Games

Players in online games sometimes quit and leave money in their accounts. In the US, and, I suspect China, the people have rights to their money.

As a way to "cash out" these players, and, hopefully to bring them back to their games, several Chinese game companies, including Shanda and Giant Interactive are giving game currency, and in some cases cash, to these wayward players.

Ah, the joy of virtual currencies.

The free currency doesn't really cost the game companies anything, but does get players back involved. And the free cash, no doubt, will be more quickly (and generously) available as game currency and only eventually as cold currency.

"China Online Game Operators in Account Repurchase Frenzy", http://www.tradingmarkets.com/news/stock-alert/game_game_china-online-game-operators-in-account-repurchase-frenzy-913648.html

China has moved to implement its long discussed program to implement parental controls for online games. Six Chinese game companies are involved so far: Wanmei.com, Tencent, Shanda, Netease, Changyou, and Giant Interactive. The program provides a number of services that should be considered by other game companies as optional services:

It is learned that parents can report their children's games accounts to the operators if they find their child is addicted to a game, and once the parents' report is verified, the operator will limit a child's access to the games or stop providing service to the child based according on the parents' request. Meanwhile, the operators will keep track of the account to make sure it is not used for playing other undesirable games.

It is an interesting question as to whether these services will be effective in limiting play by minors from a policy perspective. Some of the early metrics of these anti-addiction and parental control programs are quite suspect.

"China Launches Initiative For Parental Supervision Of Online Games", http://www.chinacsr.com/en/2010/02/09/7133-china-launches-initiative-for-parental-supervision-of-online-games/

An organized team that used a trojan software program to target online games has been busted by China's government. The 2 trojan authors apparently earned $140,000 while the rest of the gang may have earned $4.3 Million (30 million Yuan).

11 members of the group have already been sentenced and there may be as many as 80 participants going to jail.

The gang stole 5.3 million passwords which were likely used to loot and resell items from the players accounts as well as use them for "gold spamming" (marketing game currency to other players).

It is nice to see China's government go after online criminals. We see very few cases in the US in spite of the size of online fraud. In the future, however, these cases are going to be more difficult as the criminals may be located in other jurisdictions.

"China jails 11 over online games scam", http://news.yahoo.com/s/afp/20091217/tc_afp/chinainternetcrime

via

M. Humphries (2009), "Online games trojan sees 11 jailed in China, 69 more could follow", http://www.geek.com/articles/games/online-games-trojan-sees-11-jailed-in-china-69-more-could-follow-20091217/

I SCREWED UP. I bought shares in Tencent (TCTZF.PK) after I found out about its amazingly popular QQ messaging service in China. I bought low (around $2.70 a share, I think) and sold pretty high, pretty fast (over $7 a share).

cough.

Tencent is hovering between $19 and $20 a share just 3 years later.

Tencent is the Master of Microtransactions in China. Everything is has a (small) price.

A $1.50 equivalent a month subscription is needed to take your inbox from 50 to 150 messages (nice savings on storage there compared to the 1GB accounts we have for free here).

Just as with QQ, avatars, different interface skins, music, it all costs just a couple Q-coins.

Items can be purchased individually or at a discount that is driven by different subscription tiers.

The key is to keep the subscriptions and microtransactions so inexpensive that the prices are easy to pay - even in China.

As far as I know the only advantage Facebook has over Tencent is the open API for developers (and I'm not sure of that).

And, of course, QQ continues to be a money machine, Tencent is a major online game provider, and who knows what else.

Now, when am I going to get back into this stock? A clear revenue model, a rapidly growing market, growing both domestically in China and internationally (they have a US office).

Totally brilliant (still). A company to watch.

"Tencent's Strikingly Successful Qzone", http://seekingalpha.com/article/179061-tencent-s-strikingly-successful-qzone?source=yahoo

"Tencent's QQ preferred by over 80% of IM Users in China", http://playnoevil.com/serendipity/index.php?/archives/1036-Tencents-QQ-preferred-by-over-80%-of-IM-Users-in-China.html

Chinese hackers are making between $100 Million and $1 Billion per year exploiting online games in China (more conservative estimates put the value of online game hacking at between $14.6 million and $146 million). These criminal groups earn 95 percent of their revenue from attacking online games with trojan software and other attacks.

The problem has been a lack of interest in security by online game developers in China.

Trojan horse attacks grew by an order of magnitude in 2008 and anther 60 percent in 2009.

Once a machine is compromised and an account is looted, the computer is used to support other online attacks (including botnets, no doubt) as well as simply boosting traffic data for web sites.

Tie Jun, an engineer from Kingsoft, one of China's largest security firms, said online games companies in the country had not shown great interest in the past in prohibiting the trade of game accounts and virtual items in the underground market.

But with joint efforts from online gaming and security firms recently, the growth of Trojan horse attacks is seeing signs of slowing down, he said.

The problem is that the revenues for the hackers do not directly correlate with the losses for the game developer or operator. While players may lose an account that they have invested a lot of time and money in, the game company only has to deal with a customer service problem (I don't think there is the same sort of credit / chargeback environment that there is in the US). In general, online crooks are going to be willing to invest a lot more in breaking game security than game companies unless they are held accountable by their players or the government (which is not happening today).

Wang X. (2009), "Hackers milk Chinese online bonanza", http://www.chinadaily.com.cn/bizchina/2009-11/27/content_9062364.htm

Pirate servers / private servers are quite common in China (a topic I would love more information on... I suspect this situation is growing worldwide in developing nations as Internet access spreads). These individuals and companies have bought, stolen, or reverse-engineered the game servers for popular online games and operate them for a profit... selling subscriptions and items at a fraction of the cost of the legitimate MMO.

No Honor Among Thieves

A Chinese pirate server operator was having trouble with a competing private server business. So, to retaliate, he leased 81 servers for 280,000 Yuan (around $41,000... apparently, there is good money in pirated game servers!) to run a Denial of Service attack against his competitor.

His first attempt failed (poor hacker hiring... I hate when that happens), so he found a "more skilled" individual who targeted the DNS provider for his foe.

The DNS provider was rapidly overwhelmed by the excessive number of DNS requests and resulted in DNS queries being escalated to China Telecom's DNS servers causing Internet outages in 6 provinces.

The War Continues

The individuals involved were arrested, but the war continues:

Attacks between illegal game operators and other Internet businesses are fairly common in China, both in and outside of major cities, said a local security researcher. Online mercenaries who own servers or control networks of compromised PCs often sell attack services on private forums or chat clients, he said.

By the way, I discuss the Pirate Server problem (and potential solutions) in my book Protecting Games

O. Fletcher (2009), "China Game Boss Sniped Rivals, Took Down Internet", http://www.pcworld.com/businesscenter/article/171018/china_game_boss_sniped_rivals_took_down_internet.html

It appears that China is putting regulations in place to protect online game players from being suspended or banned without notification, according to China Tech News (via Poker 777):

1. Players will receive notification 3 days prior to a temporary game suspension.
2. Players will receive notification 30 days prior to being banned.
3. Players will receive clear explanation of any interruption (or alteration?) of a player's account.

Game companies will need to retain logs "traces of fraudulent deeds", for at least 6 months in order for the logs to be available to courts (obviously, trials are much speedier in China than the US!).

... and no gambling online via wagering or casinos is allowed.


Poker 777 (2009), "Online games: China establishes a text in order to protect its players", http://www.poker777.com/20090622/online-games-china-establishes-a-text-in-order-to-protect-its-players.php

Don't p_ss off your business parters!

KNOWN FACTS:

There was supposed to be an orderly transition from The9 to NetEase as the local operator of Blizzard's World of Warcraft, however, to date, World of Warcraft is not back online in China.

Blizzard had been frustrated with The9 even before the game was launched and it seems relations never got better.

When Blizzard had the chance to opt out of its contract with The9... The9, unsurprisingly, retaliated.

RUMOR ALERT: It now appears that the Chinese government is investigating the relationship between NetEase and Blizzard as an illegal joint venture - which may, as a worst case, lead to World of Warcraft being permanently suspended in China.

"As of now, we don't have a specific reopening timeframe."

Of course, every day that the game is not up and running, it is losing momentum to other MMOs. This could prove costly for both Blizzard and NetEase... and could be very damaging for NetEase who, no doubt, had to pay a good chunk of change for the right to publish the game PLUS a lot of guaranteed royalty dollars (a figure of $300 Million is being waved around).

If the charge of "illegal joint venture" sticks at all, it is going to put a further chill on anyone licensing games into China. This could be a very costly spoiler tactic and should be of concern to US and Korean online game developers, in particular.

So, when is the US Trade Representative and the WTO going to take up online gaming and licensing?

"Blizzard Being Suspected of Illegal Joint Venture, WOW Facing Suspension Forever in China", http://news.mmosite.com/content/2009-07-14/20090714054025804.shtml

"China's NetEase says relaunch of key game delayed", http://www.reuters.com/article/marketsNews/idINSHA14674820090701?rpc=44

"Rumor: Netease WoW Approval Process Postponed", http://www.marbridgeconsulting.com/marbridgedaily/2009-06-29/article/27358/rumor_netease_wow_approval_process_postponed

"World of Warcraft to Battle Chinese Investigation?", http://news.spong.com/article/18615/World_of_Warcraft_to_Battle_Chinese_Investigation

"NetEase's WoW Servers Down in China", http://www.orato.com/tech-games/neteases-wow-servers-down-china

"WoW subscriptions down to 5 million ", http://tobolds.blogspot.com/2009/07/wow-subscriptions-down-to-5-million.html

The web is abuzz. The Chinese Government has banned gold farming.

well, perhaps not.

The Chinese government has been very concerned about virtual currencies as a threat to its real currency because of the rise of QQ-coins / Q-coins in Tencent's QQ service (a topic I covered back in late 2006). If you read the actual news from the government, the focus is on QQ-coins.

Cui Ran, an expert on the Chinese online industry, said the regulation aimed to "nip illegal online activities in the bud," as current trading volume was still too small to shake the nation's entire financial system.

Its not gold farming, its a threat to the Yuan. The regulation does not even cover virtual items, only virtual currency:

...includes prepaid game cards, game currencies and game points, while tools and weapons used to play games online are not included.

There are two other concerns that the Chinese government seems to be addressing with this rule - gambling (using virtual currency and then converting it to real currency) and protecting children from "inappropriate content".

While most of the Western coverage has been entranced by gold farming, Juliet Ye of the Wall Street Journal seems to have picked up the real story (outside of Chinese sources).

The regulations also solidify some issue that are of concern to US customers of online games as well:

- If the service is shut off, customers are entitled to a refund of unused currency.
- "virtual currency should be exchanged only for virtual goods and services provided by the issuer of the currency" (this would cause problems for a lot of the third party currency folks here in the US and elsewhere)
- Companies already involved in virtual currency trading are required to register with the local cultural affairs bureau within three months.
- Minors may not buy virtual money. THIS IS POTENTIALLY HUGE. If enforced, this would essentially shut down most MMOs that use the Free-to-Play business model.

The gambling issue is very important. Even "virtual lotteries" are being affected. Giant Interactive, operator of ZT Online, is shutting down its "box opening" game (where players buy treasure boxes that yield random virtual prizes). Interestingly, this would not be considered gambling in the US (and elsewhere) since there is no "real" prize (I don't think - Lawyers?).

As one would expect, everyone in the industry is very positive about the new regulations.

The real question is whether these new regulations would be enforced. Gambling games for virtual currency have become very popular in Chinese casual game services (including Tencent's QQ service). The "open the box" game has been a cornerstone of ZT Online's success and has been copied by many other online game companies both inside and outside of China.

Locking out minors from buying virtual currency could be devastating (and was mentioned only in one line of the statement from the Ministry of Commerce). If it is enforced as "effectively" as the age restrictions for games, I don't think it will be problem, but if enforced vigorously, it would all but eliminate the "free-to-play" business model in what is probably the world's largest online gaming market.

China's government is quite concerned about the power of QQ-coins and any threat to its currency both as a currency and as a vehicle for money laundering. At the same time, they are legitimizing these currencies somewhat by strengthening their "real" value (in this regulation and in other rules that restrict the ability of game companies to freely ban accounts as well as several legal cases that have returned accounts to aggrieved players).

What next?

While "victory" will be declared, I do not think that the restrictions on minors will stand. This will be seen by the continued growth of the "Free-to-Play" model in China.

The game companies have always been officially against the use of their currency as real money, but have been very tolerant of it (and even encouraged players through promoting gambling games and such). These types of "obvious" gambling games are likely to go away and may really hurt the finances of companies like Tencent and Giant Interactive (as well as Sohu and others with casual game portals which are full of casino-style games). "Hardcore" game companies that have stuck with traditional revenue strategies will continue with little impact.

I would not be surprised to see many of these companies aggressively take these business models overseas where the definition of "virtual property" has not been well-defined. Especially in major developing nations like Brazil and Eastern European countries (Russia could be an interesting case as they've just officially banned gambling).

As to gold farming, any developing country loves foreign currency. Don't expect any real action on this issue anywhere anytime soon. This is "entertainment outsourcing" and is almost exclusively the concern of game publishers, not their host governments.

Don't hold your breath.

"China bars use of virtual money for trading in real goods ", http://english.mofcom.gov.cn/aarticle/newsrelease/commonnews/200906/20090606364208.html

"China bars use of virtual money for trading in real goods ", http://news.xinhuanet.com/english/2009-06/27/content_11610478.htm

J. Ye (2009), "China Cracks Down on Virtual Currency, For Real", http://blogs.wsj.com/chinajournal/2009/06/29/china-cracks-down-on-virtual-currency-for-real/

T. Claburn (2009), "China Bans Gold Farming", http://www.informationweek.com/news/internet/ebusiness/showArticle.jhtml?articleID=218101859

"Giant Closes "ZT" Draw Citing Regs", http://www.jlmpacificepoch.com/newsstories?id=151322_0_5_0_M

S. Davis (2006), "Q Coins and Yuan - A Real Collision of the Virtual World with Real Life through Virtual Currency", http://www.playnoevil.com/serendipity/index.php?/archives/1044-Q-Coins-and-Yuan-A-Real-Collision-of-the-Virtual-World-with-Real-Life-through-Virtual-Currency.html

K. Brice (2009), "Chinese government bans gold farming", http://www.gamesindustry.biz/articles/chinese-government-bans-gold-farming

100,000 Yuan (around $14,700) in Tencent's QQ-coins virtual currency. Extorted.

That is a LOT of virtual currency. For anyone to have.

Heck, it is a lot of money. In the US or China or pretty much anywhere.

A man and three accomplices was convicted of extortion for stealing 100,000 Yuan of QQ-coins plus a large number of virtual assets.

Oh, they also stole 200 Yuan (almost $30) of real currency.

The ringleader is off to jail for 3 years and all four are being fined 5000 Yuan (around $740 dollars).

The incident happened at an Internet cafe in China where the lead criminal was apparently losing a lot of money in the online games and the victim... well, clearly, not so much.

Digression on QQ and Tencent

By the way, while people in the US are getting excited about Facebook launching a virtual currency, China has one in the shape of Tencent's QQ coins associated with the QQ service - which has 220 million registered users (more than Facebook's 200 million).

As I've noted before, you should really take a look at Tencent and QQ if you are interested in online powerhouses. (Oh, and you can by the company's stock on the US OTC market - I've owned it before and shouldn't have sold it ).

End Digression

I'm guessing that the players were playing "virtual gambling games" which seem to be quite popular on QQ, but I'm not certain. QQ-coins can be used for all sorts of things - it is such a popular virtual currency that China's government has considered regulating it.

An interesting note from the court in China... and something for everyone involved in virtual worlds, items, and currencies to be aware of:

The court held that although no law has acknowledged legitimacy of the virtual property, game players have paid time and real money to accumulate their virtual property, which should be protected by the law.

O. Fletcher (2009), "China Sentences Virtual Currency Extorter to Prison", http://www.pcworld.com/article/165447/china_sentences_virtual_currency_extorter_to_prison.html

Deng S. (2009), "Four people sentenced for virtual property theft ", http://news.xinhuanet.com/english/2009-05/24/content_11427265.htm

M. Zuckerberg (2009), "200 Million Strong", http://blog.facebook.com/blog.php?post=72353897130