Playing is no game

Two cases – one from South Korea and one from Germany – examine the booming area of massive multiple-player online games. How should Korean company Nexon enter the Chinese market? What growth tactics should German company GameGoods.de adopt to develop its business of selling online ‘gold’?

People have always liked games. The Romans went for the spectator kind, such as gladiatorial combat; the medieval perhaps for a knightly joust. Participation gaming also has a long but more placid history: bowls on the village green, or perhaps a game of cards in the parlor. Either way, the gaming was mainly for pleasure, not profit.

Things changed in the nineteen-seventies when electronic games bustled on scene, first in arcades and on video, then online, now on mobile telephones (see chart below).

Two recent case studies – one by professor Wujin Chu of South Korea’s Seoul National University GSB and the other by professor Lutz Kaufmann of Otto Beisheim University in Koblenz – treat different aspects of the online gaming sector, as it functions today.

Both studies deal with multi-player, online, role-playing games, nerdishly known as MMORPGs. These are played on PCs and have become a veritable industry catering to players, sometimes addicted, who pay their way. The currently leading game, World of Warcraft (WoW), has over 6 million subscribers and rakes in $1.5 billion annually for its owner, Vivendi Universal group of France.

What sets MMORPGs apart is their structured enticement. Players to an extent co-create the games. To be sure, WoW sets the theme of the game in a chivalric fantasy world, but then the players develop it by customizing their roles, their attire, their arms, even their allies. WoW invites interaction between players, who may gang up to slay an errant knight-errant or a monstrous monster. With such creativity allowed, it 's no wonder that the average online gamer spends 20 to 40 hours per week with WoW, or Lineage, or Maple Story.

Worldwide, about $4.4 billion was spent for online games as far back as 2005. It has burgeoned since then. Helping raise the ante is an ongoing shift from ‘one-time’ purchasing (e.g. a game console and game cartridges) to extended spending. Online gaming is at the forefront of this trend, featuring complex business models that combine upfront fees and ‘after-market’ extras, structured in such a manner as to attract, and then ensnare, players. Another way of putting it is, the game is stacked to milk the player coming and going. Take a WoW fan: she'll be shelling out a monthly subscription fee (perhaps $15/month). Now take a MapleStory fan:  He'll  have free access but must then pay for all extras.

The case authored by professor Lutz Kaufmann focuses on a smaller German company, a 2006 start-up based in Cologne, called GameGoods. GameGoods’ business is to provide ‘aftermarket’ service solely to the best-selling online game of the moment , i.e. World of Warcraft (WoW). GameGoods provides WoW players with accessories that enable them to progress more quickly to higher levels of the game. Accessories range from magical spears, to fast elixirs, various quantities of gold, and more. Explains professor Kaufmann, “By purchasing these accessories from GameGoods, players can focus on the interesting parts of the game, and spare themselves the repetitive combat that is otherwise required to acquire elixirs, swords or gold.”

Written in a simple flowing style, the GameGoods case illuminates the dilemmas of the fresh start-up that has hit a gold vein, more or less without expecting it. Indeed, GameGoods was started in 2006 on the intuition that WoW players need a reliable and trustworthy ‘after-market’ in order to advance in the game without spending hours slaying a clutter of monsters, druids and undeads. By investing in some GameGoods gear they bought themselves a clear shot at the grail, as one might say.

Kaufmann's case examines GameGoods barely a year after its creation. It makes the basics seem good: revenues from eBay sales and from direct web-marketing are positive. In order to handle growing customer service and marketing needs the firm has grown from five founding partners, to the present stand of 20 employees,. What should CEO Richard Stallmann do next? Branch out from WoW into other online games? Delocalize from expensive Cologne? How can he protect his position against Asian competition that is cheaper and will soon spread to who-knows-where?

Even though GameGoods reached the “game over” stage in late 2008 and ceased existence, the case brings up important issues in start-ups, especially in sectors of fast change.

Now take an Asian giant in GameGoods' line.  Nexon of Korea presents a different set of givens. Professor Wujin Chu's case from Seoul provides good insight into the set's complex segmentation (see box). Arcade games are still the dominant product in Korea, but with PC games now fast closing in.

The interest of the Korean business school in online gaming may trace to a drive by the Korean government to stimulate the development of the national gaming industry. That's probably why Professor Wujin Chu’s case focuses on the possible development strategy of Nexon, a $350 million (2006 revenues) game developer (www.nexon.net). He reports that Nexon’s main interest at the present is entrance to the lucrative Chinese market.

The interest had better be keen and resourceful, as entering this particular market is anything but easy.  Professor Chu explains that Chinese players do not flock to a new online game from one day to the next. There is much preparatory work for players to enjoy a good online experience: whole parks of local computer servers, along with intensive local marketeering so that a critical mass of players starts playing and paying. Even invention of new, localized content may prove needed. And all this often turns out to mean that the game developer needs to arrange for a local partner to see things through.

But such are the travails of structured enticement.

Reference: ECCH 309-055-1
“GameGoods, The Cash is Real”
WHU, Otto Beisheim School of Management
Professor Lutz Kaufmann and Oskar Hartmann

ECCH SNU-09-03
“Online Game Industry and Nexon’s Entry into China”
Seoul National University, GSB
Professor Wujin Chu and Mi-Ja Im

Published August 2009