China proves both profitable, perilous

When We Made Entertainment Co., the first Korean company to enter the Chinese online game market, and Shanda Corporation, a Chinese online game provider, became business partners in July 2001, they were ready to make it big in China.
We Made Entertainment was looking for a trustworthy partner in China to sell its famous massively multi-player online role-playing game (MMORPG) “Legend of Mir 2,” and Shanda was looking for a partner from Korea, a pioneer in the online game industry.
They both saw the huge potential of the Chinese online game market, and they were right. Within a year of its release in 2001, “Legend of Mir 2” had a 65-percent market share, with more than 700,000 concurrent users. Their partnership was a huge success and was envied by many others.
Shanda started to provide other famous Korean games, such as Nexon Inc.’s “Crazy Arcade BnB” and CCR Inc.’s “Fortress 2.” It is now the biggest online game provider in the Chinese market and is listed on Nasdaq with a market value of more than a $1 billion.
It was obvious that both companies benefited from the partnership at the beginning. Their friendly relationship, however, didn’t last very long.
The complications began on the technical level. Whenever there was a problem with its game server, Shanda had to wait for technical support from its Korean partner, and meanwhile had to deal with a large number of complaints from users.
Also, the company didn’t even have enough money to install new servers, despite the growing number of users. Shanda began neglecting its 30-percent royalty fees to We Made Entertainment, and the two companies started to fight over the issue.
Although Shanda’s initial success was based on the partnership with We Made Entertainment, it started to realize it needed to stand on its own feet. “If we want to contribute to the Chinese game industry and keep our profits high, we have to be able to develop games on our own,” said Tiangiao Chen, Shanda’s chief executive officer.
The tensions between the two partners reached the point where service for “Legend of Mir 2” was suspended until the issue of unpaid royalties was resolved. In the meantime Shanda released its own online game, “The World of Legend,” in July 2003. It was a great success, as more than 50,000 users registered on the first day of service, but it made the situation between the two companies even worse.
We Made Entertainment said the characters and game controls were too similar to “Legend of Mir 2.” The company also said it takes more than a year to develop a new online game, even for a very experienced game company, and argued that it was impossible that a neophyte game maker like Shanda could come up with “The World of Legend” in a few months. Shanda simply said that We Made Entertainment was being unfair and unreasonable.
We Made Entertainment sued Shanda for copyright violations in 2003, and the two companies are awaiting a Chinese court’s ruling.
“As the first Korean company to make inroads into the Chinese market, we will not set a bad example by settling out of court,” said Park Sang-yeol, vice president of We Made Entertainment.
For other Korean game developers looking for a piece of the Chinese market, this case was a wake-up call. They are now much more cautious about signing a partnership with a Chinese company and prepare much more detailed contracts to eliminate any room for argument. They also spend more time to understand Chinese culture and to research the market.
Nevertheless, it is almost impossible to avoid conflict completely, no matter how cautious Korean companies are, because the two sides have completely different goals and interests.
Korean game makers are looking for a Chinese partner that will help them enter the Chinese market, while Chinese companies are looking for Korean game makers that are willing to transfer their knowledge and technology of online game management, which Korean firms are reluctant to do because they see the Chinese as potential competitors. They have reason to worry: Korean games once had an 80-percent market share in China, but now it’s only 48 percent.
Nevertheless, China, with its 100 million Internet users and 30 million online gamers, is still the land of opportunity for many Korean companies, which pride themselves as the world’s best online game creators. With the Korean online game market nearly saturated, game developers sorely need a new market.
“Even if we lose the case against Shanda, we will not give up the Chinese market,” said Mr. Park.

by Cho Young-tak, Koo Won-mo