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By SMG Research Team, August 19, 2010 3:55 pm

How much do you know about China’s online social gaming industry?  I’m sure the name “Happy Farm” will have more than a few heads nodding.

In a nutshell, the heart of this type of gaming lies in interacting and playing with people you know, and who belong to your online social network.  They are usually hosted not on a third party website, but on social networking sites (SNS).

Globally, online social gaming has been around for several years and in China, this concept holds an enormous amount of untapped potential.  Today, social gaming does not conjure up the image of a teenage boy playing WoW at a local internet café til the wee morning hours. Instead, these games appeal to everyone – from China’s youth to moms (as seen in our Digital Moms research) to corporate white collar workers.

They have emerged as a convenient activity for netizens of all walks of life, providing a sense of release, relaxation and fun. Its immense popularity in China can be attributed to the mixing of China’s relationship-oriented society with their love of the online world.  Gamers take breaks to tend to their crops on Chinese developer 5 Minutes’ Happy Farm, or steal their friend’s car parking space on Kaixin001′s Qiang Chewei.

RenRen’s new approach

Looking at this trend more closely, we can see the weight social networking sites are placing upon social gaming and how it has become an integral part of their business model.  This new RenRen TVC is most telling – take a look:

(Click here to be taken directly to the Youku site if the above is inaccessible)

RenRen appears to have shifted their marketing focus from last year’s theme of ‘real-life stories of people using RenRen to connect’, to placing their messaging squarely in social gaming.  As you can see from the TVC, the animated vegetables, animals and furniture may look familiar to you – they are references to China’s leading social games.

The future of social gaming

Expect great growth.  Social networking companies are slowly beginning to open their sites to 3^rd party programmers (instead of designing games in-house, as was the norm with many major social networking sites such as Kaixin001 and Qzone).  This model is already available on RenRen, which has seen a proliferation of external developers bringing in highly popular and innovative games and in turn, higher traffic to the site.  It is also allowing Western developers, like Zynga, a powerful market in their international expansion plans. Zynga will be launching their first internationally localized game, Zynga Texas Poker, in Chinese to the Greater China market this year.

In China, Happy Farm has an estimated 23 million active users per day. Social games boast a superior distribution model across a variety of platforms – mobile social gaming being a hot one.

Chinese social gamers are becoming increasingly discerning about game quality, and as the variety, social components and innovation improve, it is a certainly that this industry will continue experiencing unprecedented popularity.

What this means to you as marketers

Social networking is the top activity netizens engage in, and it’s not only the starting point of their daily online journey, but a constant throughout the day. One source stated that many sites are now reporting that SNS are sending them more traffic than traditional search engines. The next few years will see a convergence between social gaming and mobile gaming – especially in China, where almost 40% of the 755 million mobile subscribers use mobile internet.

The potential for brands to reach consumers through these platforms are enormous, given the right partnerships and integrations. Virtual goods, often linked to social gaming, are a prime opportunity as well. It is estimated that the sale of online virtual goods in China amounts to USD$5 billion.  Click here for the reasons why this works in China.

Disney’s recent acquisition of social gaming company Playdom (for USD$763 million) shows how seriously companies are taking social gaming and with the international love-fest for them – especially in the most populous nation in the world – it’s a safe bet that this trend is here to stay.

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By SMG Research Team, June 18, 2010 11:39 am

While US consumers are the world’s top shoppers – on and offline – this is only the case for real products.   You’re thinking: What other types of products are there?  Well, let me tell you.  The Chinese are leading the way in the purchase of … virtual products.

So much so that research firms are estimating that the purchase of virtual goods in China reached approximately USD$5 billion in 2009 – over five times that of the United States.

In a country where there is so much fluidity between the ‘real’ and online worlds, this should not come as a huge surprise (though I have to admit, that despite knowing the power of the online world in China, I still was surprised at just how large the numbers actually are).

I do understand the concept of virtual products and virtual gifts.  After all, I’ve given others Facebook gifts in the past and have had fun outfitting an avatar.  Both of those were free.  And for me, the buck stops there.  Putting money into products that I cannot touch, taste or smell seems rather, well, impractical.  But that’s only to me and clearly, scores of other consumers see it in an entirely different light.

Now let’s take a moment to try to understand the motivations of Chinese consumers and the reasons behind their acceptance and desire for virtual products.

1. Blurring of offline and online worlds.  In the eyes of many Chinese consumers, especially Chinese youth, there is no distinction between the two.  The online world is just an extension of their offline world.  If this is the case, why should they act any differently online as they do off?  Online, they can purchase a virtual gift for their sweetie, or a trendy outfit for their avatar, or a power-up to ensure their warrior wins more battles.  Purchases are made to fulfill not only practical needs, but emotional ones as well and for these youth, virtual products satisfy their emotional needs just as effectively.
2. Chinese youth have many friends online.  A third of Chinese youth 16-29 from Starcom’s Youth Surveillance research even said they have more friends online than they do offline.  Furthermore, 43% say they’ve never met many of their online friends in real life before.  Due to this unique dynamic in China, virtual gifts then hold an even greater level of meaning and importance.
3. Anonymous escapism. In a society a little bit more ‘closed’ and where tradition and conservative values still reign, Chinese youth turn to the internet as a way to express opinions, and the image of themselves they are unable to in ‘real’ life.  Over a third of the Chinese youth we studied reported feeling “more like ‘myself’ online than I do in ‘real’ life”, and 57% said “I do not feel as much pressure from society online.”  Online, they can develop their true, desired identity, wear the clothes they would never dream of wearing offline, or buy items for their dream house.
4. Gifting an important part of Chinese culture. Gifts are a large part of maintaining guanxi (a deeply rooted idea in Chinese culture and tradition combining the depth of one’s relationship with another, moral obligation to maintain the relationship, and the idea of giving ‘face’).  Thus it is not surprising that gifting would extend to the online world, and once it starts, it will continue in reciprocity.
5. Greater interaction with friends online leads to greater need for status online. In China, being online is not a solitary activity.  Friends go to war against other friends… or steal veggies from their gardens.  If Xu sees that his friend’s avatar has the newest TurboActionMissile Gun (I’m clearly rubbish at naming guns…), he will want it too, in order to show his friends that he can afford one as well, on top of the fact that the gun probably will make his avatar more powerful.

Why else does this work?

But of course, all this would not even be a consideration if companies were not able to create these offerings, build their business model around virtual product and really create a need.  Virtual money and products on social networking sites in Asia arose partly due to a less developed online advertising market.  Unlike the West, banner ads were not as effective and click-thru rates were low.  This drove Asian web businesses to seek new ways to make money.  Innovative offerings, ease of payment (via mobile phones and prepaid cards), a la carte items (e.g. avatar costume pieces), and very affordable prices have all helped drive the need and acceptance of virtual products.

For companies like Tencent (operator of QQ instant messenger and social networking site Qzone), virtual goods have become their primary source of profit.  In the first half of 2009, the company made over $300 million in revenues from virtual goods.  Compare that to online advertising, which only drew $35 million in revenue for Tencent.

Future thinking

It is certain that virtual offerings will continue to become more innovative, and payment methods will become easier.  All this while the internet continues to spread to even more users in China.  From this vantage point, the opportunities for online goods appear limitless.  How can your company take advantage of this to stay relevant with consumers?

Another consideration might be to come up with effective ways to link virtual goods to real goods, allowing consumers to get the best of both worlds and soothing the protests of consumers uncomfortable with the idea of virtual goods they are unable to smell, touch or taste (like yours truly).