How much potential for development is there in the internet economy? What is the actual state of China's internet gaming industry? What measures will the Chinese government take to standardize and guide the development of the online gaming industry? A reporter from People's Daily spoke exclusively to Kou Xiaowei, deputy director of the Audiovisual and Internet Publication Department of the General Administration of Press and Publication (GAPP), on the subject.

Internet has tremendous economic potential

Q: How much potential is there for internet economic development in China?

Kou Xiaowei: No one can deny the potential of the internet industry worldwide. The internet industry has survived the bubble and developed rapidly in recent years. Now, it has developed to a new stage, which will continue to have a great influence on China and the world.

China has a special situation. We should not adopt Western standards in assessing Chinese internet development. I believe that thanks to the characteristics of the internet and Chinese people's consumption habits, China's internet economy will grow faster and be bigger than many Western countries. The internet transmits data quickly and plays an important role in the increasingly open world. Chinese people like to communicate with others and are willing to take part in group activities. Considering such a cultural background, the internet industry will develop quickly in the country. Moreover, the internet serves Chinese people's consumption habits. For example, very few people in other countries send short messages so frequently as Chinese people. But Chinese prefer to use short messages on many occasions. Westerners do not understand how Chinese telecom companies can make such huge profits through short messaging services and why there are hundreds of thousands of internet games users online.

Therefore, the internet economy has a special and promising prospect in China. So long as telecom companies can identify entry channels, they will be able to make a fortune. The key here is to provide sufficient value-added services in the interactive network. In fact, currently, the only profitable internet services in China are short messaging and online gaming.

"Free service" mode enhances competitiveness

Q: The "free service" mode of online Chinese games service providers has attracted attention in international markets. What do you think of this business model?

Kou Xiaowei: The online Chinese gaming market has become the biggest, internationally recognized, potential market. In 2006, the scale of the online Chinese gaming market reached 6.54 billion yuan, an increase of 73.5 percent from 2005, much higher than the expected 46.3 percent. Such strong growth can be attributed to the "free service" model. It is undeniable that there are still gaps between China and other nations in terms of software development. However, the innovative business mode of Chinese game providers has won approval from many of their foreign counterparts.

The development of Shanda Entertainment is the most successful example of the "free mode". In 2005, Shanda announced that it would provide free gaming services for the online games it promoted during the year. In the fourth quarter of 2005, Shanda had zero income. This sent the entire industry into an uproar. However, in the third quarter of 2006, its profits were equal to its best ever quarter on record, which demonstrated the success of the transition. During the same period, ZT Network Science Technology and Soft-world introduced the same model and were successful. About 84 percent of online games that were put into operation in 2006 adopted the "free mode", which aims to tap the potential of consumer users by offering all types of value-added services and meet consumers' demands.

Online game providers have formed a relatively stable pyramid structure. The first tier is comprised of enterprises whose income exceeds one billion yuan, such as Netease, Shanda, and the9. Despite some fluctuations in their operating income, these companies are generally growing stably. The second tier includes 9you and ZT. Their income approaches or exceeds 500 million yuan. Companies with an income between 500 and 100 million yuan belong to the third tier, which is the backbone of industrial development. There are more than 10 such companies, including Kingsoft, Ourgame, Ggtgame, Tencent, and T2CN. All of the third-tier companies are actively looking for a breakthrough.

Government should play a guiding role

Q: What measures will the government adopt next to regulate and promote the development of the online gaming industry?

Kou Xiaowei: In the market economy, I think the government should assume two responsibilities. The first is to create a healthy environment for the industry. The second is to protect intellectual property rights. Many software development companies lose tens of millions yuan and even hundreds of millions of yuan to piracy. If the government can do more to protect intellectual property rights, it will be able to promote innovation in enterprises and safeguard China's image in the international arena.

In many people's minds, government support means that the government will provide the money. In fact, the government should play a guiding role in progress. During the initial stage of internet industrial development, the absence of imperfect rules is normal. Some enterprises will take advantage of any loopholes. In such circumstances, the government should, in the first place, encourage enterprises to be more self-disciplined and pay attention to professional ethics and fair competition. After that, they should join hands to break down foreign enterprises' monopolies by creating original online games and building a platform for exchange between Chinese and foreign enterprises. Only by holding more exchanges, can Chinese enterprises gain valuable experience from abroad. Some of the big Chinese companies are gradually beginning to expand onto the world market and have grabbed the attention of foreign producers and planners. The South Korean government has provided a lot of money to its domestic online game providers, so as to promote internet industrial development. Our government has not offered money, but Chinese enterprises are developing very well. I think using a market-oriented method will be more effective.

There are still many problems in the development of the online Chinese gaming industry. For instance, industry regulations need to be improved; industry orders need to be standardized; self-awareness and a sense of responsibility is still underdeveloped; there is a shortage of skilled R&D personnel; game themes are not innovative enough; illegal activity is rampant; and more. All these problems are restricting the development of China's online gaming industry. Objectively speaking, the Chinese internet gaming industry is still at an early stage of development and will face increasingly fierce competition in the near future. We need to have a clear understanding of its current situation.

(Source: People's Daily Online February 16, 2007)