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Videogames in China

[CGAMES1] Activision Blizzard

Forgotten (Undead Warlock) and his pet (succubus) standing in the bank.

HONG KONG—Videogame companies and investors are rushing to tap the promise of China's game market, but many of them are discovering that a slow-moving bureaucracy and rampant piracy remain significant hurdles.

"World of Warcraft," the online role-playing game that is by far China's most popular, is one example. Regulators continue to hold back the latest edition of the game, hobbling what had been expected to be a major driver of growth for the game's maker, Activision Blizzard Inc., and its local partner, NetEase.com Inc.

Companies, meanwhile, must fend off bootleg versions of their games. Diana Li, former chief executive of Shanda Interactive Entertainment Ltd.'s game unit, said hackers and other forms of piracy reduced the industry's profitability by roughly $1.5 billion last year.

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CGAMES2
Activision Blizzard

Character select interface: Insanity (Undead Rogue)

Unlike console games in the U.S. and elsewhere, China's game market is dominated by online role-playing titles such as "World of Warcraft" that hundreds of thousands of people can access via their personal computers or Internet cafes.

Some of the games are free, particularly those made by Chinese developers, but players buy virtual accessories, such as weapons, or pay to play enhanced versions of the games.

The market is attracting increased government attention and software pirates because of its rapid growth. China is expected to see its ranks of online gamers reach 230 million over the next two years, more than three times the current estimated level of 69 million, according to the China Internet Network Information Center, a government agency, in a December study.

That's expected to add to already heady market growth. Revenue from the Chinese game market rose 39% last year to 25 billion yuan, or about $3.7 billion, according to the Ministry of Culture.

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CGAMES3
Activision Blizzard

Character select interface: Forgotten (Undead Warlock) & pet (succubus)

Investors are jumping at the opportunity. Shanda Games Ltd., the Shanda Interactive unit that makes multiplayer online games with roughly nine million users, raised more than $1 billion in an initial public offering on the Nasdaq Stock Market last year while smaller rival Changyou.com Ltd. raised $120 million in its own Nasdaq offering.

"World of Warcraft" says about half of its 11.5 million subscribers are in China, including players like 30-year-old Tao Zhou. In college, "I was so crazy about the game then that I climbed over the wall to play the game since the electricity supply was cut off after 11 p.m. at the school dormitory," said Mr. Zhou, a middle school teacher in the city of Chongqing who spends about 60 yuan (about $9) a month on the game.

Along with growth has come intensifying regulation from multiple government agencies. Last year Beijing authorities banned foreign investment in domestic online games, as well as gangster- and Mafia-themed games. Government officials have declined to comment on the push.

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CGAMES4
Activision Blizzard

A screen shot from Activision Blizzard's 'World of Warcraft' showing Forgotten(Undead Warlock) equipping Tempest of Chaos and his best friend Revenge (Undead Warrior) carrying Cataclysm's Edge.

"World of Warcraft" has been caught in the middle. In June, Activision Blizzard said it would drop local partner The9 Ltd. and work instead with NetEase. The move caused a three-month shutdown as NetEase sought permission from regulators. It received clearance in September from the Ministry of Culture, which regulates public performances and Internet cafes.

But after the launch, NetEase was told by another agency—the General Administration of Press and Publication, known as GAPP, which regulates print publications and last year declared it also regulates Internet content—that it had launched the game illegally.

In the face of regulatory uncertainty, NetEase has delayed the rollout of the latest version of the game, called "Wrath of the Lich King," which allows players to explore a frozen land. Players in the U.S. and other countries have been playing the new version since late 2008. (Activision referred questions to NetEase, which declined to comment.)

Last week, NetEase reported flat fourth-quarter results in part because of the delayed rollout. William Ding, chief executive of NetEase, said in a conference call last week that the company is working hard to submit "Wrath of the Lich King" for government review as soon as possible.

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In addition to the whims of regulators, piracy is also a major problem. China's game companies say they are constantly battling operators of what are called private servers—computers to which game players can connect and play with or against each other without paying fees.

Beijing-based data analysis firm cnzz.com estimates there were 400,000 to 500,000 private servers in China by the end of last year, used by about 1.5 million Chinese players.

Expenses related to piracy have been a persistent problem for Chinese game provider NetDragon WebSoft Inc., which blamed them in part for a profit warning a year ago as it fought off private servers running its Eudemons Online fantasy role-playing game. The company, based in Fuzhou, in Fujian province, says it has worked with local police to close thousands of private servers nationwide and formed a special team to monitor private server activities 24 hours a day.

Xing Shanhu, vice president of Beijing-based videogame start-up Kylin Games, said the closely held company spends 10% of its revenue on secure online services to keep pirates from lifting its game code to run on private servers.

The extra security also helps avoid plug-ins, or software players can use to upgrade their online characters. That takes money from game operators because players typically have to pay or play a long time to get such upgrades. "Problems such as server piracy and illegal plug-ins are almost inevitable," said Mr. Xing, adding that the company does weekly sweeps to remove plug-ins and other additions.

Aaron Sun, 26-year-old employee of a foreign trade company in Shanghai, has played multiplayer online games for eight years. The games required a lot of time before players could upgrade their characters.

"After the initial excitement, I began seeking faster ways to upgrade," said Mr. Sun, who added, "most of my friends do it."