Regulation of Virtual Currencies in China and Korea, Asian Gaming Giants Eye the US Market

Gold farming is a concept by which players repeatedly purchase or gain online goods or currencies in a virtual world and exchange them for virtual currency or real world currency.  Most players hate it because it allows players with money to spend to gain a leg up on the competition without having to put in the necessary hours (sometimes days) of playing time to gain special armor, weapons, items, stats, etc.  However, gold farming and the ensuing trading of such goods is immensely profitable.

The Chinese government estimated that in 2008 about 1 billion yen or about $146 million was spent on virtual world currency transactions with that number anticipated to grow by about 20% each year.  Overall, according to a study from the research firm In-Stat, virtual goods revenue from online social games and social networking exceeded US $7 billion in 2010 and will more than double by 2014.  With respect to that figure, Asia accounted for about 70% of the 2010 revenue, or about US $4.9 billion.

However, in order for gold farming to be profitable it requires that virtual goods be allowed to be traded for real world goods or services (i.e. Ebay, Internet Game Exchange).  However, it seems that government regulation, an already connected and tapped consumer market in Korea, economic trends, or perhaps a combination of such factors have pushed Asian game developers and publishers to eye the U.S. market.

Asia accounts for 70% of 2010 revenue

China

In 2009, China outright banned gold farming out of fear that virtual currency could affect its real world currency.  As a result, virtual currencies cannot be traded for real goods or services in the country.  On paper, gaming giant Tencent has supported this measure.  Of course, virtual goods continue to be laundered or used to make payments under the table.

Ministry of Commerce People's Republic of China
China Bans Gold Farming
Virtual Money Prohibited for Trading in Real Goods

Korea

In 2010, the Korea Supreme Court made a landmark ruling allowing virtual money used in online games to be exchanged for cash.  The court acquitted two individuals were indicted on the grounds of illegally making nearly 20 million won by selling 234 million won worth of virtual money in the online game Lineage.  The virtual money in Lineage, "Aden," was traded at a ratio of one million Aden for 8,000 won.

The provincial court initially brought down fines on the two individuals for four and two million won, but an appeals court overturned the decision.  Justice Min Il-young noted that trading virtual money for cash should only be punished where it is obtained by online gambling (e.g. poker).

Korea Times

With regard to increased regulation in China, it seems as though Korea took up some of the slack with the growth of cyber crime in Korea from 2008-2011.  In or around 2009, the Korean police arrested the leaders of a $38 million dollar money laundering scheme.  The ring leaders purchased game money in China, cashed the money through domestic game item brokerages, and then illegally wired it from Korea to China.

UNAFEI report
Only in the Virtual World

In June of this year (as noted in an earlier post), the Korean government shifted gears and moved to ultimately ban the trading of online goods (effective later this year).  For now, the penalty for engaging in online bot farming and item trading is 5 years in jail and a maximum fine of 50 million won (about $43,000).

Korea Prohibits Trade of Online Game Items

Targeting the U.S. Market

As a result of the rising growth of virtual goods in Asian gaming markets and quite possibly because of so much existing and anticipated regulation in their respective nations, many such Asian game developers and publishers have set their sights on the U.S. market.  I've already commented on the rising profiles of such Asian gaming giants in the U.S. market in earlier posts (e.g. Riot, Epic).

Asian game developers and publishers seeking to grow in U.S. market

Primer on Trademark Protection in Japan

Lexology has recently disseminated an introduction on trademark principles in Japan by Satoko Kubo.  According to the article, in Japan one can file for trademark protection without establishing use of the mark in connection with goods and services.  One need not establish proof of use when renewing the mark as well.  An individual or company's registered mark can only be cancelled if another party requests the cancellation based on non-use.  A registered mark may be cancelled when it has fallen into disuse for three consecutive years.  As a result, companies regularly stockpile marks in Japan. 

Additionally, the Japanese Patent Office allows for marks to be registered across a wider range of goods because it accepts broad descriptions (e.g. "clothing," "computer games").  In contrast, the U.S. trademark system requires a specific listing of goods leading to a limited set of rights. 

If a video game developer were to have on its hands the next big IP money maker with the potential to be profitable across a wide range of goods (e.g. toys, clothes, think "Skylanders"), then at least with respect to the Japanese market that developer should register directly in Japan.  Although registering in the U.S. would still allow for corresponding protection in Japan under the Madrid Protocol, the international registration in Japan would be tied to the limited U.S. registration.  Additionally, the differences between the Japanese and U.S. trademark guidelines with respect to broad and specific designations usually requires further action by a party registering in the US first because it must explain its specific designation to the Japanese Patent Office.

Lexology

Take-Two Packaging New "Civilization" Game for South Korea

The Wall Street Journal reports that U.S. based Take-Two, the developer of the hit franchise "Grand Theft Auto," is seeking to make inroads in the Asian game market by repackaging its titles to suit local tastes and partnering with local game publishers.  Take-Two Interactive has partnered with the South Korean company XLGAMES, Inc. to bring the "Civilization" franchise (a turn based strategy game) to the South Korean gaming market.  There is plenty of opportunity in the Asian gaming market; the South Korean market reached $5 billion last year while the Chinese market reached $6 billion.
 
Certain turn-based computer strategy games are a hit in South Korea.  "Starcraft," an immensely popular turn-based strategy game, is so popular in South Korea that it is equated with sport, or more appropriately, e-sport.  The Korean e-sports Association (KeSPA) serves to manage the broadcasting and promotion of e-sports throughout the nation.

Take-Two to Asia

KeSPA

2011 Korea White Paper Report

The Korea Communications Commission has released its 2011 Korea Internet White Paper report.  The report details, among other things, the developing Internet infrastructure in South Korea, the increasing number of broadband Internet subscribers, and the growth of the mobile platform in the nation.

On page 58, the report makes an interesting claim that in 2009 online game sales encompassed about 56.4% of total gaming sales with sales figures reaching 37,087 units (1 unit = 100 million won) (1 won = 0.0009 US dollar).  The report also claims that in 2007 online games sales reached 22,403 units and that in 2008 online games sales amounted to 26,922 units. 

White Paper

Asian Game Publishers Mull Potential Valve Purchase

Asian online gaming giants Nexon and NCsoft are rumored to be in talks with Valve, makers of the successful games "Half-Life" and "Portal", to purchase the company for around US $893 million. 

Valve was started by Microsoft veterans Gabe Newell and Mike Harrington.  The company rejects a traditional management structure and allows its employees creative freedom by allowing them to choose what to work on.  The company's unique management style has led it to become one of the most successful and innovative U.S. based game developers.  Additionally, Valve commands a lions share of the on demand market for PCs through its online game distribution service, "Steam."

Given the founders' penchant for not selling out it is unlikely that this purchase will go forward.  Also, a purchase price of $893 million for a gaming juggernaut like Valve seems very low.  However, in the off chance that a deal is hammered out, Nexon and NCsoft's ownership would continue the trend of Asian publishers establishing large footholds in the U.S. gaming market.

Games Beat

SmileGate in Business with Tencent re "Crossfire"

South Korean online game developer SmileGate, the developer of the hit FPS Crossfire, is partnering with Chinese internet giant Tencent.  SmileGate will not be renewing its contract with Neowiz Games, which will expire in July of 2013.

A lawsuit is currently pending in the South Korean courts regarding the ownership of the "Crossfire" trademark between SmileGate and Neowiz Games.

Western Developers Working with Local Partners in China

You've just put the finishing touches on a mobile game you and a couple of friends have been developing for the past year.  You're excited to launch and market the app and bring in some much needed funds.  Before you jump the gun consider the impact your game can make in China.  China currently leads the world in iOS/Android phone activations and is on track to have over 200 million smartphone owners by the end of this year.

However, the Chinese mobile game market has its own quirks and issues.  Chinese gamers have a tendency to avoid purchasing apps but make plenty of in-game purchases.  In addition, China is a hotbed of rampant, unchecked piracy.  How can one seize this market?

Lately, many Western developers have taken to working with local partners like Yodo1 and The9.  Local partners can help adapt your IP to suit Chinese gamer's tastes, translate the game, optimize monetization of in-game purchases (if you haven't already), and police your IP.  Many of these local partners have also successfully built buzz for upcoming mobile games by integrating with Chinese ad networks and promoting them across other apps.

Revenues Fall

Among almost all major publishers, revenues have fallen.  This comes on the heels of several publishers doing some major cost-cutting (e.g. THQ) and encountering lower sales of hardware (e.g Sony's PS3 and PSP).

Overall, sales from video game hardware and software have fallen for the eighth straight month down to US $548.4 million.

Businessweek

Tencent Buys Stake in Epic Games

The Chinese gaming juggernaut Tencent, which reportedly has more than 700 million users in mainland China, has purchased a minority stake in Epic Games, the makers of "Gears of War" and the mobile game "Infinity Blade."  Last year, Tencent acquired Los Angeles based Riot Games, the makers of "League of Legends."  Tencent's actions are evidently part of a new strategy to develop games across multiple platforms.

Epic Stake

I'm a Clone, You're a Clone, Clones Everywhere!

Pillsbury's Virtual World's Team has recently commented on a federal court decision finding in favor of the owner of "Tetris" against Xio Interactive, Inc., the maker of a similar falling block game called "Mino".  In its post, the team advocates a dual pronged strategy of intellectual property protection through both patent and copyright law.

Game Cloning Can be Stopped!

Intellectual property protection and enforcement is of paramount importance especially with the growth of Apple's app store distribution platform.  Although the distribution platform allows developers of "indie" games to better connect with the consumer, it also allows for hundreds of game clones from various territories like China to flood the market. 

Mario Kart Wii Clone from China

App Clone Uploaded from Vietnam

Unfortunately, many of these small developers are completely unaware of how to remedy the existence of a game clone on the market.  Further, with each passing day there is the greater likelihood that a consumer will accidentally purchase the clone causing widespread consumer confusion.

At least during the initial screening of an application, Apple should have stronger safeguards in place.

The Republic of Korea's Proposed Ban on Virtual Goods

According to the Korea Times, next month the Korean Republic's Ministry of Culture, Sports and Tourism ("MCST") hopes to ban the trade of ALL in game virtual items.  According to Kim Kap-Soo, the head of MCST's content policy division, "the main purpose of the games is for entertainment and should be used for academic and other good purposes."

The proposed law would prohibit users from using automated bot programs to collect items.  Violators of the new law would face a fine of up to 50 million won (about US$43,000, or £27,600) and a 5-year prison term.

The Korea Times

Also, this proposed ban comes on the heels of Blizzard's launch of its real money auction house in Diablo III.  At least in the US, users have spent upwards of $3,000 (US) on in game items to make them competitive on the inferno difficulty, the highest difficulty setting in the game.  With each sale Blizzard takes a small cut as shown below:

For Equipment (weapons, armor, accessories, and other unique items)

Transaction Fee (Real-Money Auction House): $1.00 USD per item / $1.00 AUD per item

Transfer Fee (when sending proceeds to PayPal or other authorized payment-service provider): 15% of amount being transferred
                    

For Commodities (gems, materials, dyes, pages, recipes, and other non-unique items)

Transaction Fee (Real-Money Auction House): 15% of final sale price
Transfer Fee (when sending proceeds to PayPal or other authorized payment-service provider): 15% of amount being transferred

Diablo III Transaction Fees

Although the ban has a good aim in the sense that it tries to discourage automated bot programs, which are always illegal, it will destroy the whole point of loot in dungeon crawling games.  Moreover, users will no longer be compelled to invest their time and money in such games.

The proposed law would threaten MMORPGs and other games that are free-to-play which depend on the value of their in-game items for their very existence.  No doubt large players in the industry will fight tooth and nail to prevent the passage of this ban.

Invasion of Diablo III....by the Korean Government

Korea's Fair Trade Commission ("FTC") has raided Blizzard's Seoul offices amidst allegations that Blizzard is refusing to offer customers refunds for Diablo III.  Because the game was hotly anticipated in the region the Diablo III servers became overloaded.  As a result, users demanded refunds and eventually complained to the FTC.

The FTC is reviewing whether Diablo III's EULA is "unfair" in that it does not allow for a refund if users experience problems with the game.

Below is an excerpt from the comparable EULA available from Blizzard's Americas and Oceania Diablo III site:

Service and Terms of Use.

The Terms of Use agreement governs all aspects of game play. If you do not agree with the Terms of Use, then (a) you may not register for an Account to play the Game; and (b) you may call 1-800-592-5499 within thirty (30) days after the original purchase and request a full refund of the purchase price. Once you accept the License Agreement and the Terms of Use, you will no longer be eligible for a refund. 

Investigation

Additional Info

Diablo III US EULA

Local Partners Required!

China has strict limitations for foreign developers.  For MMORPGS, the government requires a local partner to handle the distribution of the game.  Just recently in March of 2012, Blizzard and NetEase renewed their deal for NetEase to publish World of Warcraft in mainland China for an additional three years.  Blizzard's relationship with NetEase has spurred NetEase to be a major player as an online gaming company.

Renewal with NetEase

Starcraft II, Licensed and Official E-Sports Event

Finally, it looks like the issue surrounding broadcasting rights of Starcraft II tournaments will be at an end.  KeSPA, the ruling competitive sports gaming body, OGN, and GOMtv have officially received licenses from Blizzard to broadcast Starcraft II tournaments and will work in conjunction with each other in uniting players and leagues.

KeSPA, OGN, and GOMtv

Hello all!

Sorry for the delay, but I will now resume making weekly posts.  Check back in every week!

-Brian