China's Internet cafe-based computer-gaming business has erupted into a booming, innovation-driven, newmedia, high-end PC-technology play that's fueling fierce competition among chip, system, network and software industry stalwarts.
The market has an unlikely origin: a set of Chinese government-dictated system and operator standards and mega-franchise license deals enacted late last year in the wake of a tragic fire two years ago at a popular university Internet cafe in Beijing. The tough new industry rules and regulations are bringing respectability, profits and government control to the once-seedy underworld of China's far-flung and unruly Internet cafe industry.
Leading the charge is a cadre of government-anointed system operators in league with a handful of free-market PC-gaming-system providers, notably Intel China, IBM China and Samsung. Intel, in particular, has moved aggressively to counter archrival Advanced Micro Devices' lead in China's PC games sector via massive media campaigns, infrastructure buildouts, OEM partnerships, and network-system and game-developer programs. The mix is transforming iCafes-the new, upscale moniker-from fly-by-night, fringe operations into mainstream, high-tech service outlets.
For Intel, its partners and its competitors, the upmarket push has triggered sales of faster, more powerful processors, specialized PCs and high-end game hardware, including servers, networks, LCDs and game peripherals. Falling global PC prices recently have put the most powerful desktop systems within reach of system operators.
More important, iCafe LAN upgrades are creating unprecedented demand for high-speed Internet access and broadband-network upgrades. Underscoring the need for fatter pipes is an explosion of demand for China's preferred iCafe game format: massively multiplayer online games (MMOGs).
While Intel China may be the most visible presence in the trend toward larger, more accessible facilities, others are entering the fray. IBM China is teaming with China Internet cafe operator Asia United Telecom and Network Co. Ltd. to help build a 2,000-square-meter outlet in the Wangfujing section of Beijing. The facility will be equipped with IBM equipment and software, including 700 computers and several servers as well as IBM's Tivoli middleware for system management.
Another indication of the magnitude of China's online gaming opportunity was the recent defection of Tang Jun, president of Microsoft China, to Shanda, China's largest online game network operator. Shanda is planning an overseas public offering.
Clean and sober
The gentrification of China's Internet cafe business has its roots in a tragic weekend arson incident in Beijing in the summer of 2002. The predawn blaze at the 24-hour Lanjisu Cyber Cafe, in the Beijing Technology University district, killed more than 20 people and injured 13.
Today, throughout China, the Internet is coming out of the back alleys of its past into clean and attractive quarters in upscale shopping malls and retail centers. In place of the legacy dial-up systems, users now find banks of multimedia and broadband-enabled machines. Gone, too, are alcohol consumption, the haze of cigarette smoke and the Wild East atmosphere that first brought universal Internet access to the Middle Kingdom. In their place, iCafes offer designated smoking sections, clean restrooms, noodle shops and juice bars.
"Internet cafe" is a misnomer for this high-tech hybrid phenomenon. The new outlets embrace both PC gaming and a uniquely Asian community "media center" environment in which PC-savvy, mostly teenage denizens communicate online with family members as well as peers. E-mail and text chatting are available, of course, but those with a few extra yuan to burn often opt for streaming voice-over-Internet Protocol and video-over-IP sessions run on PCs with high-end video cameras, noise-canceling headphones and the hottest LCD monitors and displays.
An Intel spokesman from Shenzhen recently gave EE Times an exclusive tour of a new-wave iCafe, called Club 520, in the Chinese capital. The ultramodern facility sits on the top floor of a five-story "computer mall" in a busy commercial section of downtown Beijing. The spacious site, which once housed a disco, is now home to a 200-seat PC media center. Nothing like it can be found in the States.
Arrayed around the site are long rows and banks of heavily trafficked single-user systems in sound-baffled stations with carpeted floors and comfortable swivel chairs. Lining one wall are diner-style booths with padded seats and pillows, set up for comfortable video- and voice-over-IP conferencing sessions. The most striking feature of the iCafe is its two "landing zones." They are home to a space-age fleet of egg-shaped "pods," built of steel and glass, that during play are manned by four-man crews of MMOG combatants.
Price points at Club 520 are as varied as the high-tech decor and are based on system configurations, software and time-based payment models.
The usage models Intel has developed deliver everything from white papers to technical manuals to seminars for integrating OEMs, ISVs, government regulators, hardware suppliers, network operators, game software developers and franchise operators into what the Intel guide called an ecosystem.
While the Internet cafe phenomenon is hardly unique to Asia, the iCafe-PC-game model here has taken on a distinctly Chinese flavor. It's a trend driven in part by the absence from the landscape of game consoles like Microsoft's iBox and Sony's Playstation, which have been withheld from the Chinese market because of the country's notorious software piracy problem. Observers note that while home-use PC penetration is high among Chinese, home dial-up Internet access is rare in China, where the ubiquitous cell phone is the platform of choice.
The Club 520 iCafe is by no means the largest facility of its kind. In Xian, the ancient former capital city to the west of the current capital, a 1,000-PC iCafe developed with Intel's help is a mecca for gamers. Each floor of the facility is built around a different theme. On the other side of Beijing, the iCafe Hotel recently opened for business. Gamers check in, get wired and play games into the wee hours, taking advantage of the modest sleeping accommodations and room service when their energy finally flags.
Intel executives in Beijing estimate that there are more than 130,000 Internet cafes in China alone, with typical installations ranging from clusters of 30 or 50 machines to as many as 2,000 in large centers like the one in Xian.
"It's not about games. It's about community. It's about communication," Michael H. Jong, Intel's marketing programs manager for China, said in an interview at Intel China's headquarters, in Beijing's Kerry Center. "For most of China, games are the first time people touch a computer." He said the high-performance market began to develop slowly two years ago, fueled by the popularity of MP3, digital video and games.
Positioning Intel as "an enabler" of the iCafe boom, Jong added that "the new regulations have had a huge impact, not only helping to generate hardware demand but also driving broadband usage. That, in turn, is helping to create better infrastructure across China."
A study released in October by Niko/IDG showed how innovative usage models, such as those pioneered by Intel, can generate revenue and create work-arounds for the obstinate software piracy problem in China. In fact, the report notes, the multiplayer online gaming market in China "is the only segment demonstrating resistance to piracy and thus shows a strong potential for revenue and profit."
Online gaming is already generating healthy pay-per-use revenues for carriers and game-center operators alike. Typical gamers spend 20 to 50 renminbi, or $2.50 to $6.25, or more per month, analysts note. By all estimates, the report says, "the online gaming industry promises to be a huge revenue generator for enterprises in the supply chain, including gaming service providers, Internet communications service providers, telecommunications carriers, data communications equipment vendors and database software vendors."
Niko/IDG pegs the potential game consumer market in China at 234 million people. It says that the business generated $96 million in revenues in 2003 and projects a rise to $127 million in 2006.