Video games embrace China's freemium model to beat piracy

In China, where mobile gamers virtually refuse to pay up front for software, developers are figuring out innovative ways to make money, and creating a possible solution against internet piracy.

When German mobile game developer HandyGames launched its casual title "Clouds and Sheep" in China this year, it decided to partner with a Beijing-based publisher to tailor it for the Chinese market.

The founder and chief executive of the publisher Yodo1 Henry Fong says it was obvious the game, which features a flock of cute cartoon sheep, would appeal to the country's legions of female players.

But, it would also need to be extensively "localised" for a market in which players generally do not believe in paying up front to download software.

"Chinese gamers have been trained from day one to prefer the freemium model," he tells the BBC.

"You have to culturalise the content, as well as the business model."

Freemium refers to a way of doing business in which a basic product is given away free of charge.

The service provider then makes money by charging for premium add-on services or features.

A study by the Business Software Alliance trade group suggests that 57% of global computer users admit to using pirated software. It says the commercial value of software theft amounts to $63.4bn (£39.1bn) worldwide.

This has been a particular problem in China where the high cost of Microsoft's Windows software in the early 1990s helped create a culture in which piracy became the norm.

Even as the wealthy elite and then the middle class began buying personal computers, they steadfastly refused to pay for software.

Video games consoles are banned in China, so the local market is focused on PCs for which it is relatively easy to copy software.

The switch to freemium looks to have worked. Publishers using the model made more than $9bn in sales last year, according to Lisa Hanson, managing partner of the research firm Niko Partners.

Based on revenues, mobile represents about a tenth of that figure.

But in terms of the number of players, the positions reverse. There are now about 192 million mobile gamers in China versus 150 million playing on PCs, says Ms Hanson.

Games developers say that despite the eye-popping player numbers, it has proved far harder to make money from smart devices than PCs because mobile games are less sophisticated.

Chris Shen, from the Chinese online gaming giant The9, says that the sector is still in a developmental stage.

"Chinese users are very used to getting games for free," he says.

"They are very well educated on how to get software and games for free. But we want them to pay eventually,"

That is why developers and publishers like The9 and Yodo1 rely on advertising and in-app purchases.

When Yodo1 adapted Clouds and Sheep, it sold advertising space within the game to America's Yum Brands, which operates the wildly popular fast food chains Kentucky Fried Chicken and Pizza Hut in China.

It also created a wide range of in-app purchases, called "coin packs" which vary from from just six yuan ($0.16; £0.10) all the way to 388 yuan ($62.26; £38.80).

That large amount of money buys hundreds of different virtual items that can help high-rolling players keep their sheep happy, which is the aim of the game.

Mr Fong of Yodo1 says the alterations helped make Clouds and Sheep the second most-popular mobile game in China's Apple Store within three days of its launch.

It was downloaded more than two millions times on both Android and iPhones over a one-month period, he says, but declined to reveal how much the game made in revenue.

He adds that while most Chinese gamers have developed an aversion to paying for downloads, they have also developed a propensity for showing off their wealth to friends online.

"The nouveau riche is not afraid to flaunt their wealth," he says.

"The leader of the group in some massively multiplayer online games will buy a lot of items within the game for everyone else to share."

China's success with freemium is proved influential.

US social gaming company bought a local studio to take advantage of its experience selling virtual goods, while Germany's Crytek launched its free-to-play shooter Warface in China ahead of western markets.

Ms Hanson says advertising and in-app purchases are now also favoured by developers in South East Asia, a region which also has high rates of software piracy.

"Very few gamers in South East Asia would pay for a subscription or a download, but similar to China, they feel they get more value when they pay money inside a game," she says. "Perception is everything."

Further afield it is also becoming the norm.

Madfinger Games, a developer based in the Czech Republic, caused a stir among global gamers in July, when it announced that it would make its Dead Trigger zombie-themed game free on Android devices due to rampant piracy despite a low $0.99 launch price. The developer now makes money by selling in-game weapons.

Many of the titles on Apple's iOS platform's Top Grossing chart are also free to download but charge for extra content, lives and characters.

Some experts insist there is still a place for pay-to-download titles.

"The reason the premium games persist has to do with quality; consumers enjoy the value of paying for quality games despite free titles being a click away," suggested a recent editorial on the PocketGamer blog.

But with even Call of Duty set to launch as a freemium title in China next year, some wonder how long it will be before basic versions of even the biggest blockbuster titles are offered without charge elsewhere.