China: Virtual Goods Are Big, Social Games Are Still Growing

With daily active uniques in the double digits and revenues climbing toward $1 billion in 2010, social games are exploding in the U.S. But, in China, revenue from virtual goods has already grown into a multi-billion dollar business. Estimates hover around $5 billion USD in revenue for 2010 from virtual goods.

In fact, China’s biggest internet media company, Tencent, recently revealed that “internet value-added services,” or virtual goods, made up 78% of the company’s total revenue for Q3 2009. And that was no fluke – every quarter since early 2006 has seen virtual goods’ share of total company revenue steadily climb and stay far ahead of every other revenue stream for the company. Mobile and other telecom services (including premium content like ringtones) came in a distant second at 13%, while online advertising only contributed 9% to total Q3 2009 revenue.

As the market leader, Tencent’s success with virtual goods monetization likely indicates continued expansion and value for all players in China’s virtual goods ecosystem.

Does this mean those involved in the U.S. virtual goods industry can look to China’s successes as a promising prophecy of their own future?

Probably. More on the growth of social gaming within the U.S. virtual goods industry is available through the research report Inside Virtual Goods: The Future of Social Gaming 2010. Meanwhile, in China, virtual goods are still most popular outside of the social game experience. Tencent, for example, owes the majority of their staggering virtual goods revenue to their popular QQ instant messaging service. Not exactly a social game, the chat service is nonetheless a social experience where users express their online personalities with unique avatars and avatar accessories.

Virtual goods are a maturing multi-billion dollar industry in China, but we believe virtual goods in social games are just beginning their takeoff. Happy Farm by Chinese developer Five Minutes is China’s most popular social game, and is seeing around 23 million daily active uniques (DAU is the number of users who log in within a single 24 hour period, and currently the most accurate indicator of users’ engagement with a given application). Five Minutes’ Happy Farm is syndicated across RenRen-Kaixin, and 51.com, a few of China’s biggest social networks. As of mid-2009, the game is even on Facebook.

Other Chinese social networks, including QZone and Kaixin001, have launched their own ‘happy farming’ knockoffs, most likely developed in-house since neither network has yet opened its platform to third party developers. Notably, Happy Farm’s numbers are on par with Farmville’s current 27 million DAUs on Facebook (up-to-date stats courtesy of AppData).

Nonetheless, when compared to traffic, engagement, and revenues from the QQ instant messaging service, it’s clear that social games like Happy Farm still have much untapped potential. It’s precisely the wild success of virtual goods monetization in avenues like QQ’s instant messaging service that indicates that there is significant potential for virtual goods to make similar gains for social gaming in China.

Overview of China’s social networking services and app ecosystem

  • The total social networking market in China is estimated at 124 million users.
  • Major social networking services include: QZone (Alexa rank in China = 2), RenRen (Alexa rank in China = 14)+Kaixin (Alexa rank in China = 119) (both RenRen. com and Kaixin.com are owned by same parent company, Oak Pacific Interactive), Kaixin001 (Alexa rank in China = 9), 51.com (Alexa rank in China = 54), Xiaonei (became renren.com) (note domestic SNS copycat issues).
  • Market share of top 5 social networking sites (SNS): QQ alumni (50%), Renren (37%), Sina Space (36.6%), 51.com (27.1%), and Kaixin001 (26.4%) (from China Internet Watch).
  • Most Chinese networks promote online social networking as a reflection of real-world relationships. Each friend request is chaperoned by a prominent “Report a stranger” feature and a bolded warning not to accept requests from people you don’t know.
  • RenRen-Kaixin and 51.com are the only two platforms to offer an open API to app developers.
  • RenRen-Kaixin platform has by far the most active development with 448 active applications in its directory.
  • Others like Kaixin 001 lag behind at 44 active applications.

A note on RenRen.com and Kaixin.com: