Online videogame revenue is the driving force for China's gaming market that comprises 28.8 million users, a new report has found. After all, Chinese gamers spend more money on online games than PC, c

(The Hollywood Reporter) -- Online videogame revenue is the driving force for China's gaming market that comprises 28.8 million users, a new report has found. After all, Chinese gamers spend more money on online games than PC, console and hand-held games combined.

There are more than 2.6 million videogame consoles in use and more than 18 million PCs in Chinese homes, San Francisco-based consulting firm Niko Partners said in the report, "The 2005 China PC, Console and Online Video Games Market Study."

Of China's population of 1.3 billion, there are 234 million males between the ages of 14-24, which is the prime videogame demographic.

Online game revenue for 2004 rose 200% to $467.8 million, and Niko forecasts that this will rise at a compound annual growth rate of 33.8% to top $2 billion by 2009, as the country's gamers grow to 55.5 million.

"Online games will be the bulk of the revenue for the next few years at least," Niko managing partner Lisa Cosmas Hanson said. "Companies may legally release packaged software games today, but the content and approval process and the distribution process are cumbersome."

Despite recent movement by the Chinese government to thwart videogame piracy, the gray market has a huge impact on gaming in the country. Online gaming, which generates revenue from subscriptions rather than software sales, has become the only viable games business in the country.

Traditional stand-alone PC game sales suffer from 95% piracy rates, as these games are easy for counterfeiters to copy and sell for as little as $1 per unit, Niko found. Hanson believes there is room for game publishers to compete with stand-alone PC games but said they must become more aggressive with pricing. There's at least one PC in 5.2% of China's households.

Similar to South Korea, the majority of gamers in China play online games in the country's 350,000 Internet cafes. More than 50% of game play occurs in these parlors.

The top 10 multiplayer online role-playing games accounted for 76% of online game spending last year. While these games will continue to sell subscriptions, casual online games, such as chess and checkers, are growing.

Casual online game revenue was four times greater last year than 2003, and Niko predicts that by 2009, casual games will account for 40% of China's total online games revenue.

With the advent of such Hollywood-licensed MMORPGs as Sega and Warner Bros. Interactive Entertainment's "The Matrix Online," games from the West could find an audience in China.

"Content preferences in China are different than in the U.S., but there is a fascination with games and movies from the West," Hanson said. "There is tight control on content by the Chinese government, but in the gray market, everything sells."

Sony sells PlayStation 2 legally in just two cities in China, and Xbox and GameCube are only sold in the gray market, Niko found. Despite the lack of widespread legal sales of these game consoles, total hardware sales in China last year amounted to 1.49 million units.

Hanson believes that the online capabilities of next-generation consoles from Sony, Microsoft and Nintendo could open up new doors in the console market in China. Niko predicts that 91% of console games sold in China by 2009 will be online.

Getting into the Chinese market as a foreign videogame company can be a challenge. The government in China welcomes international investment in the growth of a domestic games market, yet regulations governing the gaming sector are difficult to navigate.

French game publisher Ubisoft has a large game studio in Shanghai, Japanese game companies Konami and Sega have studios in China and there are more than 60 development studios in China today. Electronic Arts will open a large development studio in China by decade's end, which will be a significant investment by the largest independent game publisher in the world.