Hong Kong Innovation Project Conference New Entertainment Media Sector Report F. Ted Tschang

1. Hong Kong Innovation Project Conference New Entertainment Media Sector Report F. Ted Tschang Lee Kong Chian School of Business Singapore Management University

2. Overview • Subsectors • Global trends • Regional view • Nature of industry, products • Some strengths, weaknesses, threats • Policy recommendations

3. Subsectors • Digital media consists of the following overlapping specialty areas. • Video games (console, PC, online) • Animation • 3D, 2D • Special effects (computer graphics)  Study’s focus is on video games

4. US and Global Video Game Industry • Sunrise sector? • In US, grows faster than software or film • 2003-2006: annual growth of ~17% (4% in software) • 2007 US market ~ $9.5 bill (Global ~ $38 bill) • Still small: 2002 sales: 4 bill (application software: 47 bill) • Small US employment: 24,000 Sources: ESA 2007, PWC 2007

5. Characteristics of US Videogame Industry • Industrial-organizational: • Publishers possess financial resources • Studios contract with publishers – studios typically small but getting larger (complex content) • Spatial: Sometimes clustered, but not necessary • Nature of the work is long-term in-house projects • Experience counts (iterations and cycles to perfect knowledge of “what plays well”) Sources: ESA 2007; Tschang 2007

6. General Nature of Innovation in Industry • Means of innovating in products • Game design, e.g. new genres • Content (“world” etc.), e.g. Chinese online games • Technology, e.g. next gen consoles, s/w platforms, e.g. virtual worlds, MERECL • Nature of product innovation: creative • Does radical innovation buy success? Sometimes • Radical (e.g. Spore, The Sims) • Incremental innovations (e.g. World of Warcraft) • Radical  need for integration? Onsite • Innovation in business models, e.g. MMOs

7. US and Global Video Game Industry Trends (2000s) • PC games  Console • Online games • Frequent game players playing online: 19% in 2000 to 51% in 2007 • Of this, only 13% play massively multiplayer online (MMOs) • Casual games – most online games and some PC • Emergence of virtual worlds (open-ended MMOs) Sources: ESA 2007, PWC 2007

8. Relative Innovative Natures of Products Degree of innovation Sought Casual games - Low cost, risk, return “AAA” Console games - High cost, risk, return High • Virtual worlds? (user innovs) • Cell games • High platform cost, risk • Low user cost, risk Massively multiplayer online (MMO) - High cost, low risk e.g. Hong Kong, other countries Low Maturity Of product Low High

9. Other Characteristics of Industry: Cultural? • Japan • Some products (but not most) have great success in US • China • Domestic content provided opportunities for Chinese studios to gain Chinese market share from Korean firms • HK • How to leverage on Chinese, Western influences • Can leverage on China for the West • Own culture does not sell well in China • Solution: get Chinese staff?

10. Competitive Characteristics of Various Countries

11. Contrasting Models of Business and Industrial Linkage • Consoles and PCs: • Publishers scour worldwide for hotspots or successful studios • Publishers own studios, IP • MMOs • Operators of MMOs – link to studio-developers • Operators are the developers • With publishers having all the resources, • Studios with successful product can become next big publishers or operators

12. Summary of HK Video Game Industry • ~ 117 firms • Only a few of significant size, capability • Many distributors/resellers, or small startups • Segments: • Many focused on online gaming • Cell phone, PC games minimal or niche • Console gaming - new • Supporting institutions • Skills (training programs, e.g. universities) • Some government programs, e.g. incubation, space, advice, early stage funds, “R&D” support, etc. Source: IDC 2007

13. HK industry: 4 types of firm • 1. Medium-sized • More mature but incremental innovation • Possess some competitive advantage (e.g. “content”) • 2, 3. Small firms • 2 types – potentially “good” and unproven • Potential to be creative • Some are small or weak (low capability to implement) • Outsourcing as means of implementation (e.g. Cyberport incubatees) • 4. Pure outsourcing or services provider • Specific capabilities; moderate growth potential

14. Strengths and Weaknesses of HK Industry • Firms • Firms can be creative but • Minimal resources (ability to create high “production value”) • Markets • Largely focused on own market (63% of IDC 2007 survey) • But small market: HK 2006 = 30 mill (China ~ 2 billionS) • Support systems • Training programs, e.g. HK Polytechnic University • Research (MERECL) • Skills in short supply: game design • High cost

15. “Threats” • Other countries have better institutional support • e.g. Korea, China, Singapore (still developing) • Other countries have resource strengths • Specific skill areas (low cost, high quantity) • Philippines: art and animation • India: technology • China: technology, art (basic) • Ultimate “threat” is when strong companies emerge…

16. Assessing Opportunities for HK Industry: Implementation • Partnerships, collaborations • Local firms cooperating (scale) -- poor • Outsourcing – unclear • China facility better?; outsource what? • not common (interactive, integrated products) • Resources • Skilled labor from China -- good (but at higher wages) • Capital exists but not accessible -- poor

17. Assessing Opportunities for HK Industry: Innovation • Firms • Creative, radical innovation - unclear • What is needed? • E.g. gameplay (CarnyVale, Singapore) • Innovate in business models – unclear • Can be imitated? • Markets • Larger regional market, but not easy (culture) • Successful medium-sized firms went outside HK

18. Examples of Innovation • Game design  simulation • Spore (US) • Technology  physics • CarnyVale (S’pore) • Simulation • Enlight (HK) CarnyVale

19. Assessing Existing Policies • Does (Cyberport) incubation work? • Not if it rushes first-time products by inexperienced developers to market (recall: learning cycles needed) • Criticism by many (but functions necessary in some way) • What was gained by incubatees? • Development support • Funds for early-to-prototype stage development are ok • Commercial funding lacking -- wants track record • Does research support work? • Not if the purpose is to support existing firms (academic research does not integrate in directly in US, elsewhere) • How to develop creative potential of existing developers?

20. Prospecting Future Policies • Encourage creative innovation • But with minimal learning, experienced developers,  how to support first successes? • Not just through incubation – rethink incubator • Support for professional game design, design skills • E.g’s: casual games, complete products within institutes • Develop strong mid-tier studios • More support to existing, larger players (e.g. Korean model) - funding “development”, but how to do it • Rethink “ecosystem” and lifecycle needs of firms • Continuum of funding schemes • What are the various functions (of incubators etc.)? • Continue basic support • for all skills

21. Differing and Emerging Models • Ecosystem model (Silicon valley) • Knowledge flow between firms • Spinning off firms (true of video game studios too) • Government-led model (Singapore) • Middle models - Hong Kong? • No flows, no spinoffs (no strong firms yet?), minimal government support • Where does true innovation come from? • Interdisciplinary • Link to deeper knowledge domains, e.g. health

22. Final Thoughts • From IT to: • Culture • Visions • Beyond Tech • Creativity