CMGE crisis reveals online game industry’s vulnerability

June 27, 2014 16:22
Seeking to reassure investors, CMGE reveals it has won the rights to develop games based on famous Japanese comic titles. Photo:

China Mobile Games & Entertainment Group (CMGE), the country's largest online game developer and distributor, is in damage control mode after the recent dismissal of nine senior executives, including president Ying Shuling.

Through media interviews, meetings with analysts and the “leaking” of an internal letter, the company is trying to convince investors that things are under control and a bright future lies ahead. Just recently, the company won the rights to develop or distribute games based on best-selling Japanese comic titles One Piece and Dragon Ball Z. It also pledged to simplify its organizational and business structure to cut costs.

It is very hard to determine where CMGE stands at the moment, but the management crisis exposes some of the problems in this industry which the market seems to underplay.

The stock recovered moderately after a plunge, but is still 16.5 percent lower than where it was before the company suddenly ordered nine executives to leave their jobs within three days.

The news also sent shock waves to the online game sector, which has been experiencing a major correction since the start of March. IGG (08002.HK) and Forgame (00484.HK) both gave up more than 50 percent during the period.

Various speculations have been bandied about as to why the nine executives were abruptly sacked. But the most plausible is that they have put their interests above that of the company. Industry insiders say Ying was found to have been getting rebates from online game developers.

One of the problems in China's online game sector is that there are so many products in the market but only quite a few are any good. As a result, most of the new games depend on the distribution channels to boost their popularity, giving the latter a major role in the business.

According to technology news and analysis site, CMGE has spent quite a bit of money on signing online game developers in past few months, but most of the games failed to make a splash in the market, leading to suspicions that someone has traded off quality for personal rebates.

CMGE has other issues, too. Although first-quarter results showed solid growth, competition is becoming stiffer. Giant online game platforms such as 360 and Baidu are speeding up their acquisitions of game developers, bypassing intermediaries such as CMGE.

But all is not lost if management is taking the crisis as a chance to do a serious revamp, and to beef up its game development capacity to complement its distribution prowess.

CMGE owns a very strong distribution channel by partnering with online game platforms. It is China’s largest mobile game publisher at the moment, controlling 18.1 percent of the market as of the first quarter, according to the data compiled by market researcher Analysys International.

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EJ Insight writer