Perfect World CEO still believes game consoles can succeed in China

Disclosure: The organizers of ChinaJoy paid my way to Shanghai. Our coverage remains objective.

SHANGHAI — Robert Xiao, chief executive of Perfect World, made bets last year on the launch of Microsoft’s Xbox One and Sony’s PlayStation 4 game consoles in China. Those consoles didn’t do as well as expected, but Xiao said in an interview with GamesBeat at the ChinaJoy game trade show in Shanghai last week that he is still optimistic about the long-term success for the machines.

Xiao’s opinion matters. While there are more than 100 online game companies operating in China, Beijing-based Perfect World is a big one. In 2014, Perfect World reported net income of $73.5 million on revenues of $619.4 million. The company has more than 5,000 employees, and its success is built online game worlds such as Perfect World and the recently launched Neverwinter title from Perfect World’s U.S. subsidiary, Cryptic Studios.

Perfect World has been expanding into mobile in the past few years, and it has seen success with titles such as Return of the Condor Heroes Mobile, Legend of Chu and Han, and Cross Gate. The company was founded in 2004, and it went public in 2007. The company isn’t as well known in the West. But it is very well known in China. It won an award for being one of the top 10 influential Asian brands at the Asia Brand Ceremony.

Here’s an edited transcript of our interview.

GamesBeat: I heard the deputy director’s talk (by Song Jianxin) about the Chinese government encouraging Chinese game companies to go worldwide and be global. It looks like you’ve been following that strategy for a while. Where do you feel the Chinese game industry at large is at on that score?

Robert Xiao: In the past 10 years, if you compare—I always say you have to look at the industry in two dimensions. One is vertical, or historical. The other is more latitude-wise, comparing at certain times different portions of the market. If you look at a vertical comparison between 10 years ago and now, China has changed to so much. The progress in globalization is speeding up. 10 years ago we exported what was probably the first major game from China to the world. Now there are so many companies that are able to export their games.

We’ve been able to stay a few steps ahead, setting up our studios and publishing capability globally. We’ve acquired and invested in local capacity to develop mainstream games abroad, like Neverwinter. It’s locally developed in North America. The primary target market is North America. This trend will continue in the next 10 years. More and more high-quality Chinese games and Chinese publishers and Chinese capital will spread out across the world to engage in global competition and market expansion.

Latitude-wise, 10 years ago Chinese game development and the Chinese game market—Compared to North America, you might say it was about 100 miles away. Now we’re more like 20 miles away. Still lagging behind, but we’re doing a lot of catch-up. In the next 10 years some Chinese companies will be able – quality-wise, resource-wise – to get into to real global competition.

GamesBeat: Do you feel you already have good global brand recognition?

Xiao: We have some. Perfect World is a recognized brand in many markets. But the brand is supported by products – not only Chinese products, but also locally-developed products, like Torchlight, Neverwinter, and STO. STO wasn’t developed by us, but we came up with a way to change the monetization and make it free-to-play. It was a collaboration between Cryptic and our Chinese studios to come up with a good business that fits into the American market. We feel like we’re making progress.

GamesBeat: Last year we talked about the beginnings of your move into mobile. How is that going?

Xiao: It’s doing well. We’re the third- or fourth-largest publisher in China now in mobile. We’ve developed several games in house that have landed in the top 10. We’re a recognized producer of mobile games in China.

GamesBeat: Is that because of the game brands you’ve brought?

Xiao: Partially, yes. But you come back to the fundamentals. We’ve developed several good quality games. That, plus our brands, and our publishing strategy, and our distribution strategy, and our partnerships—Many factors combine into a successful business so far. The next question is, how do we get into the global market? We’re starting to try that out in the mobile sector.

GamesBeat: What’s your impression of China Joy this year, and how it’s grown as well?

Xiao: It’s getting bigger, more crowded, hotter. We have more and more participants in terms of game companies. The development community has gotten bigger and bigger over the last 10 years. This is almost the second-largest game show in the world now. It’s the second or third. It’s been an impressive run, and it can get much better. There’s room to improve, but every year I see progress.

GamesBeat: The government official I heard was talking a lot about encouraging game companies to think globally – to make games that include Chinese culture, but also approach the world in some way. What are your thoughts about the potential your self-produced games have to get out into the wider market?

Xiao: The government is doing a lot of surveys on the industry and encouraging the industry to move globally. We’re leading the pack, I have to say. For us, it’s not only about Chinese IP. It’s about using a blended culture. If I could use a maybe not-so-appropriate comparison, it’s like the Hollywood way. Mulan was a traditional Chinese story and a traditional Chinese character fit into an animation product that could appeal to a global audience. Things like Chinese kung fu and the Chinese symbol of the panda became Hollywood products that were accepted on a global basis.

That’s the right way to do it. It doesn’t matter exactly where the thing comes from, whatever cultural element you’re using. The way you use that cultural element, plus a modern process of production, plus a value expression that fits with the majority of consumers’ needs globally—That’s what I call a globalized view. We will use a lot of Chinese elements, as well as a lot of American elements, in different projects with different teams.

We want to do global development. Say I have a Chinese cultural element. I’ll use a Japanese artist who understands this element to form it into characters. I’ll use American designers to build the storyline and design the interaction with the game. I’ll use technologists in China to create the servers and the engine. I’ll use the Chengdu team to mass-produce graphical assets. That all combines to form a true global project.

GamesBeat: Phil Spencer at Xbox was talking about his definition of success as a Chinese-made game designed in China for Chinese audiences being successful on a global scale.

Xiao: I’m happy he mentioned our name, too. We’ve made good progress and had initial success on Xbox One with Neverwinter. Of course, Neverwinter is a U.S. property and it was designed as a mainstream U.S. game. We’ve tried to launch it in China, even though Xbox One hardware sales in China haven’t been satisfying so far. Out of all the games now running in China on Xbox One, Neverwinter is showing some of the best statistics. It’s been accepted by the gamers who play it.

GamesBeat: Console sales are expanding across the whole nation now. Are you more optimistic?

Xiao: I’ve always been optimistic. It’s just a matter of time. Sooner or later consoles will be everywhere in China, and it’ll be a brand-new market. It’ll give global platform players like Microsoft and Sony a good return. The tactics they use to sell hardware will make a difference. Once you reach a certain amount of hardware, your whole ecosystem can start running. They haven’t reached the threshold yet.

GamesBeat: You have to plan for a more gradual expansion?

Xiao: Exactly. It’s about long-term planning. In the next two to three years it’ll be there. It’s just a question of how. We’re trying, in our capacity, to do what we can do in terms of perfecting the game and working with our partners to find the best way to fit in the Chinese consumer market. For them it’s more of a question of how to boost hardware sales.

GamesBeat: How many people work for you now, globally?

Xiao: About 5,000. I have several projects ongoing for the Chinese market, although I can’t give detailed numbers. Not two, not three, but several console products being developed globally – in the U.S., in China, everywhere.

GamesBeat: Is it enough that you expect to launch games every year?

Xiao: We’ll launch a console game every year, yes, somewhere in the world.

GamesBeat: What do you think about other kinds of consoles, like Android consoles?

Xiao: I look at the market this way. At the top are the true triple-A consoles, Microsoft and Sony. In the middle range we’ll see more conveniently acquired, cheaper devices, and then below that TV set-top boxes. In the middle are mostly Android boxes. They’re much better than a normal set-top box, but easier and cheaper than the Xbox and PS4.

If you remember, two years ago we had a strategic agreement with a company that was trying to produce something like that. Eventually there was so much competition coming in that we decided to cancel the project. But we believe it could be a new way of acquiring consumers and having a new market open up – less quality of graphics, lighter, with a certain level of sophistication, cheaper, spread out more toward a bigger consumer group. It’s possible. We’re ready to turn some of our games to those platforms once we see there’s life in one or two of them.

GamesBeat: Is PlayStation 4 looking as attractive as Xbox One for you?

Xiao: Definitely. We’re working for both platforms, pursuing different projects.

GamesBeat: In mobile, what would you say has been an interesting learning for you? About things like user acquisition or marketing through WeChat and the big social platforms.

Xiao: Number one, it’s hard to build your own platform – your network, your channel, your way of acquiring customers. You need partners. You need to work with other people. That’s the golden rule in the mobile space.

In the west you have to work with Apple and Google. In China it’s more complicated on the Android side. You have to deal with everybody. So far we’ve been able to get connected and maintain good relationship with most of the channels on the Android side in China. But the key is good quality products, still. First you have a good product. Then you have good relationships. You need the ability to explain to your partners. Partners will accept and support you. Then you can have a successful project.

GamesBeat: We’ve seen some interesting projects like Vainglory and Fallout Shelter in the west. When you think of better quality mobile games, is that the direction you think of going?

Xiao: Vainglory isn’t exactly about quality. It’s about a different way of playing mobile games, a different genre. It’s new and untested. The game quality is high. We looked at it and evaluated. We wish we could do something that good. It definitely sets the bar high. But at the same time it’s not only about quality. It’s about the way of playing, the thinking behind it. New genres are moving into mobile.

We all understand that DOTA 2 and League of Legends are very popular in the PC domain. Will this eventually be successful on a mobile platform? We’re still not sure. We’re observing and looking into that genre to see whether we want to jump in, perhaps with a partner on a similar level, or perhaps doing our own entry in the MOBA genre.

GamesBeat: Are you finding that there are lots of teams in China that have a chance to do that kind of game?

Xiao: Bigger companies have more of a chance. Smaller companies have to survive first. That’s why they have to copy and imitate and quickly push out products to make money. Bigger studios with more financial backing will have a better chance. That’s always the case. You have to have capital.

GamesBeat: I’ve followed the evolution of digital games very closely over the last few years. There were a lot of venture capitalists investing money. Last year we saw lots of acquisitions. The latest data from Digi Capital suggests that deals happening this year are down 89 percent from last year. A lot of venture capitalists at our conference in May, even, said they were not investing in games, and suggested that people go get money from Chinese companies. Now the stock market is going a little crazy here. I wonder if you could predict what might come out of all this.

Xiao: Well, it’s a bubble. The bubble starts with investment from the capital markets. If people feel like they have money, they tend to spend more. When the stock market is going crazy, people feel like their paper property is being inflated, and so they have a better motivation to invest in a different way.

The market will finally settle down after a correction. We’ll get back to fundamentals, which are very simple. Money is still coming in when people can see a long-term return for it. Gaming is a good field for long-term returns. It’s down to how you invest, who you invest in. If a company is continuously producing quality products in a sustainable way, it’ll have value in the longer term. It’ll still attract capital.

Once the bubble goes, small teams producing just one game—Very few, maybe even none, can continue to succeed in terms of producing quality titles that become hits in the market. It’s very rare. That’s why the people who used to see some initial success and spend money right away or backing off. That’s why you see that 80 percent drop in investment. I doubt many of these companies are making money.

In the long run, the bubble will be gone, and there will still be people who understand this market, who understand companies, who know what their strategies are and invest in real value. There’s always value in the game sector, because there are always customers who want to put their money in this market to buy quality products and entertain themselves. It’s always been a long-term kind of market, and the capital markets will start thinking long-term as well, even in the mobile sector. The growth rate just won’t be that crazy.

Last year saw crazy growth in mobile games. This year the market will cool down. That doesn’t mean mobile games aren’t growing at all.

GamesBeat: What do you think about virtual reality?

Xiao: It’s a possibility. There are still technical issues to resolve before it can become another turning point for a new era of development and growth. It’s not there yet.

GamesBeat: Any last thoughts on how you’d define being a global game company?

Xiao: We want to be on every platform – mobile, PC, console, and possibly VR in the future if it becomes a real thing. We utilize our global capability to develop high-quality games. Quality is number one. Then we continue to expand and build our distribution and publishing globally so we can understand the global consumer better. We can tweak our games to better fit consumer needs – not only characters and storylines, or PvP versus PvE, but also the monetization strategies. Different things work in different markets. We could have similar storylines and similar characters, but a different game. That requires a global capability to understand local markets.

Finally, we want to work with a lot of global partners, like Microsoft, Sony, and Disney – good, capable partners around the world. We don’t intend to pocket all the money we make everywhere. We want to share with our partners. We can support others and others can support us in particular market scenarios. In summary, it’s very simple: global development, local publishing, and global partnership. That’s been our strategy for the last four years, and it isn’t changing.