Full transcript below:

Matthieu David: Hello everyone. This is China Paradigm, where we, Daxue Consulting, interview seasoned entrepreneurs in China. Hello everyone. Today, I am with Vincent Ghossoub. I met you in Hong Kong at an event for tech startups and I thought I had to interview this guy because you are in between China and the Middle East. I’ve interviewed many people who were in between the US and China or Europe in China, but you’re in between two parts of the world we rarely talk about and still, there’s a lot to do. You’re in an industry where China is playing a big part. It’s China’s game industry.

Tencent and many other studios are developing games for the world. That’s something I discovered through research we did for one of our clients. One-third of the top 100 apps in India are Chinese. Now people understand how China can be big in apps when we talk about TikTok. But so far it has been a bit unknown how big it could be. So, you have co-funded Falafel games. Maybe, you will tell us more about your co-founders later. You co-founded Falafel Games in April 2010 and you are still the CEO up till now. So, for close to 10 years, you’ve been adapting and developing games for the Middle East from China. I’m sure you’re going to correct me about what you do exactly, but you are adapting and developing games for the Middle East from China and you are also pushing them, doing some marketing, and contributing towards the acquisition of this game in the Middle East, and further than Middle East—Arab-speaking countries, if I’m correct.

You have raised money. You have raised several million. My number is 4.7 million so far from very actually interesting investors such as the Irish SME Association, Middle East Venture Partners, and twofour54 which is an Abu Dhabi-based incubator. And again, that shows me how the links between the Middle East and China can be. One more number: you are attracting, on your different platforms and games, more than 2 million users. And in one interview, we found out that you have been able to monetize on average $0.50 per day per user. Thank you very much for being with us. So, what do you do exactly? What’s your business model? Who are your clients?

Vincent Ghossoub: First of all, thank you very much, Matthieu, for having me. You did a great presentation and introduction explaining what I do. To answer specifically, the clients of Falafel games are basically end-users mostly based in Arabic speaking countries as you mentioned. And half of our revenue comes from Saudi Arabia. 

Matthieu David: Okay. When you say that your clients are the users, does it mean that you develop games for the Middle East from China? It’s not what I understood initially. I understood that you were taking games from China or from wherever in the world to adapt them to Arabic speaking countries.

Vincent Ghossoub: We do have this line of business currently. So, basically, we publish games. We find games that perform well in China’s game industry that are just about launched and the KPIs are okay. We approach the developer and we offer them the opportunity to promote the game in new markets such as Arabic-speaking markets and now increasingly Persian-speaking markets. So that’s one line of business. We do also develop our own games in parallel. And we have a live streaming platform from China also. 

Matthieu David: True. I remember when we met, you actually insisted on your live streaming platform from China mainly initially. Would you share a bit more about the size of the company now? I mentioned $4.5M raised so far as investment and 2 million users. I don’t know if it’s daily or yearly users. Would you mind sharing a bit more numbers, your offices, the size of the team, or the size of the company? Can you share some revenue numbers and confirm the numbers I just mentioned? 

Vincent Ghossoub: Yes. So, your numbers are not too far off—maybe they date since our last discussion. In fact, from the Arabic-speaking markets, we have 3 million cumulative users. This is the number of members of users who have installed any one of our games. And our games are focused on the mid-core category. So, the mid-core category is generally speaking very lucrative per capita. But in terms of volume, it’s quite niche. So, 3 million installs out of a market of, let say, 50 million people in Saudi and GCC, which we specifically focus on as a specific target market in the whole Arabic-speaking market. I think it’s quite an okay penetration. In terms of company size, we have sales of a few million. We have about 28 people in most places between China and Beirut, Lebanon. Yeah, as you said, we raised $4-5M over the course of the years. Yeah, generally speaking, this is the outline.  We have launched six or seven titles so far.

Matthieu David: So, thank you very much for clarifying the size and what you do. More precisely in China’s game industry, you are talking about a niche of games or apps. What’s the name of this niche you’re targeting?

Vincent Ghossoub: Most of us in the industry call it mid-core. So, it’s between casual and hardcore. I’ll try to simplify it with as few parameters as possible. It’s basically the time commitment needed by a user to spend on a game. And the attention needed to put on a game while playing is more or less what defines the whole continuum from casual to mid-core to hardcore. 

Matthieu David: I see. Are there some examples that people can know? 

Vincent Ghossoub: Yes, of course, instead of being too abstract with the definitions. So if you were to spend, for example, both hands on your phone screen on a game and 100% of your attention over the span of one hour and a couple of hours every day and over a few months, this is a lot of time commitment, especially that your full attention is taken when you’re playing the game and both hands are taken. So, this is hardcore. But if you are, let’s say, to spend one or two hours a day over a few months also, but with much less attention when you use it… let’s say you open the game, you do a couple of turns, you switch to email and nothing happens, you have a discussion, you have a call, you come back to the game, and you readjust your situation on the game and then keep going. With sessions of say, 30 seconds and maybe 30 sessions a day, this is mid-core. And then casual is like you can play in a minute and then you don’t have to commit for days or months.

Matthieu David: So, one example that everyone knows is Tetris. Will Tetris be casual, mid-core or hardcore? 

Vincent Ghossoub: Yeah, Tetris is casual. 

Matthieu David: It’s casual. 

Vincent Ghossoub: You can play it for a minute or a session and you can drop the game for six months and nothing happens. Then you come back and you can still play.

Matthieu David: What would be a well-known hardcore game? Will Final Fantasy be a hardcore game? 

Vincent Ghossoub: Final Fantasy is quite a heavy-duty, mid-core game. For a hardcore game, you need to have your full attention focused on it. So, for example, the recent Call of Duty does require full attention over 30 minutes. You cannot get distracted while you’re playing. Call of Duty Mobile released based by Tencent Studios basically is something I would call hardcore. Now, a lot of people in China’s game industry or anywhere else would agree with me on how this is defined. Generally speaking, those two defining parameters—time spent per session and attention spent per session—are something we all agree on.

Matthieu David: I see. By listening to what you said before, I feel that I overstated, in fact, the link with China’s game industry because I feel actually you develop your own games, you develop games for the Middle East from China or the live streaming platform from China. I’m not seeing the link with China as obvious as before except that you have an office in Hangzhou.

Vincent Ghossoub: The gaming business is a global business and our presence in Hangzhou is in China. And our foundation is in China. So, I founded the company in China. The company had spent six years in China before establishing anywhere else—seven years even. So, the presence in China has been essential in a few ways. So, we have employees in China. We have talent in China. We learn best practices in China’s game industry. And we do find games and partners who have games in China which we could promote outside. So, both for the games we develop, for the games we publish, and for the talent we need, China is always a part of the recipe.

Matthieu David: I see. I see. So, I understand now that China has been the place where you founded it. So that’s why actually you have a link with China; because you were there. I think you were at that time studying at CEIBS for your MBA in Shanghai or maybe in other cities because it should be Europe and China Business school. I understand that it’s by that circumstance that it started in China. And then you learned from this environment in transformation with digitization. It’s so big and so advanced in China and especially in Hangzhou. Okay. I get it. 

Vincent Ghossoub: Beyond digitization, there were some very specific trends that made it make sense to set up in China. At that time, China’s gaming freemium model (free-to-play models) were extremely nascent in the West while it was growing and becoming dominant in Asia (Korea and China) for many reasons. Mainly the Koreans started implementing it because of the situation in China where piracy was rampant back then because people wouldn’t pay to buy a box game. They would want it for free. They were used to free content back then. And then Chinese companies kind of perfected this art way before it was adopted and completely embraced in the West—in the US and Europe. So, at that time, China’s gaming freemium model which was emerging made very much sense for the Middle East because it shared a lot of similarities with the environment in China. Piracy used to be rampant back then in the Middle East also. And the internet had just come of age whereby you could actually play a game on the internet while just a couple of years before that, you had to buy it on CDs as box games. So, we shared the same attributes in terms of piracy and in terms of the need for free content and no fluency at all with buying paid content and the emergence of acceptable internet infrastructure. So, it was sort of two very similar markets except for the language difference obviously. So, beyond just digitization, very specifically in the games business, China was a good reference and model back then.

Matthieu David: What has changed? What has changed that China’s gaming freemium model now is not the mainstream and then you can have a premium? What has changed that now people can pay? Now you are monetizing like $0.5 per user on average per day. It’s a huge number for me. When you multiply it by 360 days and by 2 million, it seems huge. So, what has changed?

Vincent Ghossoub: We don’t make $0.50 per day per the millions. 

Matthieu David: Yeah, I calculated it. It’s like $300M. 

Vincent Ghossoub: Yeah, hopefully soon. But basically, if I have like a hundred users enter my games today or are active today whether it’s their first time or their nth time, I make 40 to 50 cents per these users per day. So, it’s not over 2 million. Hopefully soon. We have tens of thousands of users, a few thousands of daily active users, basically. 

Matthieu David: So, the question is what has changed?

Vincent Ghossoub: Do you mean what has changed from premium to freemium or China’s gaming freemium model being bashed these days and turning back to premium?

Matthieu David: You said that similarities were between China and the Middle East and that China’s gaming freemium model and the willingness for people to pay were low. And that freemium then became more mainstream and it had to be freemium if you wanted people to use the games. So, people want to use the games. But now it turns out that in China’s game industry, and I don’t know if it’s the case in the Middle East (you know it), people pay for games. People pay to be VIP clients of QQ email. Just because you have a bigger box, you pay for that in China. So, they accept to send small money to KOLs. What has changed in China and in the Middle East if the similarities continue to be built? What has changed that now you can ask them to pay?

Vincent Ghossoub: Yes. So, first of all, there’s a disconnect and this behavior these days between China and the Middle East. Chinese users have become much more willing to pay outright for content. While this hasn’t happened yet in the Middle East, they still expect free content and try to do their best to work around getting free content. But, of course, you can monetize them well in different ways. So, certainly, China has gone very fast through this transformation of going from ‘we want all the contents free’ to ‘we are happy to pay and even at rates much higher in some cases and in some categories than the West (paying outright for content)’. Just thinking of it, generally speaking, I don’t think much has changed. I just think the natural evolution of things is taking place.  

So when you think about it, if I want to go out with my friends today and watch a movie, let’s say, we’re going to spend ¥100 or ¥200 per person, basically, we’re watching a movie and spending time together while increasingly we are spending time together online, separate physically, but spending time online and we can get that same movie for ¥2 or for a ¥20 subscription or ¥30 VIP subscription on some video-on-demand platform or something. So that’s online entertainment. It’s the same thing for China’s game industry. If we were to go out to a bar or play tennis or something, we’re going to spend a couple of hundred RMBs also, while we might spend ¥2-3 per hour if we’re like having fun online. So, it’s just normal. Online entertainment is still by far the cheapest form of entertainment on a per hour basis. 

So, one thing that really changed and made people realize that it is actually quite cheap to have fun online is maybe the increased penetration of payment systems such as WeChat and Alipay. So, they’re used to buying. We’re more used to ordering online and transferring money all with our phones. So, it’s really one click away. It completely removed the friction from seeing, let’s say, a movie online for ¥2 or for a ¥20-30 subscription and paying for it. But that pricing had always made sense. In fact, I think if you look at how much disposable income goes online, it’s still a tiny portion. I think we can still spend much more online than we are today.

Matthieu David: So generally speaking, we know that users moved from China’s gaming freemium model to a little bit of premium which is $0.5 per day when they are active, as you said, on average. What do they pay for?

Vincent Ghossoub: It’s a bit less than $0.5 in our case. And in our case, it’s still China’s gaming freemium model. So, when I tell you it’s $0.4-5, it’s the average. If I take today’s revenue and divide by the daily active users, it’s $0.4-5, but only 1% of these users paid and they subsidize the remaining 99%. So, it’s still freemium. As you mentioned, you can pay for a lot of things online like the outright content subscriptions, premium games, and items inside of games. So, specifically, for items inside of games such as our case, basically you can categorize what the payers pay for in three categories. First of all, it’s utilities. Utilities are, for example, making my experience of the game easier. Let’s say you want to send two coins or one unit of stamina to all of your friends in the game. With one button, you can send it to all of them and that’s going to cost you a few gems. And the gems convert to dollars. They are bought with dollars. Instead of sending to all of them one by one, it just makes the experience smoother. We remove the ads if you pay a small amount. That’s utilities.

The second category is cosmetics. It’s just cosmetics. You just want to make your avatar look nicer. You want to add skins. You want to make your gun brighter. You want to have a crown on top of your icon. It’s things like that, that don’t perform in the game experience, but just look better. And when you spend enough time on the game, you might want to say, “It’s time for me to put my signature on the game”. The third category is performance items. So, for example, sometimes in strategy games. You mentioned Final Fantasy in games. Similar to Final Fantasy, you need to upgrade your heroes and find the items for your heroes and upgrade the items and go to battle. And you have very few stamina points for the battles. So, for all of these, for the waiting, you can accelerate it. For the finding, you can increase the chance of finding. For the battle, you can battle more by getting stamina. So, all of these bonuses—less waiting, more chance of finding, more battles—are paid for with gems.

Generally speaking, it varies with the markets. But in our case, a fraction is the performance. So, people just want to perform better in the game. And we can discuss a little bit of the psychology behind that. Cosmetics and utilities are a couple of percentage points of the overall spending of gems. Now, why do people want to perform so well? You have different kinds of gamers. You have the gamers who play on their own. They just want to feel they’re achieving. What is the Olympic slogan? Higher, further, stronger or something like that. So, they’re happy with beating themselves time after time. So, they might want to improve their performance from time to time. You have the killers—those who really want to compete. They want to perform better than others. So, you have leaderboards for them to compare. Sometimes, there are direct confrontations between them. So, someone wins and someone loses. You have the socializers who just want to spend their time lubricating the system and doing alliances and chatting and messaging with each other. You have the explorers who are just curious about finding out more and more hidden corners of the game.

Generally speaking, the killers are the most lucrative in the performance. That’s at least in our category of games. Now you would say we have killers who pay thousands of dollars a month. Now you can say, why do these people spend so much? And I can make the case why this is actually, first, a very proportion of their disposable income. Second, it’s much cheaper than all of their other entertainment options. But most importantly, what you do when you’re a leading killer is you’re basically showing status. You are getting a certain puff of psychological satisfaction by being the leader, by being the number one. And here, I can showcase a few situations why this is still taking place outside of games. And it’s much healthier inside of games.

So outside of games, you can go to the hottest mall in Beijing and check the cars parked by the gate. So, these cars are the most luxurious cars in the country and they’re parked there at the front of the gate. Why are they parked at the front of the gate? They’re parked right at the gate for two hours because it’s to a very large degree, one utility, but most importantly a status symbol. And that car was expensive compared to the status symbol you can get inside of a game, especially that only a few hundred thousand people are going to walk in and out of that mall and see the car while tens of thousands are going to see you for over an extended period of time inside of an online game.

So basically, I’m selling you the psychological puff, that satisfaction, without selling you the metal, wheels, alloys, and all the pollution that goes along with it. Basically, it also goes down to the question of what are you buying when you buy a pair of jeans? Why was your pair of jeans more than ¥1000? Tell me. What’s the reason? Why wasn’t it ¥50? Why that premium? That premium is basically a puff of emotional satisfaction. So, I’m selling you that puff without selling you the denim and for a much more extended period of time. So, it completely makes sense. If you’re willing to buy a ¥1000 pair of jeans, it completely makes sense to spend ¥500 on a much better level of satisfaction inside of an online game. In fact, let me go even further. There were Imperial colonial wars waged on colonies. Let’s say Holland in Indonesia or France and other places just so that a person in Paris drinks a cup of coffee and gets that satisfaction. That cup of coffee, let’s say, was sold for 5 Francs in some Parisian cafe and maybe the ton was bought for 5 Francs from the colony. So, the coffee shop was not selling coffee beans. The coffee shop was selling that puff of emotional satisfaction. 

Matthieu David: Interesting. So, what you are saying is one of the reasons for paying is social status. You believe that people want to compare to others. They want to be the first. They are competitive. As a killer, the psychology, as you said, is to be above all the others. Actually, we moved a bit further in your core business and how people convert from China’s gaming freemium model to premium. Actually, before that, I wanted to talk about the beginnings of Falafel Games in China. I believe Shanghai and Hangzhou because you have been studying in Shanghai at CEIBS and you have your office in Hangzhou. Could you tell us more about how you started and with whom? Why games? Are you a developer yourself? Why did you start this business? How did you start to develop games for the Middle East from China, with which money, and with whom? I need a bit of understanding of how it started for people to get a better sense of what the start was.

 Vincent Ghossoub: It’s a long story. I like to say I started it when I was three years old, ever since I could hold a controller because from whenever I was three years old until I started the company after my MBA graduation, there had always been a very obvious lacuna in the Middle East market. And there were not many games with authentic Arabic content. And that was not like, ‘Oh, such a discovery’. It was so obvious. It turns out when I was doing my MBA in CEIBS (China Europe International Business School) in Shanghai, it was the time when the trend we just discussed—the growth of China’s gaming freemium model and the maturity of the internet infrastructure—was taking place. And I had a few classmates also who had been in China’s game industry. It just clicked in my mind—the fact that now you can make a game that does not need to be pirated, that is free, and that can still make money in areas where the internet is just coming of age and solving the problem of lack of content. It just made perfect sense. Now, it’s really a no-brainer. It’s a very simple proposition.

Matthieu David: I take myself as an example. I’m French. I grew in France in a very French family and environment. I didn’t know what I didn’t have. Suddenly, if some movies were not translated in French or games weren’t translated in French, I just couldn’t know them. But I believe that your ability to assess that there were more games in English that were not in the Arabic language is because you have been educated in a very international environment. Because when I go on your LinkedIn, I see that you have been at the American University of Beirut. You have been in Toronto. And you have been at CEIBS. So, from the very beginning, you had an international mindset in order to be able to compare with other countries, behaviors, and so on. Am I correct with that? 

Vincent Ghossoub: Now, you’re asking me to come out of my shell and look at it and analyze. Maybe. Maybe, but I don’t think it’s so extreme really. I think I wouldn’t attribute so much the realization and the articulation of the opportunity to, let’s say, my experience in living in many places and international outlook. I just used to play games. 

Matthieu David: Okay. 

Vincent Ghossoub: So, imagine you loved watching movies when you were a kid in France and all the movies were in English. Let’s say that was the case. I know that this was not the case, but let’s say that was the case. Then you don’t need to be like Marco Polo to realize that it would be nice to have a movie in French—or at least to have it translated to French or dubbed. So that was my trigger. It wasn’t like so much international outlook. I used to play games and they were in English. What can I do? And you don’t need a lot of languages to be able to play the game. But the actual lacuna I noticed is content, not language. So, it’s not just about a matter of translating the shape of the heroes, the story, the narrative, and all of that. So, that’s one, but I think that’s in terms of articulating the opportunity.

But I think in terms of execution, this is where the international outlook really helped me. So, just in terms of context, I also lived in France during the Lebanese civil war for a couple of years during my childhood and in North America and the Middle East, in Lebanon, in Iraq, and in China. So that’s like three or four continents and four or five countries. It just made things easier. I didn’t see the barriers like doing cross-border business of like negotiating with my first Chinese partner. For me, it was just like some dude. He’s a guy. There’s a lot of them all over though. I didn’t see a big barrier in doing that. The travel needed, the cross-language communication required, and all of that including my international outlook maybe made me reckless. It gave me a reckless attitude toward it, which in a way can be good as long as it’s not too reckless.

Matthieu David: So as far as I understand, you had an understanding but also a passion for games. And it was obvious to you that you would do something in games. I mean there was basically an attraction to games. And you were in China studying at CEIBS. Because you were studying in China, for you, it was a laboratory to see what’s happening, digitally speaking, with China’s game industry. And maybe, Korea as well as a laboratory for you. And you started that to get inspired to learn the best practices and so on. It’s a bit counter-intuitive for me because what I get from most people in the development and online businesses is that China is expensive. China is not a place where actually developers are cheap. It’s not a place where you can find developers easily. It’s not a place where they can develop for the world because it’s very China-centric compared to India for instance. So that’s why for me, it was a bit contrarian. How do you react to that?

Vincent Ghossoub: Yeah, I always get that. So why are you in China? Is it because of the costs? 

Matthieu David: That’s not the case, right? 

Vincent Ghossoub: Costs are very high. Yes, of course, there’s a lot of competition from most multinationals and from a lot of software companies to get the talent. And despite the big volume of talent supply, in fact, if you divide it by the number of companies competing on that talent supply, it’s quite competitive. And it just jacks up the salaries basically but there are a lot of reactions. There are a lot of justifications for that. First of all, it’s the best practice developed. So, China is a bloodbath in terms of China’s game industry and it’s leading in terms of competition.

Matthieu David: Would you mind sharing two examples of the best practices? What best practices have you learned from China?

Vincent Ghossoub: It’s just doing good game design. So, if you look around the whole world, teams that could do good game design develop a game efficiently. There are very, very few places. And China is one of them where suppliers are big enough or large enough. And if you compete, if you are able to acquire, you can come up with something. So, let me boil it down to you to a very simple equation. You want to make a game in China. You want to make games in China. So, let’s say you have a certain cost; let’s say $1M to make the game. So, your cost per game is $1M divided by one. You spent $1M to make a game. If you make it elsewhere, it might cost you $500,000, but you’re not sure you’re going to get a game. So, it’s $500,000 divided by zero. You end up with zero games and it’s practically infinite costs. So, per human resources, it might be cheaper elsewhere. But per game, you might end up with no games.

I’m not saying it’s only China that can deliver that. Of course, there are other places that are still much more expensive than China. Northern Europe, the US, and Canada can deliver good quality games. And there are even developing countries. It’s not like it’s the monopoly of advanced places. But the idea here is that you need to get a good game so that you can compete. And then you stop asking about the cost of your human resources, especially that your cost of human resources is practically not the cost of goods sold. It’s not like I’m buying cheap and selling slightly with a markup. In games, if you think of the cost structure, the development team is a fixed cost. You have to pay for the salaries every month. And then the revenue is variable. So, it’s very high operational leverage. The revenue can grow ad infinitum in theory. It can grow infinitely in theory without much growth in your fixed costs. I’m not mentioning here the variable cost of the marketing.

Matthieu David: Yeah, that’s the beauty of it. 

Vincent Ghossoub: Yeah, exactly. So, if you’re in a situation like this and you’re chasing the utopia whereby you get high revenue compared to the fixed cost, then you will accept to have a fixed cost that’s still okay and relatively high because the revenue is so much higher. And if you try to save a little bit on your fixed costs, let’s say bring it down by 20-30%, you might be killing the chances of the game even breaking even on your fixed costs.

Matthieu David: So, we understand that there is an investment.

Vincent Ghossoub: Yeah.

Matthieu David: Initially, you need to invest for a period of time to develop games for the Middle East from China. How did you invest? Was it your own money? Did you raise money from the very beginning?

Vincent Ghossoub: A bit of everything. So, early on, we just discussed the proposition. The proposition is quite simple. And if you look at the Middle East market, generally speaking, it’s around 400 million people, a homogeneous language or quasi-homogeneous religion, a lot of common cultural norms, they have a young population, and they are well-connected. So, it’s a good opportunity. So initially, I put in some of my money. I was able to convince a couple of friends to put in a little bit of money. And most importantly, I found a whole team because, in games, you need multiple skills. 

Matthieu David: What skills do you need?

Vincent Ghossoub: The art, engineering, game design, and management. You need to glue them all together. And then, of course, a few sub-skills within these. You need them all. You cannot have one link missing.

Matthieu David: Designers. 

Vincent Ghossoub: Yes, design. Game design. So, I was lucky to find a game development company based out of Hangzhou which agreed to partner with us for equity to go after the opportunity and put in their own team. 

Matthieu David: Wow. 

Vincent Ghossoub: And I had the option to bring that team in-house and I did exercise that option. So, I don’t have the exact numbers in my mind. We needed a few hundred thousand dollars to come up with that first game. And we only had tens, maybe a couple of hundred thousand, in cash commitments early on. But along with the team that was working on it for equity, we were doing progress and this allowed us to raise our first institutional round.

Matthieu David: How much time did you take to develop your first game for the Middle East from China? Did you talk about two months, three months, six months? 

Vincent Ghossoub: No, no, no. A lot of time. Generally speaking, our category of games has a very variable production cost. In our case, it’s about 15 people over 15 months.

Matthieu David: 15 people over 15 months. I see. 

Vincent Ghossoub: Yeah. So, 225 man-months. But you have similar games in the same category that might cost tens of millions of dollars—10, 20, 30 million sometimes just because it’s so easy to spend bottomless pits of money on, let’s say, perfect art, more art, and more stages. And you always have a critical decision of when you should launch and start harvesting or collecting money. When you’re at 50% or 99% or 150% of the development progress in the game, it’s something that affects your upfront investment. But generally speaking, now more and more, the upfront investment in developing games for the Middle East from China, whether a few hundred thousand dollars like our case or a few million dollars like many cases or even tens of millions in very few cases, is generally not the main upfront investment. The main upfront investment eventually turns out to be the user acquisition spend. 

Matthieu David: But this is like less of an investment and variable cost because you should cover your cost after the acquisition, right?

Vincent Ghossoub: Yes. So, I mean it also depends on policies cause it’s so variable. You can spend $100 on user acquisition per day or you can spend $10,000 per day. You can spend millions per day. It’s extremely variable. Essentially, it boils down not only to that, but an easy parameter is a cost per install. So, you put your target installs and then you know your budget needed per day. And that can be extremely highly variable. Let’s say you have a policy of like 90-day-payback on your ROI or your ad spend. So, you have this initial trust that you have to go through and you need the cash balance for it. Some companies go for a 360-day-payback. So basically, the idea is if I spend, let’s say, $100 on Facebook ads today, from the cohort of users that get acquired from this $100, how long do I need to earn back the $100? So, I keep optimizing my targeting and my budget allocations until I need a certain payback target. So, if my payback target is 90 days, depending on the game, the game quality, and the advertising quality, I might reach a high volume of players or a low volume of players. But the longer my payback target period target is—I know some companies who have 440 days payback period target—then your cash balance needs to sustain all that trust. That valley is huge.

Matthieu David: I think another question that many people who are listening to us are asking—and I am myself—is how were you able to connect with this Chinese company to convince these Chinese company to work with you and to actually work well with the Chinese company when you are just an MBA student or you just got out of the MBA? I think those three items—how you found, how you convinced, and how you worked with them—are kind of a mystery for us right now.

Vincent Ghossoub: It’s kind of a mystery to me too. The secret word here in my case in how I found this Guanxi. I’m sure you have like 50 podcasts where you discuss Guanxi. It’s a friend who knows a friend who knows a friend and then it’s a chain of favors. And then, things get done. I was very lucky that my MBA gave me sort of like a soft landing in China and I was able to build a small network of well-connected businesspeople in China. But you have to push through. The first layer of your Guanxi is never the one that gets you the connection. Then you have to ask one person for the next and build trust. Then they ask the next for the following and build trust. And you don’t know in which branch of your Guanxi network where you can eventually get the click where there’s a good synergy for good business.

So, I had a friend basically. I have one of my alumni who was into gaming too. And we were going around looking at opportunities in games and going to conferences. And then he remembered that he had that friend who had a development company who does things that I might be interested in. And then we discussed that. He was interested in my market and my proposition and he agreed to put in his team. Another thing in games and software, in general, is that you could, to some degree, build one cell infinitely many times. So, from the perspective of our first development partner who entered for equity, they could build our games skinned for us once and reskin it infinitely many times for other markets. And that was their idea. So, they had actually every skin of our very game in the Chinese market for themselves. 

Matthieu David: I see. 

Vincent Ghossoub: Let’s say his investment in nine months was $500K. But that $500K also went into his own games. 

Matthieu David: I see. 

Vincent Ghossoub: So, the margin of cost he had for us was not so much. It was like tens of thousands. So, that’s how we found it. How we worked was much more difficult. And I think luck and perseverance were big factors because I completely moved to Hangzhou. I stayed on top of it. I knew we were not going to understand each other. They barely spoke English. We barely Chinese. So, our proposition was bringing Arabs with Chinese together and develop games for the Middle East from China. I can barely work with Arabs. I can barely work with the Chinese. Now I have to work with both and let them work together. So, it needed a lot of perseverance, I think. And one of the mottos I had is whatever the problem is, consider it a cultural gap problem first. Put that off the table. Sometimes, it’s coordination. Sometimes, it’s bad code. Sometimes it’s implementation not as per requirements. I didn’t start like this, but I got to the point where whatever this problem is, let’s see whether it’s a cultural communication? Should we just sit and cross the cultural bridge and put it out of the way? And then if I make sure all the possible cultural gaps are not there, then it’s a normal professional problem that you handle normally and professionally. But guess what? Most of the problems were of that first category.

Matthieu David: I see. Very interesting. Very, very interesting. When did you raise your first round from institutional investors? I mean, understand it was from a partner first and then from institutional investors. Actually, I’m surprised about the investor you have. You have the iSME. I didn’t know about them—Irish SME Association. I didn’t know they would invest in it. And then you have the Middle East Venture Partners. I understand better because they are Middle-East focused. And then you have an Abu Dhabi based incubator. 

Vincent Ghossoub: We might be mistaking the iSME you are mentioning here. So, the iSME that invested in me is basically a Lebanese financial entity which is a joint venture between a large loan insurance company in Lebanon and the World Bank. Half, half.

Matthieu David: I see. So, it’s not Irish at all. So, my team wrote wrong. Right?

Vincent Ghossoub: It seems it’s the same name. Maybe, I shouldn’t say iSME. I should just say Kafalat which is the name of the loan insurance company because iSME is almost like an internal name for them. It’s that small initiative. It’s just a small fund of maybe $25M or $50M or something like that which they put half and the World Bank puts half. It’s for equity investment. In fact, it’s for equity matching. They don’t invest. They match. And in my case, they matched MEVP with this venture partner which is my lead investor in a couple of rounds—two rounds, basically. 

Matthieu David: When did you raise? One year after? 

Vincent Ghossoub: Yeah, about one year after. Like they say in the stories and when you listen to podcasts, I got Series A or Series B, very finite, opened round or closed round… maybe because I’m in a market with very little equity financing liquidity. So, it’s like an ongoing thing with me. My round is always open. My valuation is always going up and down and those windows are not so well defined. So, to tell you how it went—this kind of like flexible, ongoing thing—I got $100,000 convertible loan by MEVP first and they had three conditions to enter with their follow-up equity round. I think it was $500,000 or $600,000. One of them was getting a co-investor. Two of them are operational. One of them was getting a co-investor. And I was really, really lucky that the game we were working on, met the branding of a TV series that MBC (Middle East Broadcasting Corporation) was working on. So, they accepted to join that round and I cleared that condition. I also cleared the other two conditions. So, they entered with an equity round then of 800 more or less. Yes, 800, including the convertible and they converted their convertible note to equity with a discount. And then the following round was also led by MEVP and followed by twofour54 and iSME. 

MATTHIEU DAVID: Did you raise money because you were not profitable or did you raise money to go faster and develop new markets?

Vincent Ghossoub: Both.

Matthieu David: Okay.

Vincent Ghossoub: It went hand in hand. 

Matthieu David: Are you profitable now? 

Vincent Ghossoub: We are if we want to. 

Matthieu David: Okay. I see.

Vincent Ghossoub: So, we are investing heavily in our live streaming platform from China. And it’s eating from profits and from the capital in our live streaming business. 

Matthieu David: I see. 

We have not talked enough about live streaming and we’ve been talking for one hour already. So, I’d like to take five minutes to talk about the live streaming platform from China which actually seems to be the masterpiece of Falafel games. I feel that it’s the cornerstone of it. Could you tell us more about what it is, how you monetize, how important it is, and where it came from?

Vincent Ghossoub: Yes, of course. So, today the interactive live video multiplayer platform is indeed the masterpiece of our strategy moving forward. And in fact, it’s even a separate kind of department and even a subsidiary in the whole Falafel Group. So, we have the developing games for the Middle East from China part and the live streaming part set up in two separate legal entities, but it wasn’t designed that way at the beginning. In the beginning, it started as a simple product to solve one challenge we had in the game part, which was that the cost per installs (CPIs) were rising dramatically and significantly fast. And ROIs were thinning. So, we were thinking, “Okay, where is this going and what is an approach we can do so that we dramatically reduce our CPI?”. And we found a nice category of games with experimentation. And after the experimentation, we realized how nice it is and we were able to articulate it.

It’s basically games that are not in Arabic and cannot be played by Arabic users such as word games or quiz games. A competitor from, let’s say, the US can come with the best quiz game in the world but if it’s not good Arabic content, my crappy game in comparison will do better. And people will want to install mine because of the content. It’s basically the difference between necessary local content and nice-to-have local content. Consider yourself a user and going through a journey. And I tell you to come to play this tank battle game. Whether it’s an English or Arabic or French, it’s not going to make a big difference for you. The language is nice to have, but if it’s a quiz game or a word game or crossword game, whatever, it’s a must. So, we put out a crossword game which was a really cool game by the way. And it just sucked traffic like crazy. In fact, I don’t count this traffic as part of the official KPIs I gave you early on because it was more of an experiment and outside of our core back then.

But to give you a comparison, when we launch a mid-core game, let’s say a strategy RPG game, our cost per install is $2 to $7 depending on the channel and the quality. It averages out at about $4. It’s a bit less than $4. It’s $3.5. When we launched that crossword game, it was a must-have Arabic game so there was very little competition in that category. And although, in general, Arabic-speaking people don’t like too much reading games or games that involve texts, with only $13,000, we were able to get 500,000 installs. Make the comparison. Yes. In terms of CPI, it’s very big. I don’t know; is it like $0.3 CPI or something like that? So, it’s a very big difference and we concluded that the reason was that this game is a must-have. It must be Arabic. It doesn’t have much competition. And then we stumbled upon a second problem.

We thought, “Okay, let’s go after this category”. But then we stumbled upon the second problem. It’s that text medium doesn’t monetize as good as a strategy or role-playing games. So, lifetime value (LTV) of your user is very low. Then you go back to the problem of low ROI. In the case of mid-core, it’s a high cost to acquire and high lifetime value per user with a thin margin. In the case of a quiz, it’s low CPI but also lows LTV with a thin margin. So, what are we doing? And so, now we set out to bring up the LTV and we thought, “Okay, let’s move from the quiz or text medium to the live video medium where we have real hosts who present the game”. It’s much more engaging.

So basically, it turns out like Who Will Be The Millionaire game kind of whereby instead of having one participant, everybody’s competing at the same time on a leaderboard. Everybody’s talking, chatting, and interacting with each other and especially between themselves and an audience and the host who is streaming live. And the LTV was slightly better. So, we found a good chance here—high ITV, low CPI. We can go after this. And it solved in a way another problem which we had in China’s game industry and the world’s one, which was the sunrise, sunset reality. You know, for every game, you have to launch it, you harvest for a while, and then it sunsets. Then you have to go again with new games or revise the game somehow. So, there are almost always up and downs. But the live video content is basically kind of like YouTube. You always have new content that you can put out there. So, we’re hoping and it’s starting to prove that it’s much more sustainable. It grows slowly but it’s sustainable. 

Matthieu David: Sorry to interrupt.

Vincent Ghossoub: Yes.

MATTHIEU DAVID: Livestreaming platform from China. Live video. I mean Facebook, as you mentioned, is doing it well. How do you differentiate yourself from them for instance?

Vincent Ghossoub: Did you say Facebook? 

Matthieu David: Yeah.

Vincent Ghossoub: So, of course, there’s Facebook. There’s YouTube. There is Twitch even. But our proposition is basically mostly interactive live streaming platform from China with a lot of different ways to interact with the game. So, we have games set up on top of overlay—on top of our live video feed—where a host or an influencer can come and set up. So now we have variations of quiz games. We have roulette games whereby the host is practically the dealer in a social casino setting. So, no cash-out. And we are releasing, I guess, what’s in the box game. So basically, the video feed technology is the same but we have a lot of gamification on top, which I don’t think Facebook or YouTube even want to do. It’s not their DNA. So, we’re a completely separate DNA from what they’re doing. And we’re geared towards maximizing revenue for hosts and influencers. So basically, our product road map is going to the influencers and hosts and telling them, “What do you want now that can help you make more engagement and more money and we’ll just do it for you”.

Matthieu David: I see. Do I understand well if I say that during a live stream, for instance, you will have someone playing with cards with an audience of people watching and they may ask some people to pay if they want to interact in the game with him? Would it be this kind of live streaming?

Vincent Ghossoub: Almost. So, it’s not only cards. It’s not only a live social casino. 

Matthieu David: Yeah. It’s just an example.

Vincent Ghossoub: Yes. So, any interaction or participation will include some spending on virtual items of credits in the game. So, if you earn, you earn credits, if you lose, you lose credits. If you like the game enough, you reach a point where you run out of credits and then you want to top up.

Matthieu David: What’s the closest version in China to what you do? What’s the closest version in the US?

Vincent Ghossoub: Yes. So, there are a few attempts in China and the US to crack this system which is basically the interaction of traditional media and interactive games. Some went well and then crashed. Some are going well and some are exploring. So, I’ll name a few. The most famous one in the US was HQ Trivia and it had a couple of clones in China such as ChongDing DaHui where it’s one or two 15-minute sessions per day and there’s a cash payout at the end. So, it became really popular because of the cash payout or prize, but then it went down and people realized that they were not able to win so much because so many people were joining. And for a lot of regulatory reasons, this was stopped in China. You have other kinds of a live streaming platform from China or anywhere else which I allow myself to call soft sex cams. So, it’s basically Facebook Live but with tipping and gifting. But most of the monetization comes from quasi-nudity or at least users flirting with the host. 

Matthieu David: Do you have this issue? How do you tackle this issue with your own platform?

Vincent Ghossoub: Yes. So, let me go to the third category. Then I’ll tell you how I tackle this issue. 

Matthieu David: Yeah. Okay. 

Vincent Ghossoub: Another one is obviously live casinos—the real money gambling. They do it and they’re doing it well. It’s probably the fastest-growing category. And you have a horde of people exploring it to which we belong and some others belong. It’s like a company in the US called Joyride. Another one is called Tele. So basically, the reincarnation of live game shows on mobile is in a much more interactive way whereby the interaction is no longer message-in or call-in or rate or poll or vote. We have all sorts of possible interactions which you can do through the mobile. Now how did we tackle the issue of sex cam business when we started our own live streaming platform from China. In fact, we did have a host monetizing crazy amounts per hour of broadcast and we had to figure out why. And eventually, it was sort of like she was pushing a certain behavior from the users. She was incentivizing them to send her a lot of gifts. So, she was using us as an appointment platform and as a payment gateway basically because the gifts are paid.

So, they sent the virtual gifts on the platform and then we’ll give her her revenue share on the back end. Now, you mentioned it’s an issue for a lot of companies. It’s the core business. If you look at the numbers, they are not so bad. So many of these companies in China are listed. Some of them are listed in the US running this as a core monetization scheme for them and making billions a year. So, putting aside the ethical issue, we didn’t even consider it for ethical reasons. Luckily, we did not have to confront that dilemma. At least, for business reasons, we thought it wasn’t sound for us to do so. We were at the same time finding in one room housewives who wanted to play and males who just wanted to flirt with the host. And this could not cohabitate. So basically, we just removed all incentives to the host to redeem revenue shares from gifts and we focused the whole experience on the gaming part. So, you come and you play the game. You don’t just do social interaction forever without playing the game. You must play the game. 

Matthieu David: I see. Is the game designed by you or it’s just someone live streaming the game?

Vincent Ghossoub: It’s designed by us. So, it’s a functional overlay on top of the live video. Maybe in the future, but not very soon. We could open up an API for other people to put their functional overlay on top of the live video. But today, it’s too early. So, we’re just coming up with our own functional overlays on top of the live video feed which represents different kinds of games.

Matthieu David: I see. Thank you very much for your time. It’s already more than one hour. Actually, I had more questions. Maybe we could have one session on the live streaming platform from China part, but it was very, very interesting and instructive on how you partner with the Chinese company which invested in you at a very early stage. Thank you very much. I hope you enjoyed. I can tell you I enjoyed talking to you. 

Vincent Ghossoub: Thank you very much, Matthieu. I enjoyed too. 

Matthieu David: Thanks again. 

Vincent Ghossoub: Thank you. 

China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.

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This article Podcast transcript #86: A promising company developing games for the Middle East from China is the first one to appear on Daxue Consulting - Market Research China.

The sports market in China is expected to reach 5 trillion RMB by 2025 through the Chinese government lifting the sports industry as a part of a national strategy. In 2018, the size of the sports industry reached 2.4 trillion RMB. Between 2018 and 2025, the government plans to double the size of China’s sports market. Basketball, Football ( Soccer) and e-sports are the main three sports markets in China. Viewing sports online is not uncommon in China. Online sports such as e-sports, have numerous media platforms that have been established by IT giants such as Tencent (Tencent Sports) and Sina (Sina Sports). With a market, sports advertising in China  uses multiple channels: traditional advertisement, digital advertisement, endorsements and sponsoring.

Slight decline of traditional sports advertisement in China

Traditional advertising includes the use of billboards, posters, television commercials, radio, and print materials such as magazines.  Traditional media continues to decline since China shifted to a digital ad ecosystem. This means that there was a decline in spending on television and print. However, poster and billboard sports advertisements are still used outside athletic facilities or recreational centers such as gymnasiums, stadiums and sports centers. At bus stops located near these locations, there are also printed displays of sports team for sports such as basketball, soccer, gymnastics, etc.

 [Source: Reuters/Aly Song, traditional sports advertising in China, at the Oriental Sports Center in Shanghai]

Although China is deeply embedded in the digital age with the Internet of Things and digitizing, these traditional methods of advertising are still used because of their ability to reach local targeted audiences easily such as the silver economy.  Sports teams, especially individuals of sports teams, are often featured in magazines for categories such as fashion, sportswear, and other items in which they may have been chosen to model for or be a representative of.

Digital advertising dominates

Digital advertising spending in China is rising. In 2019, ad spending in the Digital advertising market reached $52,513 million US. That largest segment of the market showed to be Search advertising, which has a market volume of $22,562 million US. Digital displays are very common in China as digital display screen line bus stops, subway stations, and are all throughout malls. Online sports media platforms in China like alisports and Tencent have also taken off in recent years.

Mobile advertising

Mobile ads are becoming one of the leading as spending channels in China and by 2023, 35% of total ad spending will be generated through mobile. With mobile ads, you have various categories: Social media advertising, Banner advertising, Search Advertising, and Video advertising. Within their own media platforms, E-sports advertising mainly utilizes video advertising to reach targeted audiences. On social media apps such as Weibo and WeChat, sports advertising is not uncommon either as ads for a sporting goods brand or sports team would appear.

Social Media Advertising

Sports advertising in China is often through social media. These ads often appear as, but are not limited to, sponsored posts with content or alongside the news feed of the social networking site. Brands such as Nike, Adidas and other sports/fitness brands will utilize these forms of advertising the get their brand across to wider audiences.

Banner Advertising

Banner advertising is a form of digital advertising that comes in various shapes, sizes, and formats and are displayed on a website and mobile-enabled website, or app. Formats includes wallpapers or pop-ups that link to a landing page of the advertiser. They generally match the form of the environment in which they appear. The banners can be static, play sounds, animations or even videos. Along with its very own category on Weibo, E-sports events and popular players are usually part of Weibo’s banner ads that pops up right after the app’s logo screen when you open it. Sporting goods and sportswear  brands may utilize this form to generate more traffic to the brand’s direct website/platform for awareness.

Search Advertising

Also known as Paid Search Advertising or Search Engine Advertising includes advertisements that are displayed on search page results above or next to organic search results. They are usually text and image based. Keyword advertising and sponsored links are also a part of search advertising. When it comes to sports advertising in China, sporting goods or apparel would appear in this form.

Video Advertising

Video advertising carries across all ad formats within web-based and app-based video players. They are often in the format of video ads that appear before, during or after the streamed video. Text or image overlays that appear while watching a video are also video ads. 

Sports Sponsorship in China

Sports sponsorship is a marketing technique that consists of an association between a company and a sports club or team. The licensed sports merchandise market in China is growing at a rate of 10-15% every year. In sports sponsoring, both the sponsor and the sport club benefit. The goal of sports sponsoring is for the sponsor to generate brand awareness and customer loyalty, and the sports club to receive a financing source. Chinese tech companies have become leaders in sports-sponsorship choosing to partner with major sport leagues. Along with increasing brand awareness, sport sponsorship provide the potential for increased sales and reaching a wider audience base for companies. Many companies utilize sports celebrities such as Yao Ming (basketball), Chen Zhihao also known as Hao (esports), and Zhu Ting (volleyball) as endorsers or ambassadors of their brands and organize some activities or events with them. [Source: daxue consulting, sponsorship in sports advertising in China]

Segmentation for sports advertising in China

China’s sports market is very large, but different tier cities have different sports media consumption habits

First-Tier Cities – Big cities like Shanghai and Beijing have well developed markets that are ready for high class or expensive sports good. Consumers within this tier will care more about quality and function.

Second-Tier Cities – Consumers in second-tier cities possess personal incomes that will be reflected on their consumption. They are more likely to focus on a brand name.

Third-Tier Cities – Rural areas, with low consumption power of brands. Third-tier consumers are increasingly joining the middle class and becoming more consumers that are sophisticated. When it comes to sports advertising in China, low-tier city consumers are future targets, as they are already being primed with exposure to sports media like the NBA.  

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This article Sports Advertising in China: Reaching China’s sports enthusiasts is the first one to appear on Daxue Consulting - Market Research China.

The Chinese online sports market

In 2014, the State Council of China issued the No. 46 document Comments Relevant to Accelerate the Development and Consumption of Sports Industry. The Chinese government stated that sports industry would be lifted as a part of a national strategy; and by 2025, the total output of sports industry in China would be 5 trillion RMB. The policy triggers the development of the sports industry of China. As a result, the Chinese online sports market is also booming.

The scale of the Chinese sports market

In 2018 , the market size of sports industry in China is 2.4 trillion RMB, while there is a 2.6 trillion RMB gap between the current market size and the goal of the Chinese government. In addition, according to the data of Forward-The Economist, the percentage of contests and performance in the sports industry of China is only 1.05%, which is tiny compared to 25% in the sports industry of the U.S. This indicates that the sports industry in China has large room for further development.

According to the estimate of PwC, the sports sector in China will embrace a tremendous annual growth to 15% in the next five years, which outpaces the expected annual growth of the world.

The number of people who watch sports online in China

Statistics offered by General Administration of Sport of China and Bohai Securities shows that the online sports audience in China rose from 80 million in 2012 to 410 million in 2016.  The 100 million average annual increase reflects the continuous growth of Chinese online sports market.

Online sports media platforms

With the sports industry initiative of the Chinese government and the number of people who watch sports online in China, the IT giants in China are establishing their own Chinese online sports media platforms. Tencent, one of largest tech companies in China, has performed the best in distributing sports information to Chinese sports fans through its established Chinese online sports media platform, Tencent Sports. Tencent Sports provides sports news and information not only related to China, but also reports on the global sports scene. The biggest achievement of Tencent Sports to open its market is that it cooperates with NBA in the U.S. to broadcast all NBA games, helping the NBA improve its influence in China. Based on Tencent’s vast social network services, Tencent Sports easily spreads to every corner of the nation and garners a large number of users, and it successfully became the main source of sports content distribution in China.

Sina, another IT giant company in China, set up the first Chinese online sports media platform Sina Sports to provide sports content in China. Sina sports is a popular Chinese online sports media platform and it has huge influence on the internet in China as it leverages the network of Sina Weibo by sharing marketing and sports information, and therefore convertsWeibo users to its own users.

New entrants of the sports media platform market are also noticeable. Alisports, a new Chinese online sports media platform backed up by Alibaba Group, entered the market in 2015 and have spent a good deal of money to grab its market share. Began with the e-sports in China, Alisports expanded its platform by cooperating with several international sports organizations and games and sponsoring advertisement, human resource and technical support to improve its popularity. Alisports can establish a new retail sports platform that gives different parties chances to share and exchange sports resource and information.

Tencent Sports: Tencent online sports media platform

Tencent, as one of the three biggest internet companies, has built up its own Chinese online sports media platform and has taken an important position in the market. It is also a good example to unveil the Chinese online sports media market at present.

The establishment of Tencent Sports

Tencent Sports used to be a part of Tencent’s web portal as an informational channel called “sports channel” which provided sports content in China since 2003. At that time, Tencent’s “sports channel” performed just like other online sports media, merely acted like an online sports reporter offering a sports newsletter.

In 2008, Tencent Sports began to develop Tencent live streaming to broadcast a few games. As the number of competitions was not sufficient to support continuous user inflow, Tencent’s “sports channel” picked out some highlighted matches for Tencent live streaming to attract Chinese sports fans to visit the website.

Development of Tencent Sports: starting from the NBA Tencent game

In 2014, Tencent Sports started its business independently and now is led by Zhao Guochen, who is former deputy editor-in-chief of Tencent’s website. Unlike what it did in the past years, Tencent Sports determines to be a more comprehensive online platform and offers a variety of functions. At the beginning, Tencent Sports negotiated with the NBA and bought out its broadcasting rights in China for five seasons to improve Tencent Sports’ popularity. The NBA Tencent game stimulated users inflow to Tencent Sports, and Tencent Sports began to introduce more sports association and obtain their games broadcasting rights in China on the net, such as the English Premier League and the National Hockey League. Tencent Sports acted like an online TV station on which Chinese sports fans can watch sports online in China just as on TV through its website, app and other Tencent online platforms. With stable and high-quality images, Tencent Sports soon became the most popular Chinese online sports media platform.

Data on Tencent Sports

Data reveals that Tencent Sports has advanced performance in the Chinese online sports media platform market compared to other counterparts. Besides, it also shows that Tencent Sports room to develop.

Picture of users of Tencent Sports

Data on Baidu index reveals most users of Tencent Sports mainly concentrate on people in their 30’s and 20’s, which make up 80% of those who search Tencent Sports.

When it comes to the gender distribution, Baidu index shows that males are more interested in Tencent Sports than females, with almost 90% of the searchers are male and remaining are female.

Data extracted from Tencent Sports app is somewhat different from what is shown on Baidu index. The age distribution of Tencent Sports users is basically identical with what is shown on Baidu index, with age groups under 35 are the majority of Tencent Sports users. The percentage of female users of Tencent Sports is higher than that of searchers of Tencent Sports, which may suggest that females are more easily converted as loyal users than males, or it could be explained my males use Tencent Sports at a higher frequency.

Profits and cost of Tencent Sports and its users

Although no public financial data has been provided from Tencent Sports, the CEO also admits that the Tencent online sports media platform, just like other online sports media platforms in China, has not obtained any profits.

The cost now is too high for Tencent Sports, and it mainly consist of the broadcasting rights in China of different renowned sports leagues. Taking the NBA as an example, Tencent Sports signed the broadcasting contract with the NBA in 2014 the five following seasons, and it took Tencent Sports about 500 million USD to win the contract, which is a great deal of money. The prices of broadcasting rights in China of other top sports leagues are also rising, which is a huge burden for Chinese online sports media platforms.

As for the fees collected from the audience and users, Tencent Sports charges much less money than its counterparts abroad. At present, Tencent Sports charges fees for add-value services like better quality of images, which is different from foreign counterparts who deliver authorized matches services after the users and audience pay the fees.

How does Tencent Sports operate and make their marketing and advertisement

Tencent Sports now is the most successful and representative Chinese online sports media platform, and its success should give the credit to Tencent Sports’ operation, especially its marketing and advertising strategies.

Seize top sports rights and cooperate with top leagues and authorized TV channels

By utilizing the NBA’s broadcasting rights in China, Tencent Sports soon gained a lot of attention from Chinese sports fans. The NBA successfully helped Tencent Sports market itself as a Chinese online sports media platform. This cooperation between Tencent Sports and the NBA is mutually beneficial, as Tencent Sports began to pursue vast cooperation with other top sports leagues to expand its influence on Chinese sports fans. On the other hand, sports leagues that cooperated with Tencent Sports became more popular than before in China, as their matches had more opportunities to be exposed to Chinese sports fans and was broadcasted on Tencent Sports, which is a perfect platform to showcase itself to more potential audience.

But Tencent Sports doesn’t act irrationally, as it gave up to contend for broadcasting rights in China of all the top sports leagues with other platforms or TV stations. Instead, the cooperation between Tencent and ESPN was put forward to help Tencent to fulfill as much sports content distribution in China as possible. The cooperation between Tencent and ESPN allows both parties to share the broadcasting rights and broadcasting channels with each other. Besides, by providing editing and producing Tencent live streaming of matches for other TV stations who own their broadcasting rights in China, Tencent Sports can get access to these matches with fewer cost and expand its influence in the market. The pattern of the cooperation between ESPN and Tencent is also used by Tencent Sports with other TV stations.

Tencent Sports advertisement

As most TV stations and live streaming platforms do, Tencent Sports inserts advertisements between the breaks of each match’s video on Tencent live streaming. Except for the users who pay for the add-value services, all common users will go through the advertisements when they watch sports online in China, and this may trigger a lot of potential consumption of these companies who sponsor the advertisements on Tencent Sports.

For the advertisements that Tencent Sports makes for itself, as a subsidiary of Tencent, Tencent Sports takes advantage of Tencent’s vast social media network to reach every corner of the internet. For example, Tencent Sports leverages Tencent and Weibo to create sports topics that are reported in Tencent Sports and attracts the Weibo users who are potential sports fans in China to visit Tencent Sports and therefore achieves the sports content distribution in China, which may improve its popularity and brand-awareness. In addition, with a great deal of users on WeChat, Tencent Sports can distribute sports content in China by the links of game results and game forecasts on WeChat and redirect the users to its own platform.

Tencent biology: Sports + games, online and offline social interactions

To expand Tencent Sports’ influence and market sports content in China, Tencent Sports utilizes online and offline resolutions to build up its biology chain in the market. On the net, Tencent Sports uses Tencent mobile apps like Tencent Sports, Tencent news to grant users more accesses to the matches videos or Tencent live streaming. Besides Tencent Sports assigns games commentators to renowned athlete or sports experts to interpret each game. It also leverages social media like Weibo and WeChat to create sports discussion topics, such as sports stars, matches forecast and sports teams, for sports fans in China. Teams and athletes can also create official accounts to operate their marketing activities and advertisement. Tencent Sports also maintains a Tencent Sports community, an online community for users to discuss sports, which allows user of Tencent Sports to obtain extra sports content in China provided by UGC (User Generated Content) and PGC (Professional Generated Content). Users in Tencent Sports community can not only obtain professional analysis of specific sports events and athletes, but also participate in or even create interesting sports topics and discussions, marketing the sports content in China more comprehensively.

Tencent Sports also arranges different events with KOLs or famous athletes to market sports content in China. For example, Tencent Sports invited pop stars and sports stars to compete in contests, which attracts not only sports fans in China but also the fans of the pop stars, gradually influenced the latter ones to pay attention to Tencent Sports who distributed the sports content in China and became the users of it. In addition, as the contests of events attracted a lot of attention in China, many brands like Benz and Nike sponsored Tencent for such contests in exchange of their advertisements during the contests. The cooperation between ESPN and Tencent also helped Tencent Sports to broadcast its contests via ESPN’s channels in different languages, and therefore made the contests be widely viewed around the world.

Apart from what mentioned above, Tencent Sports also plans to set up Tencent online sports retailing market. The market is a part of Tencent Sports to attract users to immerse more in the platform, and Tencent online sports retailing market mainly provides the commodities relevant to the sports leagues it has broadcasting rights in China. For example, Tencent online sports retailing market can sell products endorsed by Kobe Bryant who is a popular NBA star. Currently, Tencent Sports community shoulders part of this function by letting users to share their collection of sports kit, and therefore some of the users may trade among themselves, which incurs the inspiration of the users to immerse in the platform.

What does it mean to potential partners of Tencent Sports?

The pattern of Tencent Sports’ operation is inspiring for potential partners of Tencent Sports, especially the NBA Tencent game is a good example for Tencent Sports partners to evaluate the cooperation with Tencent Sports. Besides, there are also aspects for potential partners to consider when they want to enter Chinese market via Tencent Sports.

Tencent Sports may be monopolistic in the online sports media market

Chinese online sports media platforms are led by three main platforms, respectively are Tencent Sports, Sina sports and PPTV. While Sina sports is the traditional Chinese online sports media platform and PPTV is a emerging platform, Tencent Sports has been the most leading sports platform in China, as it leverages the influence of NBA and NBA Tencent game successfully attracts more users than broadcastings on other platforms. Besides, Tencent Sports establishes cooperation with different sports leagues, making it become the most influential Chinese online sports media platform. With substantial influence and the most users who watch sports online in China, Tencent Sports becomes monopolistic in the market and a suitable platform to market sports content in China.

Weaker negotiating power as Tencent Sports become more mature

As mentioned above, Tencent is more and more influential in the market, and counterparties may lose negotiating power when Tencent Sports expands more because other platforms have fewer contests to watch, which attract less attention from Chinese sports fans and is disadvantageous for newly entered sports leagues to market sports content in China.

A good deal of audience based on Tencent users

Tencent Sports utilizes its network shared with associates within Tencent Group and can market sports content in China more conveniently. Partners that cooperate with Tencent Sports have more incentives to sell sports content in China via Tencent Sports and more access to WeChat to spread content and convert users to using Tencent Sports to watch sports online in China.  The cooperation between ESPN and Tencent is a good example model for potential partners.

Author: Dennis Deng

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Cross-industry collaboration in China. Last month, the Canadian cosmetics brand M.A.C and the most popular Chinese mobile game Honor of Kings released five co-branded lipsticks, featuring the lip colors of 5 well-known game characters. This cross-industry collaboration has become a huge success and caused an enormous response from Chinese consumers. Over 14,000 pre-orders across all three platforms (Tmall, the official M.A.C. website and a WeChat mini-program) were placed; and all five shades sold out across all sales channels within 24 hours of the launch.

The most popular mobile game in China – Honor of Kings

王者荣耀 (Wang Zhe Rong Yao, unofficial translated: Honor of Kings) is a multiplayer online battle arena game developed by Tencent, which was launched November 2015. Tencent’s 2016 annual report stated that the game had amassed 200 million registered mobile users, including more than 50 million daily active users. Honor of Kings has shown a very interesting demographic of the players: according to an estimation by data firm Jiguang, more than half of the players are female by May 2017; and in 2018, 63 percent of the Weibo viewers of the Honor of Kings pro league games were female.

How did a world-class make-up brand and a Chinese mobile game decide to collaborate?

According to M.A.C China marketing director Weng Yanling, this cross-industry collaboration was inspired by the players of Honor of Kings. The cosmetics brand observed the players attempting to find lipstick shades that perfectly match the lip colors of their beloved game characters; these players mentioned M.A.C a  number of times. Moreover, the two brands share the same target audience, who are girls between the ages of 18 and 24.  These factors created a perfect opportunity for a cross-industry collaboration.

Also, five celebrities from an eleven-member Chinese girl group formed by Tencent in 2018, called “Rocket Girls 101”, participated in the marketing campaign. In the promotion poster, each of these five young stars presents a unique M.A.C lipstick color. In addition to make-up enthusiasts and fans of the game creating a stir, M.A.C and Tencent managed to make an even bigger buzz among Chinese young netizens through the celebrity’s endorsement.

Also, five celebrities from an eleven-member Chinese girl group formed by Tencent in 2018, called “Rocket Girls 101”, participated in the marketing campaign. In the promotion poster, each of these five young stars presents a unique M.A.C lipstick color. In addition to make-up enthusiasts and fans of the game creating a stir, M.A.C and Tencent managed to make an even bigger buzz among Chinese young netizens through the celebrity’s endorsement. As a result, these celebrities have had a huge impact on young Chinese consumers; each Rocket Girl has several million followers on their personal Weibo accounts. Two of them even have over 17 million Weibo fans; while one of the Rocket Girl’s Weibo page achieved 4.7 million views and caused over 120K discussions after a 15-second promotion video for the M.A.C lipstick.

Cross-industry collaborations in China: Takeaways for foreign brands

As we can see from the results on Baidu Index, the search index of M.A.C has been stable for the last 6 months. After collaborating with the popular local game, the brand has successfully boosted its brand awareness among the Chinese people. So, what can be learned from this successful campaign and how it can be implemented?

M.A.C search frequency on Baidu index peaked on the day of the product launch (Jan. 8, 2019) [Source: Daxue Consulting]

• For company/brand who is searching for more exposure, find a well-known Chinese brand with a similar target audience to launch a co-campaign. For brands already in the Chinese market, such collaboration could be used for new product promotion or just to boost the brand awareness; it could also be used for brands who seek a proper entrance into the Chinese market.
• Thinking outside the box might help your brand stand out from the crowd. Brands from the e-sports and cosmetic industries becoming partners is something consumers don’t see much. When you can literally use the same lipstick colors as your favorite game characters, things are really getting interesting.
• KOLs have a more powerful impact on Chinese consumers than their counterparts in the West. To further ensure the campaign’s success, recruiting the right celebrities/KOLs will help to push the collaboration to another level.
• It was consumers who first mentioned M.A.C in the context of the game character lip colors. M.A.C was attentive to what target consumers were saying on social media and seized the opportunity. So, never cease to research and understand your consumers. Through social media listening, brands can achieve the same level of consumer insight that M.A.C demonstrated.

Author: Chencen Zhu

Daxue Consulting helps you get the best of the Chinese market

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This article An exemplary cross-industry collaboration example in China: What do lipstick and China’s most popular mobile game have in common? | Daxue Consulting is the first one to appear on Daxue Consulting - Market Research China.

A huge gaming population gives a solid foundation for the rapid growth in the Chinese e-sports market. Consumers of e-sports products and services (including games, in-game purchases, e-sports merchandises, and other related products and services) contributed the largest single country spending in the world in 2017. In the same year, China (US$32.5B) and the United States (US$25.4B) account for half of the world’s total consumption on games.

E-sports is still considered to be a controversial topic in China. Public attitudes towards gaming has largely affected the promotion of e-sports as a type of competition. Fortunately, the Chinese government and Chinese social media recognized the legitimacy of e-sports and a neutral view is now taking the advantage against the traditional negative views on e-sports in China.

Now is the best time for the Chinese e-sports market

China has an enormous domestic gaming and e-sports market

The Chinese e-sports market size doubled in only two years, growing from 30 billion RMB to more than 60 billion RMB from 2015 to 2017, and is expected to hit 100 RMB in 2019. The year-over-year growth rate kept growing from 2015 to 2017 and reached its highest level of 59.4% in 2017. This figure showed a slightly decreasing trend as the expansion of the e-sports market in China slew down recently. However, the 31.6% annual growth rate from 2017 to 2018 still represents around 21 billion RMB in net growth. This amount is only 3 billion less than the amount grew between the year 2016 and 2017, when this market was on the full growth acceleration.

China now consumes the most e-sports goods and services in the world

China is now the second largest e-sports economy in the world, only after North America consisted of Canada, the United States, and Mexico. In 2018, the Chinese e-sports economy contributed 16% of the worlds’ total e-sports industry revenue. As a country, China and Chinese e-sports consumers show a huge desire for e-sports goods and services. Data shows that China has the largest consumer spending on e-sports related goods and services. In 2017, Chinese consumers spent 32.5 billion USD on goods and services. In the same year, the once leading e-sports consumer, the United States, only generated 25.4 billion USD, considerably less than China. Together, China and the United States generated half of the world’s total e-sports related consumption and hold dominant places on market size and market spending.

China has a huge e-sports-ready gaming population with an unrealized potential to consume

The e-sports market’s growth is mainly driven by the large gaming population in China.

According to Daxue Consulting’s research, the population of e-sports users (defined as those who play e-sports games, consuming e-sports related goods and services) grew from 100 million to 260 million in only 3 years from 2015-2017. The yearly growth rate between 2016 and 2017 has even reached 104.9% per annum. The total gaming and e-sports users population doubled between 2016 and 2017 and will reach 350 million in 2019 by expected estimation. The similar growth pattern is observed in e-sports consumers population like that in the e-sports market. The expected annual growth rate in e-sports users population is expected to slow down in 2018 and 2019 as the e-sports economy starts to mature in 2018.

Mobile gaming is the future of the Chinese e-sports market

Mobile gaming was not a threat to PC before 2015. The largest leap on market share of mobile games happened between 2015 and 2016, which resulted in an 18 percentage point growth on market share and enabled mobile games to exceed PC games to share the most of the Chinese games market at 57.2% in 2016. Researchers on Chinese e-sports and gaming industry set high expectations for mobile games in the next three years. In 2020, mobile games are suggested to consist of more than 2/3 of all types of games in the Chinese market.

Social attitudes starting to favour e-sports in China

2018 witnessed several major breakthroughs in Chinese e-sports history. In the presence of ubiquitous internet connectivity, every social event can be viral in a second. Chinese social media and search engines significantly contribute towards the promotion of a neutral view on e-sports as a type of competition. Meanwhile, the Chinese government is trying to build a stable and healthy environment for digital production by issuing new guidelines and regulations on contents, publication and distribution. These efforts now see the returns in terms of more objective public attitudes on gaming and e-sports.

Major breakthroughs on e-sports promote the awareness of the Chinese public

Besides professional leagues events such as League of Legends Professional League in China, Mid-Season Invitational and Rift Rival, the major international game for the first time took e-sports as part of its competition system in 2018. The 2018 Jakarta Asian Game held an e-sports demonstration game in four games. Among those games, League of Legends got the most attention, and the Chinese team finally won the gold medal. This news generated intensive Internet search and heated up the biggest microblog social media platform Weibo. According to the data from Baidu Index, the search intensity of ‘league of legends’+ ‘Asian Game’ almost caught up with the search intensity of ‘basketball’+ ‘Asian Game’ when China won the first place in LoL demonstration competition on the same day.

The public holds mixed views on e-sports in China

Though e-sports activities and events are gaining more and more attention among the Chinese public, the overall trend is still unclear.

The public attitudes are all at their infancy with both positive and negative comments on Chinese e-sports. The government has made self-contradictory moves by making new regulation and plans in pursuit for more quality digital publications including new games while stopped issuing new publication allowances for a new video game in early 2018. Social media and traditional media both call for fair views on e-sports and the separation of e-sports from simply gaming. However, the international professional sports games organizations such as the International Olympics Committee still regards e-sports as violent and inappropriate to be involved in Olympics.

The government’s official view boosts the confidence of Chinese e-sports

When the Chinese team won the gold medal in the League of Legends demonstration game, the Chinese government official media Weibo account CCTV News has immediately announced this news. This microblog post gained 15,572 comments, 25,801 reposts and 51,562 likes in the first several hours after posting and most of the comments are congratulating and praising Chinese e-sports teams on their outstanding performances. In the following days after the gold medal, topics of social media posts and articles started to diversify with different focuses on e-sports industry, player’s characteristics, the distinction between e-sports and gaming and so on. In short, the public focus turns gradually from the negative side of gaming towards a more diversified spectrum of views on e-sports and estimated as overall neutral.

Games as cultural and entertainment products gain more attention from the government than before

Managing regulations on digital products including video games have been refined during recent years. These refinements did not only add more detailed classification and corresponding rules of operations but also diversified the related punishments for different offences within the practices during the process of production, distribution, and management of various video games. The aim for these actions of frequent updates on regulations potentially means the Chinese government is now seeking more qualified gaming products. Meanwhile, the Chinese government is trying to create a healthy and lively environment for quality game production, distribution, and management.

Business potential is evident: an LPL example

Among all major professional e-sports leagues in China, the League of Legends Pro League is the most recognized one and leads the development of the entire professional e-sports industry.

In 2017, LPL announced that they will promote a ‘home-away’ competition system with current LPL participating clubs. In 2018, there are already 6 clubs announced their League of Legends team home city. These clubs are most prominent clubs in Chinese e-sports histories such as LaoGanDie (LGD – Hangzhou), Edward Gaming (EDG – Shanghai), OH MY GOD (OMG – Chengdu), Royal Never Give Up (RNG – Beijing), SNAKE (Snake – Chongqing) and Team WE (WE – Xi’An). The purpose is to attract local audiences and promote the localization process for LPL competitions. This creates a great opportunity for cross-industrial investments as the localized ‘e-sports +’ model will generate more opportunity than ever before.

Mobile gaming: a China-unique phenomenon

In 2017, the total trading value of Chinese mobile e-sports market in first time exceeded PC e-sports to become the largest in China. Chinese mobile e-sports market now shares more than 46.33% of the total e-sports market trading value in China, contributed 30.3 billion RMB in 2017.

Mobile MOBA games delivered the best performance

Among all mobile game types, mobile MOBA games perform the best. Mobile MOBA games deliver nearly 25% in both in-game sales and in-game time spending. Compared with other types of games (such as leisure games, which share 27% of in-game time spending and only 4% of in-game sales), MOBA games deliver the best outcome and continue to be the most welcomed game type by producers and consumers.

Honour of kings: a successful mobile MOBA example

Honour of Kings by Tencent Games is the most successful mobile MOBA game in China. In 2017, this mobile game, and its professional league King Pro League (KPL) ranked in the first place among all mobile e-sports professional competitions with 10.3 billion full-year content viewers in 2017. Among those, its official broadcasting and videos on various platforms had 9.1 billion full-year content viewers, means nearly 90% of their views are either watching their live professional games broadcasting or videos from the KPL official operator Tencent Games.

In early 2018, Tencent teamed up with VSPN to promote a home-away system like LPL, and established two home stadiums in Chengdu and Shanghai for the Western and Eastern Conferences.

The unexpected surge of tactical-FPS mobile games

After the success of PC-based tactical first personal shooting (FPS) game PLAYER UNKNOWN’S BATTLEGROUND (PUBG) in early 2017, many mobile game producers managed to imitate this new game type and produced various similar mobile versions.

In December 2017, FPS (including tactical FPS games) users increased by 178.6% compared with the previous month, making it the biggest surprise in the mobile game market in late 2017. Tencent Games, the biggest mobile game producer in China, has gained authorization from Bluehole Studio, the original publisher of PC game PUBG, and launched the official mobile version in both domestic and international app stores. NetEase Gams and other domestic producers all produced own similar versions to compete in the domestic market.

Market trends and opportunities for future development

Games are getting more entertaining with lower barriers of entry

Currently, dominant PC and mobile e-sports games are showing a trend of being more entertaining with diversified playing mechanism, while the requirement for entering game playing is becoming much easier. For example, PUBG, the game combined FPS and team tactics into one, has created an entirely new concept of competitiveness with 100 players competing for one last surviving title in one game. The Honour of Kings, on the other hand, has lowered the barriers of entry on skills, gaming gears, and team paring mechanisms. Based on large Chinese mobile population with a web connection, everyone can quickly pair up with other people and play a game which only consumes 10-20 minutes. Less gaming techniques are needed as Tencent Games updates the game frequently with new features providing more conveniences.

Lifted purchasing power means e-sports consumers are willing to pay more

More than 70% of the Chinese e-sports consumers are willing to pay for one or several types of e-sports goods and services. The major consumption will come from online live and content streaming. Among all online e-sports consumption types, consumers mainly focus on the quality of their online experiences including high definition (HD) streaming (29.0%), ads-free services (25.3%), professional commentators (18.4%), Multi-perspective streaming (16.7%) and high-speed video streaming (12.1%). The off-line e-sports market is being realized gradually in recent years. Now about a quarter of the e-sports consumer population is willing to pay for off-line events tickets and also more than 1/5 of the same population is willing to buy merchandises related to e-sports games, events and professional e-sports clubs.

The new ‘E-sports +’ business model can attract cross-industry interests

The off-line potential of professional e-sports leagues, tournament, and participating clubs and players can be realized by integrating online and offline operations. To realize the offline potential of online events, a business can team up with traditional industries such as manufacturing, retailing, food and other goods and services which have abundant offline promotion experiences and resources. Meanwhile, traditional industries can also be benefited from the online promotion by e-sports industry operators to reach a wider audience for their promotional activities. One example of an online-offline cooperation is Giant Networks’ Battle of Balls professional league and Tongyi Ice Black Tea.

This cooperation combined two unrelated brands into one entity and Tongyi has reached its promotional purpose via a full spectrum of advertising activities including the specially-designed in-game skin, theme song, special product design of Tongyi Ice Black Tea, in-game special tools and other online and offline activities. Battle of Balls, on the other hand, has reached Tongyi’s large consumer population that could be potentially turned into their gaming consumer in the nearly future. In 2017, more than 60% of the Chinese e-sports users agree that the advertisement showed during e-sports events is related to e-sports spirits and themes.

Industry needs will drive social changes

The growing demand for entertaining gaming experience and easier access to playing will drive the expansion of the market. And the expansion of the market will reciprocally boost the demand for an understanding of gaming and e-sports activities. Governmental attitudes are now changing, and e-sports now need objective justification to reach a harmonious social understanding. This requires more talents in the industry, also needs a comprehensive regulation and supervision system to maintain the healthy development of the market. Overall, preliminary findings suggest that there are already tendencies of development in this direction, and the continuing expansion of the industry will further accelerate such tendencies.

Author: Jiameng Hu

Daxue Consulting can help with the analysis of any market in China, including the e-sport market

Daxue Consulting, as a market research company, provides the adapted data in one of the most challenging markets in the world, China.  We have a wide range of services to deliver a competitive market research. To know more about the personal data market in China, do not hesitate to contact our project managers at dx@daxueconsulting.com.

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