MARKET SHARE COMPETITION IN THE CHINESE ONLINE GAME INDUSTRY QUN REN Thesis submitted in partial fulfilment of the requirements of the Business School of Bournemouth University for the degree of Doctor of Philosophy July 2010 The Business School Bournemouth University COPYRIGHT STATEMENT This copy of the thesis has been supplied on condition that anyone who consults it is understood to recognise that its copyright rests with its author and due acknowledgement must always be made of the use of any material contained in, or derived from, this thesis. Abstract This study investigates the impacts of pricing innovations and other non-pricing dimensions on the market share competition of dominant Chinese online game companies. The empirical context of my research is the strategic behaviour of online game operators (i.e. the companies who operate online games) in the Chinese online game market – the most active market in the world with strong network effects. According to the literature review, previous pricing studies have focused mainly on the evaluation of traditional pricing theories and their limited validity for the information economy. Velu (2005) pointed out how dominant firms in a market with strong network effects adopt business innovations to sustain their market dominance. This study first investigates the validity of Velu‟s theory and then aims to develop and expand the theory of pricing practice by discussing how dominant companies integrate pricing and other non-pricing dimensions during market share competition. With the application of an analytical synthesis, this study covers large parts of the traditional economy and information economy literature by linking the concepts of „within‟ and „across‟ theories of pricing and competition. It finally brings together different theories and adopts Bouwman and MacInnes‟ virtual web idea as an original conceptual framework to give an insight into how the pricing process and other internal and external factors impact differently on the market share competition. The study adopts a descriptive multiple-case study strategy including five dominant Chinese online game companies and employs qualitative data collected from 64 interviewees and reliable secondary data from documentations and archival records. III The findings suggest that, instead of devoting all their efforts to pricing innovation, the companies have turned to an exploration of their internal resources to enhance their competitiveness. Superficially, as an influential external factor, government regulations have constrained the operation of imported games. The study also discusses two internal themes that influence each company‟s competitive strength. They are: how to deal with the exodus of talent and how to handle strategic alliance management. There seems to be no previous research concerning the relationship between pricing innovation and market dominance within a new economy‟s service sector. As a consequence, this research should provide insights into this academic blind spot and rationalize the diversity of strategic theory within the specific industry. IV List of Contents Abstract …………………………………………………………………......... III List of Contents……………………………………………………………….. V List of Tables………………………………………………………………….. XIII List of Figures…………………………………………………………………. XV Abbreviations………………………………………………………………….. XVII Acknowledgement …………………………………………………………….. XVIII Chapter 1 Introduction 1.1 Background to the Research…………………………………………………………………. 1 1.2 Overview of the Global Online Game Industry …………………………………………….. 3 1.2.1 Global Video Game Industry and its Growth ……………………………………………… 3 1.2.2 Introduction of the Chinese Online Game Industry ……………………………………….. 6 1.3 Pricing in the Online Game Industry ……………………………………………………….. 9 1.3.1 The Significance of Pricing ………………………………………………………………. 10 1.3.2 The Link between Market Share and Pricing ………………………………...................... 11 1.4 Research Aim and Objectives ……………………………………………………………….. 12 1.5 Research Approaches Adopted in This Study …………………………………….................. 14 1.6 Thesis Structure ……………………………………………………………………………… 15 Chapter 2 Literature Review 2.1 Introduction ………………………………………………………………………………….. 17 2.2 Pricing in the Traditional Economy …………………………………………………………. 17 V 2.2.1Traditional Pricing under Different Forms of Market Structures …………………………... 17 2.2.2 Relevant Traditional Pricing Theories …………………………………………………….. 19 2.2.3 Concept Ambiguity in the Traditional Economy ………………………............................... 21 2.3 Limitations of Traditional Pricing Theories …………………………………………………. 22 2.3.1 Emergence of the Information Economy ………………………………………………….. 22 2.3.2 Related Concept Confusion around Business Model ……………………………………… 25 2.4 Related Theories Developed for the Information Economy ………………………………… 25 2.4.15B Key Factors in the Information Business Competition……………………………………. 26 2.4.2 Differences between Virtual World Economy and Physical Economy…………………… 28 2.4.3 Online Game Pricing ………………………………………………………………………. 30 2.5 Theory of Integration -Theoretical foundation for This Study ………………………………. 33 2.5.16B Theory put forward by the UK Department of Trade and Industry………………………… 35 2.5.27B Bouwman and MacInnes‟s Value Web Framework …………………………………….. 37 2.5.38B Summary of the External Factors and Internal Factors ……………………………………. 39 2.5.49B Development of the Original Conceptual Framework …………………………………….. 44 46 2.60B Other Important Concepts in the Business Competitiveness Study …………………. 46 2.6.11B Market Share and Business Competitiveness …………………………………... 2.6.22B Porter‟s Theory of Uncertainty ……………………………………………………………. 49 2.6.33B Social Value ……………………………………………………………………………….. 50 2.7 A Review of Human Resource Management Theory ………………………………… 52 2.8 Strategic Alliance Management Theory and Related Weakness ……………………….. 54 2.9 Governmental Policy Support on the Online Game Industry …………………………. 55 2.9.1 Wi‟s Theory on the Korean Government Policy …………………………………… 55 2.9.2 The Role of Chinese Government …………………………………………………………. 56 2.10 Summary ……………………………………………………………………………………. 57 VI Chapter 3 Market Share Competition and Chinese Online Game Operators’ Pricing Innovation 3.1 Introduction …………………………………………………………...................................... 58 3.1.1 Velu‟s Propositions …………………………………………………................................... 58 3.1.2 Chinese Online Game Market –Ideal Context for Testing Velu‟s Propositions.................... 59 3.2 Market Share Dynamics in the Chinese Online Game Market ………..................................... 59 3.2.1 Market Share Competition in 2003-2005 ……………………….......................................... 60 3.2.2 Market Share Competition in 2006-2009Q2 ……………………......................................... 60 3.3 Pricing Strategy Innovation in the Chinese Online Game Market …....................................... 62 3.3.1 Less Dominant Companies‟ Pricing Innovation in 2004- 2009 Q2.................................... 62 3.3.2 Dominant Companies‟ Pricing Model Innovation in 2004-2009 Q2..................................... 64 3.4 Pricing Innovation Impact on Game Operators‟ Market Share Competition ……………… 67 3.4.1 Majority of Less Dominant Online Game Companies - Passive Followers ………………. 68 3.4.2 Pricing Innovation and Dominant Companies‟ Market Share Competition ……………… 69 3.5 Summary …………………………………………………………........................................... 70 Chapter 4 External Factors Influencing the Market Share Competition 4.1 Introduction …………………………………………………………....................................... 71 4.2 Market Changes …………………………………………………………............................... 72 4.2.1 Competitions between Rivals …………………………………………............................... 72 4.2.2 Customer Demand ……………………………………………………................................ 77 4.2.3 Influences from the Social Concerns …………………………………................................ 78 4.3 Technology …………………………………………………................................................... 80 4.3.1 Technical Infrastructure- Efforts by the Chinese Telecom Industry...................................... 80 VII 4.3.2 Broadband Development in China ……………………........................................................ 81 4.4 Chinese Government Regulations ………………………………........................................... 82 4.4.1 The Development Internet Cafes‟ and Government Regulations......................................... 83 4.4.210B Chinese Online Games‟ Policy Environment …………………........................................... 84 4.5 Summary …………………………………………………...................................................... 85 Chapter 5 Research Methodology 5.1 Introduction …………………………………………………................................................... 87 5.2 Research Philosophy and Strategy …………………………………....................................... 87 5.2.1 Positivism and Interpretivism …………………………………............................................ 87 5.2.2 Inductive Approach and Deductive Approach ………………….......................................... 88 5.2.3 Combination of Inductive Approach and Deductive Approach............................................ 89 5.3 Research Design ………………………………...................................................................... 89 5.3.1 Relationship of Research Design and Research Methods ………………………………… 90 5.3.2Case Study Design in this Study…………………………………………………………….. 90 5.4 Data Collection ………………………………......................................................................... 92 5.4.1 Qualitative Interviews Adopted in this Study ……………………………………………… 90 5.4.2 Secondary Information …………………….........................................................................