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Technology and Culture 273




Chapter XIV



Technology
and Culture:
E-Commerce in China
Alev M. Efendioglu
University of San Francisco, USA

Vincent F. Yip
University of San Francisco, USA




Abstract
The number of Internet users around the world has been steadily growing and this
growth has provided the impetus and the opportunities for global and regional e-
commerce. However, as with the Internet, different characteristics (infrastructure and
socio-economic) of the local environment have created a significant level of variation
in the acceptance and growth of e-commerce in different regions of the world. Our
research focuses on the impact of these infrastructure and socio-economic factors on
e-commerce development in China and the findings provide insights into the role of
culture in e-commerce, and the factors that may impact a broader acceptance and
development of e-commerce in China. In this chapter, we present and discuss our
findings, and propose some strategies for success for e-commerce in China.




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274 Efendioglu & Yip


Introduction
In this chapter, we will present and discuss our findings from a research study we
conducted that focuses on culture and its implications on e-commerce development in
China. To identify the current infrastructure and socio-economic influences on the
development and growth of e-commerce in China, we developed a 20-question question-
naire and pre-tested it by administering it to small group of participants. It was eventually
administered to a total of 252 individuals that formed our study group. The study
participants were located in Beijing, Shenzhen, Shanghai, Guangzhou, Wuhan, and
Shandong during the time of the study, worked for different types of organizations (Joint
Ventures, State Owned Enterprises, Multi-National Corporations, etc.), resided and
worked in different regions in China, and had different educational levels, professions,
and gender.
Over time, similar studies have been conducted in other countries and various models,
by Zwass (1996), Wolcott et al. (2001), and Travica (2002), were developed to identify
diffusion of e-commerce in different environments, with Travica™s study being the only
one that presented some discussion of the impact of social factors in e-commerce
development, focusing on Costa Rica. These models have looked at “infrastructure” and
“services” as the primary diffusion factors and we did incorporate some of the concepts
and characteristics identified in these models into our questionnaire. However, in our
study, we combined the “infrastructure” and “services” categories into a broader
infrastructure group and focused on cultural issues more so than these models have
incorporated in their studies. However, we do recognize the importance of infrastructure-
related issues and have collected some information on these issues as well.
Based on similar previous research, we identified three primary infrastructure-related
elements and two cultural issues that impact consumer participation in e-commerce in
China. The infrastructure elements we identified are access to technology (computers,
connectivity, and gateway to the Internet), payment systems for enabling transfer of
funds (credit cards, bank transfers, etc.), and distribution systems for physical transfer
of goods (physical delivery to consumers). The two cultural issues we consider to be
most relevant and unique to China and that we focused on are: transaction trust
(representations of the goods are accurate and true, purchased goods will be delivered
and payment will be made) and attitudes towards debt (role and acceptance of debt in
Chinese society). Previous studies have identified that Chinese rely on face-to-face
contact and personal relationships (“guanxi”) much more than other cultures (Davies
and Lsung, 1995), and we consider this to be an element and manifestation of the
importance of “transaction trust” in Chinese society and support our assumptions about
the concept. Our questionnaire was designed to test the relative importance of these
characteristics. As we present and discuss the responses of our participants on cultural
issues, we will also present our infrastructure-related findings. However, in our opinion,
the infrastructure issues, as important as they may be, are in a constant state of change
and improvement, and we project that, in a relatively short time, they will cease to be a
major constraint for e-commerce development in China. Whereas, the unique social and
cultural characteristics of China and the concepts associated with off-site exchange




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Technology and Culture 275


systems, which are the foundations of e-commerce, will pose much greater challenges
and will act as the major impediments.




The Research Study
Our objective was to find answers to three primary research questions and present some
possible solutions.
1. What is the degree of e-commerce participation among Chinese consumers that
have similar characteristics to participants in a consumer society such as the U.S.
(compare and contrast the development and acceptance of e-commerce)?
2. What are some of the prevailing attitudes and cultural issues associated with e-
commerce in China (identify and test the influence and impact of prominent Chinese
cultural characteristics on e-commerce)?
3. What can domestic and foreign businesses do to facilitate e-commerce in China
(present some short-and-long run recommendations and approaches to e-com-
merce development in China)?


Our study has some unique characteristics when compared with similar studies done in
China. The survey questions, developed in English, were translated into and adminis-
tered in Chinese. The translation was done by one of the co-authors, who is very
proficient in English and Chinese, Internet and E-Commerce terminology, and has a
profound understanding of cultural nuances of the Chinese language. This is important
because of the possible danger of lost meanings and incorrect interpretations of what
is being asked when questionnaires are developed in one language and administered in
another language (especially in Chinese) to a culturally different population. The
questionnaires were administered by one of the authors personally, increasing the
validity of the study by minimizing contamination that may be inserted into mail or online
surveys, increasing the participation rate, and decreasing the rejection of responses that
were unclear or incomplete. The participants were asked to fill out the questionnaire
without any inducements, such as prizes or money, as is the tradition in most of the mail
in or electronic surveys conducted in China. The questionnaire contained questions
designed to collect information on demographics, Internet usage, e-commerce activities
(frequency of commerce and type of purchase, means used for purchase, transaction
experience), and perceptions and attitudes towards e-commerce in China.
The study group (252 participants) was specifically selected to represent a group of e-
commerce users that we identified and classified as “early adopters” and considered to
be a close match to e-commerce users in developed countries. As researchers with
previous research experience in China and knowing the degree of technological and
economic development among the general populace, we selected these participants
because we considered them to be the most likely users of e-commerce, with access to
technology, significant purchasing power, exposure to concepts and practices outside
China, and open to trying new/novel things. Since we wanted to focus on the “impact


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276 Efendioglu & Yip


Table 1. Organizational affiliation of study participants (n=252)

MNC Domestic Enterprises* Joint Venture
53 160 39
Participants in Sample
21.03% 63.49% 15.48%
% of Participants
* Includes Private Enterprises, SOE, and University



of culture,” we wanted to get the opinions of actual participant/users of e-commerce and
wanted to eliminate the infrastructure problems (payment transfer systems, access to
computers, telecommunication infrastructure, access to Internet Service Providers, etc.)
as much as possible. As such, our study population was not intended to be, and is not,
a representative sample of the general populace in China.


Findings

Study Population Demographics

The study population (252 participants) consisted of 59.92% males and 40.08% females,
88.89% with a Bachelors degree or above (13.49% with graduate level degrees), 62.30%
were between ages 26-35 years, with 75.40% between ages 26-40 years of age. There were
also differences in the professions of the participants. The largest representative
professions were 40.87% management, 29.76% IT (Information Technology), 5.56%
service, and 5.56% consulting. These study population characteristics are very different
than the overall characteristics of China™s general populace and are also significantly
different than other studies conducted to primarily identify the development and
progress of Internet use in China. Among these studies is one semi-annual study,
conducted by the China Internet Network Information Center (CCNIC), using the Internet
to collect information. The demographics of their latest (China Internet Network
Information Center, 2002) survey included 60.9% males, 35.7% between the ages of 25-
40 years (with 53.5% younger than 20 years of age), and only 31.3% with college
education (Bachelors degree or higher). Their study participants also had a much broader
sample of professions and backgrounds, including those who checked categories such
as “military,” “peasants,” “agriculture, forestry, fishery,” real estate,” “wholesale and
retail,” “culture and arts,” and “sports,” etc., professions which were not covered by our
survey. However, since they conduct their surveys using the Internet and participants
are self-selected, their population demographics, other than possibly the professions
and backgrounds, do not necessarily truly represent China™s general population, either.


Internet Usage

The responses to our questions related to Internet access and usage reinforced our
primary premise in selecting this group to be the study participants. Overall, they had


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Technology and Culture 277


complete and easy access to Internet enabling technology (e.g., access to a PC and
telecommunication connection to an ISP) and used the Internet regularly for multiple
purposes/activities (e.g., email, web search, etc.). 37.70% of the respondents accessed
both English and Chinese Internet sites and pages, while the remaining 62.30% used only
Chinese language sites and pages. The three most popular Internet based activities were
email, with 88.49% of respondents, reading news, with 80.95% of respondents, and
search, with 58.33% of respondents. Other activity categories were downloads, chat,
games, etc. The most popular Internet site accessed was sina.com (with 80.56% respon-
dents) followed closely by sohu.com (with 54.76% respondents) and yahoo.com (with
39.29% of respondents). In the type of Internet usage, we found significant differences
between our study participants and the latest CNNIC survey findings. The CNNIC
(official Internet data collector for the Chinese government) survey data shows that
45.5% of their respondents engage in “online chatting” and 18.6% in “online games and
entertainment,” which may be attributable to their much younger (53.5% of them <24 year
old) population with lower education level (42% being of high school and lower) and to
the diversity of the professions (or lack of any profession) of their respondents, all of
which are significantly different than our study group characteristics (China Internet
Network Information Center, 2002).


E-Commerce Activity

The objective of the next set of questions (pervasiveness of e-commerce acceptance,
choice of payment methods for electronic transactions, purchased items, and evaluation
of their experiences by e-commerce participants) was to identify and clarify the culturally
based behavioral patterns of the study participants, especially as they related to their
attitudes towards “transaction trust” and “debt,” which are among the most critical
foundations of e-commerce. Chinese culture does not condemn piracy and copying, and
the legal infrastructure is not sophisticated or organized enough to deal with some illegal
activities, especially fraud. Counterfeiting and distribution of below par products is a
major problem in China, which amplifies the prevailing lack of transactional trust between
parties that do not know each other personally. As a result, Chinese rely on face-to-face
contact more so than other cultures (strong individual relationship and long-term
association between the parties, a concept described as “guanxi,” which refers to a
particular kind of social networking based on trust) and, to provide themselves with the
necessary comfort level that they are making the right purchase and demand to have
physical contact with the purchased good before they pay for it. Furthermore, the current
Chinese banking system is primarily designed to accommodate businesses, especially
SOEs, and banks are primarily owned and used as tools by the Chinese government to
further its economic and social aims, and such a system does not provide an opportunity
for the general public to easily acquire credit cards and use them in making purchases.
Financial institutions have not yet developed, do not encourage or support consumer
lending practices, and continue to reinforce the principle of “buy when you have cash
to pay,” make debt unavailable, unknown and unacceptable, and further perpetuate the
“cash society” characteristics.
The first set of questions in this group were designed to determine the ability (access
to type of medium used for payment) of the respondents to pay (possession of credit


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278 Efendioglu & Yip


Table 2. Sample population (n=252) vs. e-commerce participants (n=166)

Education Have Credit Purchase Purchase
Male Age <36 years (BS-GRAD) Card in 12-mo in 6-Mo
59.92% 79.37% 88.89% 86.51% 64.29% 65.88%
All Respondents (%)
E-Commerce
55.42% 88.55% 88.55% 86.75% 97.59% 100.00%
Participants (%)



cards) for e-commerce and whether or not they had purchased any goods/services, using
e-commerce, within the previous 12-month period. The 166 respondents that indicated
having purchased goods/services were further asked about the frequency of their
transactions during the previous 12 and 6-month periods, the products/services they
purchased, highest total value of their single purchase, and their payment method (credit
cards and other commonly used methods of payment in China) for these purchases. They
were also asked to list their primary reasons for utilizing e-commerce and rate their overall
satisfaction with the activity, and to provide unstructured comments on what they
considered to be impediments to the development of e-commerce in China and Chinese
attitudes towards use technology as a means for commerce.
Of our 252 respondents, 65.88% had participated in e-commerce transactions. The ability
to pay (access to credit cards) was not an impediment to e-commerce (86.51% of our study
participants had credit cards, with 69.84% having two or more credit cards), and we do
not consider this finding to be representative of China and attribute it to the deliberate
composition of our study population. However, what was surprising was the percent of
respondents participating in e-commerce, 53.01%, that had made more than six purchases
during the previous 12 months and the 55.42% of respondents that had purchased goods/
services more than three times during the previous six months. These percentages are
far greater than the findings of a recent Business Software Alliance survey, reporting
around 38% of U.S. Internet users that say they purchase products fairly or very often
using the Internet (Business Software Association, 2002). It was also quite surprising to
find that our study respondents who possessed credit cards participated in e-commerce
activity (86.75% of the credit card holders purchased goods/services via e-commerce)
in rates similar to U.S. Internet users (with 93% of Internet users who have bought online).
Furthermore, our study results show that younger age customers have a greater
propensity to use e-commerce (88.55% of the e-commerce participants were 35 years or
younger in age as compared to 79.35% of the study population). If we consider that the
earning power increases with age, this finding is also somewhat surprising for China and
might signal pervasiveness of technology acceptance among younger age groups that
one normally finds in other societies. Based on consumer behaviors in the U.S., if we
assume a positive correlation between ownership of increased number of credit cards and
frequency of purchase patterns, our findings did not support this general rule. In our
study, the respondents with four or more credit cards constituted 21.03% of total
respondents and 21.69% of e-commerce participants, with other credit card ownership
ranges having similar equal distributions between the study participants vs. e-commerce
participants. We could not find comparable age, availability of credit cards, or frequency
of purchases data in the CNNIC semi-annual survey that conducts studies of broader
Chinese Internet user populations. However, the latest CNNIC survey showed that 68.8%



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Technology and Culture 279


of the respondents had never made any online purchases, which is much higher than our
findings that showed only a 34.12% non-participation rate (China Internet Network
Information Center, 2002).
The value of single purchases ranged from less than RMB50 ($6.00) to over RMB1000
($80.00), with the majority of the purchases (83.73%) ranging in value from RMB50 to
RMB500 ($6.00-$60). The respondents paid for these purchases in four major ways: cash/
check (travel-related purchases were paid at the time of use, e.g., hotel stay), C.O.D.,
credit card, and bank transfer. In our study group, contrary to purchases made in the U.S.,
a credit card was not the most common payment method. Chinese mentality and their
traditions (reinforced by the prevailing operational characteristics of the financial
institutions and the legal system) still adhere to a way of thinking that says debt is not
good. Furthermore, the estimated RMB410billion (USD50billion) stashed away in sav-
ings and for future purchases provide some evidence that the credit system is not as
popular and that China still is a cash society. Our findings also support this cultural
characteristic. Even though 86.51% of our study group (218 respondents) had credit
cards, only 19.28% of the e-commerce participants (32 out of 166 respondents) paid for
their purchases using a credit card. Both authors, during their extensive travels in China,
rarely encountered credit cards being used for any daily purchases, including some very
expensive entertainment events hosted by high-level managers and individuals that
have significant economic means, and, without any doubt, have multiple credit cards.
U.S. e-commerce vendors would require credit card information before accepting any
requests for online purchases and have set up infrastructure (secure servers to collect
credit card information) to accommodate and enable this payment methodology. How-
ever, lack of such infrastructure and a lack of broad availability of personal credit cards
in China have created transaction payment systems that also utilize other payment
methods, such as C.O.D, cash, and postal order (money order). This lack of infrastructure
(payment systems), coupled with not-so-generous return policies of Chinese busi-
nesses, and the prevailing societal characteristics have made the Chinese cynical
consumers and reinforced commerce systems where the customer must see and check the
product and the seller must get paid in cash, without any ambiguities or collection
problems that may accompany credit-based payment systems. When one looks at the
findings of our study, it is easy to see that these attitudes are still prevalent and will
continue to act as a major impediment to large-scale diffusion of e-commerce in China.
Our 166 e-commerce participants used C.O.D. (39.16%) as their primary payment method,
closely followed by Cash/Check (33.13%), with a Credit Card having the distinction of
being the third highest (19.28%) further followed by the Bank Transfer (8.43%) method.
The latest CNNIC survey shows the top three payment methods as cash and carry
(33.1%), online payment (30.7 %), and post office transfer (30.0%) (China Internet
Network Information Center, 2002). Both our findings (approximately 73% of e-com-
merce participants paid in cash) and the findings of CNNIC (approximately 63% paid in
cash) clearly demonstrate and support our observation and classification of China as a
“cash based society.”
Even though some of our findings confirmed the cultural characteristics we had identified
as the prevailing characteristics of the society, the responses to the questions related
to the types of purchases presented findings contrary to some of the other characteristics



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280 Efendioglu & Yip


associated by the Chinese consumers. When we asked what was bought online, the
responses we received were in categories that were similar to purchases made by U.S.
online customers and the findings of the latest CNNIC survey. Our respondents (166 e-
commerce participants) indicated a total of 379 transactions over the previous 12-month
period, with books as the most popular item (34.83% of respondents stated purchasing
books), followed by video-CDs (26.39%), and travel (15.57%). In comparison, in the U.S.,
books and videos are the most common online purchases, followed by music CDs,
clothing or accessories, and computer software or hardware. The top five online
purchases in the CNNIC survey were books and magazines (37.0%), computer appliances
(27.6%) and communication/AV equipment /electrical appliances, each ranging around
19.5%. The high preferences for online purchases of books and video-CDs were
surprising findings in a country where normal, as well as pirated, books and video-CDs
are sold in local markets for very low prices. Unfortunately, we did not have an
opportunity to focus more on this preference by our respondents to determine possible
reasons and explanations for this behavior seemingly contradictory to general and
popular beliefs.
We also asked questions to determine the level of satisfaction e-commerce users
experienced while making online purchases. Our scale used categories “very unsatisfac-
tory,” “unsatisfactory,” “average,” “satisfactory,” and “very satisfactory” to solicit
responses, without assigning any number value to each category. One of the most
important attributes of the Chinese culture is for Chinese to act humbly and take the
middle of the road and understate their ideas, as compared to taking a position that is
clearly identifiable. Unfortunately, most of our respondents exhibited this cultural trait
and selected “average” (“Yi Ban” in Chinese) as their response, reinforcing the fact that
a complicated set of conditions are required to conduct any type of field research in
China. Nevertheless, we had some responses that presented clear “satisfaction” or
“dissatisfaction” with their online purchase experience.
Our findings show that frequent users of e-commerce were satisfied or very satisfied with
their experience in larger numbers as compared to the least frequent users. Overall, the
“unsatisfied” and “very unsatisfied” responses were selected in very low frequencies.
We attribute this finding to the affinity of the user with technology and more experience
with the online transaction process through increased usage. Except for the least
frequent users, the transactional experiences during the most recent six months were
more satisfying than the previous six-month period. Even though the vendors might have
made changes in their presence and processes, this improvement most likely was the


Table 3. E-commerce transaction frequency & satisfaction (n=166)

Frequency of Purchase (times)
Satisfied/Very Satisfied <=3 4-6 7-9 9< Study Group
24.32% 34.15% 50.00% 61.29% 36.75%
Purchases During Last 6months
24.32% 29.27% 18.18% 54.55% 36.75%
Purchase During Last 12months

Very Unsatisfied/Unsatisfied <=3 4-6 7-9 9< Study Group
1.20% 1.80% 0.00% 1.20% 4.22%
Purchases During Last 6months
1.20% 0.60% 0.60% 1.81% 4.22%
Purchase During Last 12months




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Technology and Culture 281


result of learning that came with repetition. Similarly, Shenzhen Economics Daily
reported that the portion of Internet users who made online purchases rose to 31.67%
while the overall dissatisfaction of online experience decreased from 52.8% to 21.04%
(Shenzhen Economics Daily, 2002). Shenzhen population has characteristics similar to
our study population, as it is one of the most prosperous cities in China (has the highest
per capita income) and has the youngest average age population. Once again, these
characteristics are significantly different than most of the other regions in China. No data
was provided by the CNNIC survey (which has a wider geographic coverage) related to
satisfaction with online transaction process/activity.
Convenience was identified as the most selected reason for conducting an online
transaction, with price, delivery, and speed as being next three reasons with almost equal
frequencies. Given that our study participants were all working adults, it is somewhat
understandable to find “convenience” as the overwhelming choice within the study
group, and this finding reflects similar findings in the U.S., where a large number of e-
commerce participants work. However, it might seem as a surprising finding to see the
fairly similar frequencies of choice among “price,” “delivery,” and “speed.” We can
explain this as another specific finding based on the composition of our sample group,
working adults, with relatively good earnings, and in valued professions. Given our
study group characteristics, it is no surprise that “delivery” and “speed” are as important
(different types of convenience preferred by busy professionals) as “price” (high income
level). Even a delivery charge of 10% for purchases up to RMB800 (USD100) for
deliveries, with no charges for anything above this amount, did not seem to be a major
concern for our participants, especially for C.O.D. payments. Even if for orders less than
RMB100, the most common delivery charge of RMB5 (barely enough to buy a can of Coca
Cola in the store) is easily affordable by most city residents of China. Given the Chinese
consumers™ culturally based behaviors (especially the need to physically evaluate the
purchased product) that govern their purchases, we think the acceptance of this system
and associated costs (delivery charge) are not unique to our study group and a similar
acceptance will prevail among the general populace.
We also included a section for unstructured comments on the questionnaire and
conducted brief interviews to identify perceptions on positive and negative aspects of
e-commerce as it currently exits and its future in China, and any other issues that we might
have neglected to categorize and include in our questionnaire. These comments, in some
cases, provided additional information, and in others, reinforced the previous responses
and strengthened the data we collected through other questions.
As we had assumed and previously identified as unique to our study group, the lack of
credit cards or the deficiencies in payment mechanisms was not an issue for our
respondents (even though they indicated that this is a major problem for the general
public). Neither did the lack of brand name products or the quality of the products. The

Table 4. Reasons (multiple responses accepted) for using e-commerce & satisfaction

Convenience Price Delivery Speed Selection Privacy
128 96 75 65 18 9
Stated as Main Reason
39.06% 40.63% 33.33% 44.62% 33.33% 22.22%
Satisfied/Very Satisfied
2.34% 2.08% 4.00% 1.54% 11.11% 1.11%
Very Unsatisfied/Unsatisfied



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282 Efendioglu & Yip


primary obstacles (which support our “early adopters” classification of our sample size),
in the order of importance, were “Internet security,” “lack of feel-and-touch associated
with online purchases,” “problems in returning products,” and “selection” (product
breadth). In comparison, CNNIC survey identified the top five obstacles to be “Internet
security,” “inconvenient payment method,” “quality of products and trustworthiness of
merchant,” “late delivery,” and “unattractive price” (China Internet Network Informa-
tion Center, 2002). As can be seen, there are some overlaps and some contradictions
between our findings and the CNNIC™s findings, which can be explained by the different
study demographics.
Our study participants also identified some infrastructure and social issues that will
impede and be obstacles to full development of e-commerce in China in the near future.
Among the most identified and repeatedly mentioned issues were lack of credit cards
(availability of them for the general public in China) and convenient payment means, poor
distribution logistics, lack of specialized, trust-worthy online merchants of reasonable
size (too many small players facing many bottlenecks and without necessary resources
to set up e-commerce systems), an imperfect legal system, and the lack of large scale
telecommunication transmission capability (broadband). Overall, however, the respon-
dents were reasonably positive about the availability of hardware/software, government
and industry support for IT in China.
Even though it was identified as a major infrastructure impediment, over the recent years
access to technology in China dramatically increased and it is projected that 10.3 million
PCs will be sold during 2002, making China the third largest market after the U.S. and
Japan. About 30% of China™s 1.3 billion people are currently wealthy enough to afford
PCs, roughly corresponding to a market size equal to the population of the U.S.
Furthermore, according to Nielsen/NetRatings (as reported by BBC News, 2002), China
is now second only to the United States in the number of home Internet users with nearly
57 million people with web access at home, and Internet subscriptions are growing by
5-6% every month. In just three or four years, 25% of the population could have Internet
access, translating to over 250 million people. Physical distribution was also identified
as one of the impediments. Currently, multiple private courier companies, that already
have operations in major cities, are providing physical distribution, with China™s postal
service that has contracts with dozens of merchants for regular or express delivery.
Manpower for physical distribution is abundant and relatively cheap, and there are many
inexpensive modes of transportation, including bicycles, motor scooters, and small
trucks, that can be effectively used as alternates to large scale distribution in close
geographical areas. As more efficiency (grouped deliveries, efficient modes of transpor-
tation, efficient routing systems, etc.) is incorporated into the system, this impediment
will cease to be a major problem. Unfortunately, the problems associated with financial
infrastructure (credit cards and credit-based transaction systems) require major action
by the government and the financial institutions. To overcome this e-commerce con-
straint, Chinese government has to accelerate the banking reforms and the banks should
reorient themselves to provide more services (credit cards and credit card payment
clearing systems) to the general public and the average consumer. In their report titled
Consumer E-Commerce in China, BDA-China argues that China has over 150 million
bankcards, providing some evidence that support positive changes in this direction
(Consumer E-Commerce in China, 2000). However, these cards are in the hands of very



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Technology and Culture 283


few consumers (in our study, 70.12% had two or more credit cards) and, as such, the
existing card owners may not be large enough to sustain broad-based e-commerce in
China, one that is available to large segments of the general populace.
Our study group was overwhelmingly less positive when asked if the Chinese culture
“supports” the propagation of IT and e-commerce. The group thought the Chinese
consumer society was not quite ready (lack of confidence in technology and off-site
transactions, online culture, and overall sophistication of the general public) and the
conditions were not “ripe” for e-commerce. Off-site transaction systems (like e-com-
merce, catalog sales, mail order systems) which require a trusting relationship (transac-
tion trust) between the unseen vendor and the consumer requires a sophisticated
consumer society, specific legal (consumer protection laws) and financial (consumer
credit systems and social acceptance of credit cards as a payment mechanism) practices.
Continuing lack of consumer protection laws and the prevalent business practices of the
financial institutions contribute to and enhance the negative connotations associated
with debt and reinforce cash-based transaction systems. Absence of these practices,
coupled with inherent social and political characteristics of the Chinese society, have
made Chinese cynical consumers and reinforced commerce systems where customer can
see and check the product and the seller can get paid in cash, without any ambiguities
or collection problems that may accompany credit-based payment systems. Furthermore,
Chinese consumers see commerce as a social activity and value time-developed personal
relationships with vendors that are local and have a physical presence. This is an attitude
that is very contrary to e-commerce process/practices and, as a result, the cultural
acceptance of online transactions (business foundations of e-commerce) will take much
longer and will require major transformations in Chinese society. Similar transformations
have taken place in other societies over extended time periods, by first becoming a true
consumer society (a transition that took over four decades in the U.S.) and then
eventually accepting e-commerce (a transition that has been taking place in the U.S. for
the past decade). Even after years of being a consumer society and developing
technological sophistication among the general populace (very high levels of penetra-
tion of computers at work, school and home, and over 55% of the population accessing
the Internet from home), only around 38% of U.S. Internet users say they purchase
products from the Net fairly or very often, and 55% buy occasionally. Fundamental
changes, both in the way Chinese banks operate, and the way the Chinese society views
consumerism and commercial activity need to be instituted over time to overcome these
major barriers. However, as China opens up to the outside world and becomes a more
integral part of the world community (evidenced by China™s entry and full membership
in WTO, 2008 Olympics in Beijing, and 2010 World Expo in Shanghai), changes will take
place, starting with the banking reforms, which in return will promote fundamental
cultural changes in the Chinese society.




Conclusions
While the infrastructural and cultural impediments identified above will get resolved over
time, Chinese business establishments and their professional groups can play a signifi-


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permission of Idea Group Inc. is prohibited.
284 Efendioglu & Yip


cant role in providing interim solutions and services that address the infrastructure
issues and help society in its efforts to become a truly consumer society, within which
many different business models can develop and flourish, including e-commerce. One of
these approaches is to utilize a combination (virtual storefront and physical distribution
center) business model that can address many of the issues we have identified and may
be the only way for businesses to participate in e-commerce in China in the short run.
Chinese companies are socio-economic entities and not just pure economic ones and
there is a strong individual relationship and long-term association between the parties
(buyer and the seller), which provides a sense of community and enhances social
bonding. Since most of the business is conducted through small enterprises and is local,
the success of doing business in China depends heavily on the quality and sometimes
the quantity (number of customers that have this special relationship with the business
owner) of personal relationships. These local, smaller enterprises can use a system that
is similar to the franchising system in the U.S. to exploit this characteristic in their efforts
to transition to large-scale, e-commerce systems. Businesses that sell similar products
can form alliances with businesses in other cities and towns, even establishing loosely
aligned franchises, and utilize the services of existing Internet Service Providers (ISP),
acting as intermediaries, to develop national electronic storefronts with local distribution
systems. Through these alliances, they can provide credit (issue local or alliance-wide
credit cards) or continue to provide “cash-and-carry” services to the consumers who
prefer to pay cash (aversive to debt), overcome the local distribution problems (by
transferring products among themselves) and surmount customer concerns related to the
“touch-and-feel” issues (counterfeit and below par products, problems with product
returns, online merchants are not trustworthy, and Internet is not secure). These newly
formed e-commerce businesses can overcome some of these customer concerns by
forming organizations that encourage, validate, and publicize establishments that have
instituted product policies that condemn piracy and counterfeiting, and distribute
quality products. Furthermore, these businesses can and should develop more consumer
favorable return policies and extensively publicize their policies and efforts. These types
of practices will give them additional competitive advantages while appealing to another
cultural characteristic of the Chinese people, “moral obligation to return a favor.” Chinese
customers feel bad and think they have a “moral obligation” to buy again from the same
merchant to make up for the “loss of face” on both sides, caused by the rejected purchase.
These same recommendations apply to foreign firms, which are even at a greater cultural
disadvantage, as they try to conduct domestic business. Foreign firms that want to
participate in e-commerce in China will have to find ways to overcome the cultural barriers
and will have to utilize similar approaches by creating a local presence (through
associations with local vendors) and use the “guanxi” developed by these local
businesses. However, they do have some competitive advantages, such as brand
recognition and e-commerce infrastructure (web servers, computer-based transaction
systems, and telecommunication infrastructure) which they can exploit and use to
support local businesses.




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permission of Idea Group Inc. is prohibited.
Technology and Culture 285


References
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Retrieved November 25, 2002 from the World Wide Web: http://www.nua.com.
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China™s Home Web Use Soars. (2002, April 23). BBC News. Retrieved November 2, 2002
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the World Wide Web: http://www.cnnic.net.ch/develst/2002-7e/5.shtml.
StatMarket: China has the second largest online population. Retrieved August 30,
2002 from the World Wide Web: http://www.nua.com.
Travica, B. (2002). Diffusion of electronic commerce in developing countries: The case
of Costa Rica. Journal of Global Information Technology Management, 5(1), 4-
24.
Wolcott, P., Press, L., McHenry, W., Goodman, S. E. & Foster, W. (2001). A framework
for assessing the global diffusion of the Internet. Journal of the Association for
Information Systems, 2(6).
Zwass, V. (1996). Electronic commerce: Structure and issues. International Journal of
Electronic Commerce, 1(1), 3-23.




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286 Park




Chapter XV



Internet Economy of
the Online Game
Business in
South Korea:
The Case of
NCsoft™s Lineage
Kyonghwan Park
University of Kentucky, USA




Abstract
This chapter attempts to lay the groundwork for in-depth discussions on the economic,
social and cultural dimensions of the online game business as one of the most successful
forms of the contemporary digital contents industry using the Internet. As a form of the
digital economy, the online game has evolved both “through” and “within” the space
of the Internet. I suggest that the broadband Internet infrastructure and the construction
of the game users™ community in cyberspace constitute two necessary conditions for the
economic success of the online game business. Conceptualizing such a socio-cultural
economy of the Internet business as the economy of a “third space,” I argue that the
online game business contains emerging forms of new economic space not only in-
between the real space and the virtual space, but also between the production and the
consumption of those games produced.




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Internet Economy of the Online Game Business in South Korea 287


Introduction
The Internet is one of the most significant technological innovations that capitalism has
achieved, having a wide range of influences across different scales and scopes of
economic realms. Instead of focusing on the accumulation of conventional inputs such
as labor and capital, many contemporary macroeconomists along with economic histo-
rians have recently emphasized the significance of technological innovation in overall
economic growth (Romer, 1990; Grossman and Helpman, 1991; Aghion and Howitt, 1992;
Helpman, 1998). Some of these studies use a specific term called “general-purpose
technology” (GPT) to describe a drastic “enabling technology” involving “innovational
complementarities” (IC) that increases the productivity in a downstream sector (Bresnahan
and Trajtenberg, 1995; Helpman, 1998; Malecki, 2002). Distinct from incremental and
secondary technological innovations, GPTs such as printing, writing, electricity, factory
systems and automobiles are considered revivals of an historical technological tradition
instead of a total “discontinuous newness.” Malecki (2002), for example, argues that the
Internet generally reiterates past technological traditions, especially since the invention
of the telegraph, in terms of its strong initial ties with financial institutions, and invisible
commodities like financial tallies, a systematically networked economy, and private-
owned telecommunications networks.
In this vein, economic geographic studies on the Internet since the early 1990s have
contributed considerably to the understanding of recent telecommunications technolo-
gies within the context of specific geo-economic scales and the conventional physical
flows of capital, labor and goods. Pioneering works in urban and economic geography
devoted themselves to the significance of emerging telecommunications and their
impacts on the economic, social and spatial dimensions in postindustrial economies
(Moss, 1987; Langdale, 1989; Hepworth, 1990; Brunn and Leinbach, 1991). Recent
geographic studies are also interested in the multifarious interactions between the
spaces of networking flows and real urban places (Graham, 1994; Mitchell, 1995; Graham,
1997; Adams, 1998; Graham and Marvin, 1996; Graham and Marvin, 2001), the utopian and
dystopian visions of cyberspace as a public space and related cultural dimensions
(Rheingold, 1993; Shields, 1996; Adams, 1997; Kitchin, 1998; Crang M., Crang P. and May,
1999; Crang, 2000; Dodge and Kitchin, 2000), and the geopolitics of global Internet
diffusion, connection, and “digital divide” (Brunn and Cottle, 1997; Warf and Grimes,
1997; O™Lear, 1997; Warf, 2001). More recent geo-economic studies focus on diverse
constraints and possibilities of the Internet-based e-commerce and its geographic
dimensions (Leinbach and Brunn, 2001; Zook, 2000, 2002). Instead of arguing for the end
of geography by technological space-time convergence to create a “space of flows”
(Castells, 1996), many of the above studies have implied that e-commerce is not bringing
about the destruction of economic regions and places, but is providing the impetus to
reorganize and differentiate the economic space in which business operates.
Theorizing the Internet as a GPT is a useful framework to elucidate its “complementary”
role in commerce and telecommunication sectors, and its “general-purpose” diffusion in
social and cultural spheres. At the same time, however, the framework has an overall
danger in downplaying the significant “discontinuity” of the emerging Internet economy,
an economy that not only appropriates the Internet for complementary telecommunica-



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288 Park


tion infrastructure, but also takes the Internet “network” itself as a core, as an alternative
economic resource, and a social space of economic activities (i.e., Liebowitz, 2002;
McKeown, 2002). Especially is this observation apparent in the realm of the digital
contents industry, with its low barrier to market entry and differentials in transaction
costs that form the complex geographies of cyberspace (Kenney and Curry, 2001). Within
this context, this chapter attempts to lay the groundwork for in-depth discussions on the
economic, social and cultural dimensions of the online game business as one of the most
successful forms of the contemporary digital contents industry using the Internet. The
central queries in this chapter are: “what are the salient characteristics of the online game
business as a form of digital economy?”, “why has it been one of the most consistently
profitable and stable forms of dot.com business?”, “what factors are significant in the
success and growth of the online game business?”, and finally “how is the operation of
the online game business associated with game users™ social and cultural spheres?”
Entangled with other forms of the digital economy, answering these questions requires
us to examine scrupulously the cultural economy of contemporary Internet businesses
and its societal implications.
This chapter begins by examining some of unique characteristics of the online game
business as one of the most exemplary forms of the Internet contents industry. The online
game business not only utilizes the digital space of the Internet to make stable profits,
but also creates social spatiality through technology-intensive visualization and
rhizomatic connections of the game users. It is a frontier form of the digital economy
evolving both “through” and “within” the space of the Internet. I suggest that the
broadband Internet infrastructure and the construction of the cyber game community
constitute two necessary conditions for the economic success of the online game
business (and possibly other forms of the Internet business). Especially, drawing on Jean
Baudrillard™s (1983; 1988; 1998) critical discussion on simulacrum and simulation, I will
illuminate the ways in which the simulated hyper-reality of the online game produces
certain “spatiality” in the online game, evokes a sense of community among game players,
and consequently generates a “third” socioeconomic space in-between (or overarching)
the real and the virtual. For an empirical analysis, I specifically investigate the case of
the South Korean online game company NCsoft™s Lineage: the bloodpledge. This game
had over 3.2 million registrations and 11 million accumulative registrations in 2002. The
latter figure accounts for almost one-fourth of the country™s total population. The
company generated 44.2 million U.S. dollars of net profit from game players in 20021, and
has opened operations in Taiwan, Hong Kong, Japan and the United States. The U.S.-
based investment bank JP Morgan upgraded the company™s shares in 2001, signaling it
as the most valuable stock in the South Korean high-tech stock market KOSDAQ (Korea
Securities Dealers Automated Quotation System) in 20012. Overall, NCsoft™s Lineage
would be an archetypal online game, featured by massive game players, transnational
scope of operation, and stable and high profitability.




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Internet Economy of the Online Game Business in South Korea 289


The Online Game Business as Digital
Economy
The term “online game” is usually distinguished from the network game and the Internet
game. The characteristics of online games, such as Ultima Online and Everquest in the
United States can be summarized as an infinity of game participants and exquisite
audiovisual technology for digital representation of real space and life. A network game
such as the Blizzard™s Starcraft lacks the former characteristic of an online game while
an Internet game such as the MSN™s Gaming Zone lacks the latter. The differences
between the Internet game and the online game are also significant: online games create
a simulated “cyber-world” through realistic representations of space, while Internet
games are related to simple cyber-games such as billiards, card games, car-racing,
checkers, etc.
The online game business, rapidly emerging in a digital economy, has become one of the
fascinating Internet contents businesses, including an Internet portal service, e-broad-
casting, e-education, e-business solution, and e-security. Because many online game
companies maintain their profit models based on “retail game package with online fee”
(i.e., Everquest and Ultima Online) or “free game package with online fee (i.e., Lineage),”
they have been quite successful in securing continuity and consistency in making profits
(Costikyan, 1998; 2000). The online game has actually evolved from the textual structure
like MUD (Multiple User Domains) to more elaborately represent graphic networks like
MUG (Multiple User Graphics) and currently, MMPOG (Massively Multiple Player
Online Game). Usually, MMPOG is played by 50,000 ˜ 200,000 multiple Internet users who
construct a virtual community in cyberspace through their access to the host computers
of the game company (Lee, 2001). It is different from a PC-based network game in which
usually 2˜20 players can play game at the same time, whereas the online game is played
by an infinite number of players in many different places (Lee, 2001). For this reason, most
of the online game players consider the cyberspace elements of the game not only as
virtual, but also as “real” society. Table 1 shows that the online game industry is generally
small, but growing faster than other types of games. Note that arcade and video games
still dominate the global game market.
More specifically, there are at least three significant features of the online game business.
First, as a form of the contents industry of Internet e-business, the success of the online
game heavily depends on users™ accessibility to a broadband Internet infrastructure,
including xDSLs and cable modems, for it simultaneously inter-connects 50,000 ˜ 150,000
game players who rhizomatically communicate large capacities of textual and audio-
visual data. Hence, the online game business is one of the most accurate, efficient and
inclusive measurements to evaluate the digital economy in association with the Internet
and telecommunication infrastructure. Furthermore, the online game technologically
depends on a meticulous graphic design, 3-D visualization, and a delicate user-network-
ing structure. It has stimulated a variety of innovations including artificial intelligence
techniques, image-processing software and hardware, and super-speed Internet infra-
structures.




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290 Park


Table 1. Global market of game businesses

1998 1999 2000 2001 2002
Market Growth Market Growth Market Growth Market Growth Market
(billion rate (billion rate (billion rate (billion rate (billion
dollars) (%) dollars) (%) dollars) (%) dollars) (%) dollars)
PC 5.0 14 6.7 34 9.3 39 13.9 49 20.7
Video 39.8 35 43.0 8 49.0 14 55.4 13 62.0
Arcade 60.5 21 75.6 25 98.2 30 129.0 31 170.0
Online 3.3 18 4.5 36 6.5 44 10.2 57 16.0
Total 1,086 25 1,298 19 1,630 26 2,085 28 2,687


Source: http://stat.nic.or.kr (Korean Network Information Center); http://www.gameinfinity.or.kr
(Korean Game Promotion Center); http://www.game.or.kr (Korean Entertainment System Industry
Association)




Second, as a form of a non-material, information-based business, the online game
business does not necessarily require the conventional processes of production,
storage, and distribution of material goods, all of which require physical facilities and
management systems. Thus, the profit model of the online game business is substantially
different from other forms of e-commerce, such as e-shopping, e-auction, and e-
bookstore, in which the conventional system of storage and distribution remains one of
the most influential factors in their profit models.
Third, an analysis of the online game business is crucial in understanding the contem-
porary cultural economy in the information age. Playing multiplayer online games not
only means it is a game, but it also implies that the game users socialize with other real
time players in the game™s virtual community. Online game users share similar socio-
cultural codes and bonds, and experience a sense of belonging. Therefore, an online game
company™s role is often not only to create machinic algorithms, rules, and plots for a
specific game, but to provide game users with a comfortable cyberspace in which they
can enjoy their social associations with one another. In this sense, an analysis of the
online game is instructive in investigating the cultural and economic implications of a
cyber-community, in which the conventional economic binarism of producer and con-
sumers is often blurred, contested and negotiated.




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Internet Economy of the Online Game Business in South Korea 291


The Conditions for the Success of the
Online Game Business

Broadband Internet Infrastructure

The first significant condition essential for the growth of the online game business is
being associated with the development of the broadband Internet infrastructure. The
Internet infrastructure is increasingly based on broadband networks that allow hundreds
of thousands of Internet users to log on the server at a time and to exchange large-sized
date files. While Internet games are played through executing small-sized files and
exchanging small data between players, online games usually depend on executing large-
sized (10˜200 MB) program files and exchanging large data files among real-time players.
Furthermore, the online game business requires intensive high-tech innovations for
image processing and server management. For this reason, while playing an online game,
a large quantity of data flows simultaneously among players, i.e., texts, images, 3D-
graphics, sounds, and video clips. Further, not only is broadband a prerequisite for the
success of multiplayer online games, but the online game industry itself promotes a
greater market demand of broadband.
The U.S. Federal Communications Commission (FCC) defines the term “broadband” as
a new generation of high-speed transmission services, which allows users to access the
Internet and Internet-related services at significantly higher speeds than dial-up modems
(narrowband). The FCC uses the term “advanced telecommunications capability” to
describe services and facilities with upstream (customer-to-provider) and downstream
(provider-to-customer) transmission speeds exceeding 200 kbps (FCC, 2000). Many
professionals use the term “broadband” to describe any of various high speed, always-
on Internet connections, including xDSL (x-Digital Subscriber Line), HFC (Hybrid Fiber
Coaxial), FTTH/O (Fiber To The Home/Office), PAN (Power Area Network), PLC (Power
Line Communication), and B-WILL (Broadband Wireless Local Loop) (Yun et al., 2001).
Generally speaking, high-speed broadband refers to a high-capacity, two-way link
between an end-user and an access network supplier capable of supporting real-time data
rates in megabits per second (Broadband Task Force of Canada, 2002; Adamson, 2003).
Today, successful deployment of broadband Internet connections has become one of
the most urgent and significant components in the development of an “information
society” for many countries (U.S. Department of Commerce, 2002; Belson and Richtel,
2003). Many contemporary electronic applications require broadband to work “prop-
erly.” Figure 1 from the Broadband Task Force of Canada (2002) shows the minimum and
ideal speeds necessary for some of the more popular applications. The minimum
bandwidth for tele-working, video-conferencing, and tele-medicine is above 100 kilobits
per second, an almost impossible data-transfer speed for conventional modem users.
Furthermore, such applications as movies-on-demand and digital TV require 1,000
kilobits per second for the minimum requirement and 7,000 kilobits per second for getting
“suitable operation.” Beyond exchanging e-mail, documents and reading e-newspapers,
contemporary Internet content providers increasingly deliver a variety of forms of



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292 Park


Figure 1. Bandwidth requirements for selected applications




Reprinted from the National Broadband Task Force of Canada (2002).




additional services, such as audio-visual data, streaming video clips, real-time Internet
broadcasting, and online games (Yun et al., 2002).
According to Hausman™s (2001) study of the estimation of cross-price elastics of the
Internet infrastructure market, the broadband Internet market is asymmetrically and
distinctly separated from the narrowband Internet market. In terms of the characteristics
of data flow and traffic, the narrowband Internet connection is not complementary to the
broadband Internet market. That is, the narrowband Internet connection is incompatible
with data-intensive multiplayer online games.


Sense of Community

One of the most salient characteristics of the online game business is in its relatively long
life cycle of more than eight years (Lee, 2001; Themis Group, 2001). Ultima Online is
currently in its seventh year of live operations. It has more than 200,000 subscribers, and
consistently adds more subscribers each year. EverQuest reached its second anniver-



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Internet Economy of the Online Game Business in South Korea 293


sary in May 2001. It had more than 410,000 subscribers as of August 2001 and also
appears to be steadily growing. As a result, EverQuest and Ultima Online respectively
generate more than $U.S. 4 million and $U.S. 2.75 million per month (Bartle, 2001).
One basic question remains. What is the factor that consistently makes online game
players happy to spend $U.S. 15 ˜ 25 each month? According to a report from the Themis
Group (2001), past performance shows that there are at least two main phases in the
subscriber growth for online game services: the initial “try it out” phase and the second
“this is my home, come join my team” phase. Thus it is almost an axiomatic principle
among online game providers that players come for the game and stay for the “commu-
nity” (The Themis Group, 2001). In other words, players may be attracted to a certain
genre or style of game and try it out, but ultimately they remain because they make friends
and fulfill their need for social interaction within the game™s framework. There are also
other factors involved, such as the ongoing and persistent ownership of items and in-
game property, regular new features and an evolving storyline. But the “key” element is
the “social bond” that forms among game players.
In this context, the Themis Group (2001) suggests an interesting lifecycle model of online
game players. The stages consist of confusion, excitement, involvement and boredom
(see Figure 2). Among them, the third stage (involvement) is the longest subscription
period of the player lifecycle and is closely linked with game users™ strong involvement
with the online game community. If a game player becomes attached to an in-game micro-
community, he/she generally becomes involved in the meta-functions of the game, such
as an ongoing story plot and sponsoring team events. Players who move into the
involvement phase normally continue to subscribe to the game for a period of years. In
sum, one of the most important success factors in the multiplayer online game business
is constructing the feeling of community and belonging among online game users. In
terms of the value chain, while the conventional console and PC-based games have retail-
driven forms of the value chain, the multiplayer online game mostly depends on game
users™ subscription fees. In the online game business, consumer subscriptions generally
constitute about 70˜80 percent of the total revenues (The Themis Group, 2002). And, in
this case, revenues are highly dependent on the extent of the game™s community-oriented
structuring (in cyberspace) and the game company™s promotion of festivals, contests
and other meetings for subscribers (in the real world). All are important in evoking a sense




Figure 2. The ideal persistent online game player lifecycle


4 MONTHS ˜ 4+ YEARS
< 1 MONTH 2 ˜ 4 MONTHS 2 ˜ 4 MONTHS



INVOLVEMENT
CONFUSION EXCITEMENT BOREDOM




Source: The Themis Group (2001)



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294 Park


of cohesive belonging to a cyber-community among game players. Therefore, it is not
an unusual event, for example, in South Korea, for online game users whose animated
game characters married in cyberspace to “really” marry in the real world (Macintyre,
2001). Even the following case is quite pervasive throughout the country.


Last September Han Sang, a 14-year-old boy in Seoul, stole $35 from his
parents to buy sunglasses and other accessories. The petty thievery was bad
enough, but what really irked his dad was that none of the stuff he bought was
real. They were for the animated character, or avatar, the boy used as a stand-
in for himself on the Internet. Han was spending four hours each night hanging
out online with his friends and wanted his virtual stand-in to look as cool as
possible (Fulford, 2003).


At least in the online game business, the distinction between “real” and “virtual” is
drastically blurred, combined and contested. This process seems to have its own
economy. In terms of Jean Baudrillard™s (1983; 1988; 1998) notion of “simulation,” the
figuration of cyberspace as spatial simulacrum undermines the symbolic distance
between the real and the imaginary. In the age of a technology-based postmodern culture,
the semiotic equivalence between the signifying and the signified gives way to simula-
tion, which is “no longer a question of imitation, nor of reduplication, nor even of parody
¦ rather a question of substituting signs of the real for the real itself” (Baudrillard, 1983).
Simulation envelops the whole edifice of representation as itself a “simulacrum,” that is,
an imaginary construct that has no referent in reality, but is more real than the real (i.e.,
hyperreal). In the Baudrillardian epistemology, the cyberspace of the Internet as a
simulacrum is not a representational space of referents in reality, but it has “real”
spatiality with its own geographies almost unconsciously inscribed in such spatial terms
as “home” page, e-mail “address” and web “site.” The real spatiality of cyberspace is
especially salient and significant in the image-enhanced and user-intensive space of the
online game. At the same time, we should be careful not to overestimate the relative
autonomy of spatiality in the online game, not only because it cannot exist without the
network of a broadband-based Internet infrastructure, the game operator, and the
massive game uses in reality, but also because it is essentially inseparable from the
economic geography of the online game industry. It is in this context that Baudrillard
(1988; 1998) considers the notions of simulation, simulacra and hyperreality as the
postindustrial (or postmodern) cultural phenomena that have resulted in drastic changes
in the consumption sphere. For example, Baudrillard (1998) argues that consumers no
longer purchase goods because of real needs, but because of desires that are increas-
ingly defined by artificial images for a commercial purpose, which keep consumers one
step removed from the reality of human bodies. In sum, the online game business is
located at the frontier of the emerging broadband-based socioeconomic community that
creates a “third” economic space in-between “cyberspace” and the “real world.”




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Internet Economy of the Online Game Business in South Korea 295


NCsoft™s Lineage: The Bloodpledge
The online game business in South Korea has been one of the country™s most consis-
tently profitable, sustainable, and successful accomplishments in the midst of other
dot.com companies™ waxing and waning (IDC, 2001; Kim, 2001; Moltenbrey, 2003). The
online game has become in name and reality a national sport, frequently broadcast by
television stations and Internet Web sites in South Korea. A considerable number of
“professional” online game players visit Seoul from Australia, Canada and the U.S. in
order to win large amounts of prize money coming from online game tournaments.
Compared to the world game market (see Table 1), the growth of the online game business
in South Korea has significantly exceeded PC and video game markets since 2002 (see
Figure 3). The arcade game market had been the largest, but the online game market has
exceeded other types of game markets since 2002. Most online game companies estab-
lished in the last four to seven years are small-sized firms predominantly funded from the
venture-oriented capital. While employing a relatively small number of employees, these
South Korean online game companies have made high net profits and experienced a high




Figure 3. Korean game business market
(US$ bn)
700

600

500

400

300

200

100

0
2000 2001 2002 2003

Online PC Arcade Console


Source: NCsoft (2002).




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permission of Idea Group Inc. is prohibited.
296 Park


growth rate in their sales. Domestic gamers account for about 80 percent of all registra-
tions, and foreign gamers make up the remaining 20 percent. Also, major South Korean
online game businesses have been expanding their services with success in Taiwan,
Japan, Hong Kong, China and the U.S.
Among the online game companies in South Korea, NCsoft, established in 1997,
accounted for about 40 percent of the domestic online game market in 2002. It is by far
the world™s largest online gaming network, with 3.2 million subscribers paying about
$U.S. 25 per month (Fulford, 2003) 3. This company was considered one of the most
successful venture businesses in South Korea in 1998, and since has expanded into
Taiwan, Hong Kong, Japan and the U.S. The company also aggressively pursued and
acquired the prominent U.S.-based online game companies ArenaNet and Destination
Game. It also established a strategic branch, NC Austin, in Texas in 2001. NCsoft™s
Lineage: the bloodpledge has been the principal propellant of the company™s rapid
expansion and growth in the global online game market. Figure 4 shows that the average
ratio of operating profit amounted to over 45 percent (77,115 million Korean won, or $U.S.
65 million) of the total revenues (154 million Korean won, or about $U.S. 130 million) in
2002. Most strikingly, out of the total company™s 154 million Korean won in revenues,



Figure 4. Revenues, operating profit, and net profit of NCsoft (2000-2003)




Reprinted from NCsoft (2002).



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permission of Idea Group Inc. is prohibited.
Internet Economy of the Online Game Business in South Korea 297


the cost of goods sold, which includes the Internet operation and other services, is only
about 32 billion Korean won (20.8 percent). Hence, the company™s total gross profit in
2002 amounted to 154 billion Korean won (79.2 percent), which is nothing short of
incredible in terms of conventional Internet businesses.
NCsoft™s Lineage is a so-called “massively multiplayer online role playing game”
(MMORPG) in which more than 120,000 users simultaneously can gain access to the
company™s game servers and associate with other players. Set in the Middle Ages,
Lineage is a fantasy game in which each game player chooses to be a knight, wizard, elf,
or prince/princess along with other players. Lineage requires a high level of co-operation
as armies storm castles, platoons need to be organized, and charges planned and
executed in cooperation with other players. Lineage operates via multiple remote
computer servers in which users in different places can constantly meet new counterparts
literally around the world who are accessed via the Internet. Most importantly, Lineage
features over 50 different cyber worlds, and each of them is so large that it takes over six
hours for an animated character just to walk from one end to the other. The cyberspace
in Lineage is not a metaphor but a reality. In this way, according to Taek-Jin Kim, the chief
executive officer of NCsoft, “the game has evolved into a new society in the virtual world”
(Macintyre, 2001).


Growth of the Internet Sector in South Korea

The necessary condition for the online game business, as noted above, is a broadband
infrastructure and Internet environment favorable to dot.com companies. Either fortu-
nately or strategically, NCsoft™s Lineage was first launched in 1997 when the South
Korean government vigorously began following the Asian financial crisis to seek new
ways to implement successful economic restructuring projects. These projects include
radical rationalization of labor-intensive industries, deregulation of governmental eco-
nomic policies, decentralization of large conglomerates, and strategic facilitation of high-
tech venture businesses (Kim, 2000; Shin, Chang and Belsey, 2002). Although South
Korea is still struggling with considerable economic problems such as continuous
stagnation and high rates of joblessness, neoliberal governmental policies and institu-
tions in the restructuring process have strongly promoted the country™s economic
constitution into a more flexible, liberalized and knowledge-based structure (The Econo-
mist, 1998; Kim, 2000; Bremner and Moon, 2002; Shin, Chang and Belsey, 2002).
Of all these economic transformations and initiatives, one of the most striking successes
is South Korea™s rapid achievement and its pioneering position as one of the most wired
(and wirelessly-wired) countries in the world, all the direct result of its elaborate Internet
and telecommunications infrastructure. It thus comes as no surprise to witness the
miraculous success of NCsoft™s Lineage to the South Korean digital economy. Accord-
ing to the Korean Network Information Center (2003), South Korea in 2002 had 25.6 million
Internet subscribers, equivalent to 58 percent of the country™s total population. Among
these subscribers, 10.2 million have broadband Internet connections with 54 percent
having xDSLs (x-Digital Subscriber Lines) and another 34 percent high-speed cable
modems. Thus, South Korea had the world-highest 20.8 broadband Internet penetration



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permission of Idea Group Inc. is prohibited.
298 Park


per 100 inhabitants (OECD, 2002) 4. Furthermore, at least 80 foreign companies have set
up research sites in Korea to tap into this gigantic broadband laboratory (Fulford, 2003)5.
South Korea is one of the most electronically wired countries on the planet, with cheap
broadband access available almost everywhere (Lee and Choudrie, 2002; Internet
Magazine, 2003). In truth, South Korea is now “the powerhouse in broadband and
wireless Internet markets” (Rao, 2001), “the bandwidth capital of the world” (Herz, 2002),
and “tech™s test market: a hotbed for anything new that™s digital or online” (Moon and
Stone, 2003).
In a broad sense, NCsoft™s success should be contextualized within the “national
innovation system” (NIS) (Nelson, 1993; Lundvall, 1992; Wijnberg, 1994; Leinbach and
Brunn, 2002). National laws, policies and institutions in conjunction play a major role not
only in the construction of the broadband Internet infrastructure, but also in promoting
domestic capital to invest in small-size and high-tech intensive venture businesses such
as NCsoft. In this sense, the South Korean government is considered one of the most
interventionist and aggressive in the world in superseding the narrowband market with
broadband Internet networks (Rao, 2001; Herz, 2002). Since the mid-1990s, the South
Korean government has implemented a series of three master plans for the development
of information and telecommunication industries. First, in August 1995, the South Korean
government enacted the Framework Act on Informatization Promotion, established the
first Master Plan for Informatization Promotion in June, 1996, and established a national
organization for planning and implementation of the goals outlined in the Master Plan.
The plan presented ten key projects for the realization of an “advanced information
society” by the year 2010 (MIC, 2002). Second, in March 1999, the government estab-
lished “Cyber Korea 21 Project” as the more concretized blueprint for the new information
society of the 21st century. The project has become one of the highest priorities among
principal structural adjustment programs since the 1997 financial crisis. Through these
plans, the government brought South Korea closer to the realization of the information
society with the construction of an advanced information infrastructure. More recently,
the government launched its third master plan called “E-Korea Vision 2006,” which was
implemented primarily to cope with four current issues: (1) slow spread of informatization
in the public sector, (2) low IT investment in the SMEs (i.e., small-and-medium enter-
prises), (3) the adverse effects of information and communication technologies such as
computer viruses, hacking problems and privacy infringement, and (4) insufficient
investment in the R&D sector of advanced information and telecommunication technolo-
gies. Especially, in regard to the broadband Internet infrastructure, its policy objective
is to have broadband connections of 155 megabytes to five gigabytes available nation-
ally by 2005 (MIC, 2002; 2003). South Korea has also made direct investments of $U.S.
600 million to promote its digital contents industry, and is scheduled to add an additional
$U.S. 30 billion into its broadband infrastructure by 2010. These are the results of a
combination of government and private investments along with the strong cooperation
with the R&D sector such as universities and research institutes (Adamson, 2003; MIC,
2003). As a result, xDSLs and cable modems provide service to 94.7 percent of all Internet
connection subscribers in 2003 compared to only 3.3 percent using dial-up modem (see
Figure 5).




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permission of Idea Group Inc. is prohibited.
Internet Economy of the Online Game Business in South Korea 299


Figure 5. Internet infrastructure in South Korea

subscribers
7,000,000


6,000,000


5,000,000


4,000,000


3,000,000


2,000,000


1,000,000


0
1997 1998 1999 2000 2001 2002 2003
97,325 2,353,314 5,178,323 6,386,646 6,483,463
xDSL
173,662 1,556,072 2,936,280 3,717,173 4,000,758
CATV
108,733 121,965 93,775 93,685 90,935
ISDN
6,186 13,843 38,938 73,058 93,388 98,308 83,226
Leased Line
31,398 39,959 36,856
BWLL/WLL
317,329 754,680 951,989 1,018,155 622,876 479,837 366,279
Dial-up



An examination of the sales breakdown of NCsoft™s Lineage (see Figure 6) reveals more
about the broadband-based economy of the online game business. While narrowband-
based sales are minimal, broadband-based PC-cafes and households account for the
most of the company™s total sales. From 1998 ˜ 2000, PC-caf©s in particular were the most
important source of NCsoft™s revenues 6. They were mostly privately run facilities that
provide super-speed Internet access to those households not equipped with xDSLs and
cable modems. In 2002 the number of PC-caf©s in South Korea was about 24,000,
ubiquitous on almost every street corner in built-up areas and nearby commercial
buildings (KNIC, 2003; MIC, 2003). The PC-caf© is not just a place for Internet access,
but also a convenient place for meeting friends and socializing with other online game
users. For this reason, despite the rapid growth of the home broadband market, PC-caf©s
still remain important cultural and social places for Internet users (Lee and Chourdrie,
2002). Finally, as NCsoft began to expand its services for Internet users overseas, the



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permission of Idea Group Inc. is prohibited.
300 Park


Figure 6. Sales breakdown of NCsoft™s Lineage: The Bloodpledge
100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
1Q_01 2Q_01 3Q_01 4Q_01 1Q_02 2Q_02 3Q_02 4Q_02 1Q_03
2,209 2,221 2,222 1,682 1,923 568 1,160 1,038 582
Narrow-Band
1,615 2,046 2,608 3,056 4,906 4,833 5,821 6,302 6,746
Royalty
6,767 7,405 12,311 17,075 18,602 17,685 19,243 19,195 19,711
Personal
14,004 14,235 16,409 16,681 15,970 12,845 13,065 11,450 10,447
PC Caf©

Source: NCsoft (2003). (Unit: million Korean won)



royalty from foreign countries (especially from Taiwan) increased rapidly, amounting to
$U.S. 5.5 million in the first quarter of 2003 (NCsoft, 2003).




Cybercommunity: Social and Cultural Dimensions of the
Online Game

A Web-crazed country: Earlier this year, Internet gaming company NCsoft found
it had some unwelcome visitors. The Seoul company is the creator of Lineage,
an online fantasy game in which players do battle in a medieval cyberworld with
swords and shields and magical rings that change their identities. Players can
swap weapons or buy and sell them using the game™s cybermoney. So popular
is Lineage - and so competitive its fans - that players started buying and selling
weapons with real money instead of cyberbucks. (Rings were reportedly going
for as much as $300 each.) NCsoft didn™t like that practice, and barred two
offending players from the game. Soon after, the banned players barged into
NCsoft™s office and demanded to be allowed back online. The company had to



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permission of Idea Group Inc. is prohibited.
Internet Economy of the Online Game Business in South Korea 301


call the police. That™s how it is today in South Korea”the Internet seems to have
made the whole nation a little crazy (Macintyre, 2001).


What was happening to these two players? What was their desire to purchase rings (or
the screen image of the rings composed of digital signals) in the cyberworld for real
money? Were game players so crazily intoxicated with the NCsoft™s online game that they
could not recognize their social positions in-between the cyberspace and the real world?
Or is this a coincidence happening in South Korea, where about one-third of the
country™s 48 million people are logging onto the Internet on a daily basis, one-third are
using wireless Internet service on the street, and more than one-half are at home using
the Internet through super-speed broadband connection?
In regard to cyberspace as a social space of the Internet, one of the contemporary
questions in social sciences has been, “How could the cyberspace of the Internet impact
individual users and overall society?” An interesting answer from Poster (1996, 206) is
that, “There can be only one answer and that is that it is the wrong question.” Human
beings are usually understood to manipulate the materials for ends that they impose upon
the technology from a “pre-constituted” position of subjectivity. But, Poster argues that
the problematic aspect of cyberspace would be meaningless without considering the
subjectivity of the Internet user, who produces and transforms cyberspace as much as
she or he is transformed by cyberspace.
The significance of Poster™s argument is strongly embedded in the massively multiplayer
online game (MMOG), in which a large number of game players get together, not only
because of the game plot™s own merit, but because of its external social effects on the
game users™ socializing with other people, belonging to the game community, and feeling
free from the complicated real world. In this vein, online game players are not necessarily
users, consumers, or customers. Rather, they are creative producers and consistent
maintainers of the contents of the online game. As discussed above, almost all of the
online game developers strongly believe that one of the most crucial axioms in the
successful online game business is that players come for the game and stay for the
“community.” The key element of the online game business is to construct “social
bonds” among game players in cyberspace.
NCsoft™s Lineage is noted for its exquisite image-processing graphic technology,
through which 3D graphics of animated game characters, land, buildings, and other
objects in the game are projected into the two-dimensional digital space on the computer
screen. In terms of game players, this spatial representational technology is highly
conducive to the production of a “third” spatiality in-between cyberspace and the real
world. Here the creation of spatial simulacra accompanies the simultaneous epistemo-
logical process of domestication and foreignization of social space. These image-
process skills are used for the procession of simulation, which Baudrillard (1983) defines
as the image having four successive phases: (1) it is the reflection of a basic reality; (2)
it masks and perverts a basic reality; (3) it masks the absence of a basic reality; and (4)
it bears no relation to any reality whatsoever, that is, it is its own pure simulacrum. First,
Lineage contains a variety of simulated images that reflect the basic geographies of
reality, including not only large-scaled entities such as mountains, lakes, islands and
buildings, but also small-scaled materials such as trees, humans, and even more specific



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302 Park


and smaller items. The game™s simulation is not based on its high fidelity to basic reality,
but rather it appropriates the representational freedom inherent in its digital represen-
tation for generating a fantasy and attractive cyber-spatiality in which a medieval knight,
monsters, pizza, and candy coexist in a cyberspace beyond the restriction of time and
space, or beyond the real and the imaginary. The simulation in Lineage both reflects and

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