China Startups Focus on Pay-to-Gain

Dec 4, 2013

China Startups Focus on Pay-to-Gain

With a bevy of Internet companies that have grown successful on clones of Western products from YouTube to FacebookFB -0.70%, the Chinese Internet industry has long been maligned–often unfairly—as a domain of copycats. Though in some cases that has been true, the emphasis on the products put out by some of China’s largest Internet companies has obscured another area where Chinese companies have for years been pushing the boundaries: The ways they make money online.Using free products or services to lure users into paying for more is a longstanding practice in the business world, and online it is vital. But where U.S. companies have long made use of so-called freemium models to offer teaser services or products, and then demand payment for a complete product, Chinese companies have done something somewhat different.

“Since a decade ago, the Chinese freemium model was way more advanced” than in the U.S., said former Google Inc. China head Kaifu Lee in an interview. “In order to build a successful franchise, Chinese companies offered as much free to as many people as possible and let them play freely for a long time.”

“The pyramid of who pays or doesn’t is not a two-tier structure,” he said. “It may be a large number of people don’t pay, only a small fraction pay, but they pay large amounts.”

One example is Tencent Holdings Ltd.TCEHY -1.48%

’s Crossfire , a first-person shooter game that is free to use, but takes advantage of its popularity to sell the most rabid users special virtual weapons. The game contrasts with Counter-Strike.com in the U.S., which makes its money via a licensing fee that each user must pay simply to use the game.

Last year when Activision Blizzard Inc.ATVI -1.21%

signed up with Tencent to bring its biggest franchise “Call of Duty” to China, it said it would follow a similar model . Though consumers in the U.S. frequently pay around $60 for each new version of the game, Activision will give the game away in China and then seek to make money with in-game sales of virtual goods, like weapons, body armor or other enhancements.

For games like “Call of Duty” the China model is still somewhat unorthodox. For mobile games, which generally make more money than other types of mobile applications, it has become a far more accepted way to make money. Desperate users of Candy Crush struggling to get past a high level who otherwise would never think of paying for a video game might just spend to get an edge.

More recently, the model has been creeping into the hardware industry. Companies like upstart smartphone maker Xiaomi Inc. have grabbed a considerable chunk of market share in China, now the world’s largest smartphone market, by selling phones with good specs as close to cost as possible. Though the company’s margins on its hardware aren’t great, it says it plans to make money later off of services like providing content.