One of the reasons we’ve decided to co-invest in Kwestr, an innovated Beijing based start-up analyzing social networks and gaming, has a lot to do with the management team. Frank Yu, a Senior Venture Partner with Ymer for many years, and co-founder of Kwestr may just be one of the most in-tuned social gamers in Asia. Frank is joined by Calvin Chin, Chris Tou, and Prashnth Hirematada. We’re pumped to be included as one of their four seed investors and advisors. Stay tuned for more information as to when Kwestr goes live.

2008 Game Developers Conference (GDC) organizers have announced that renowned futurist Ray Kurzweil (pioneer in speech recognition technology) will give the GDC’s keynote speech in February titled “The Next 20 Years of Gaming” – a look at the next two decades of video games and what the landscape may look like come GDC 2028.

Honestly, I’m looking forward to Kurzweil’s speech but, with that said, I started thinking about other keynote speeches I’ve heard over the past year and how the gaming related talks have all kinda started to sound the same.

I almost thought about summarizing the top three common themes when I came across a post titled Five Short Video Game Industry Keynote on the Magical Wasteland’s blog. These guys have done a much better job pulling this together than I would have done, for example gaming keynote theme number one:

Let’s think about the future for a second. You probably don’t understand the kids that make up the bulk of our audience, but I do. I call them the network MySpace remix 3.0 social generation. Unlike any other people before them, young people today like to interact with each other. They also like music. YouTube is the perfect example of whatever point it is I’m making. Everything should be online and customizable.

You’ll have to click on the link above to read of the other four keynotes – they’re really funny (and spot on).

For the past 12-months, the market’s been buzzing about Beijing’s partnership with MindArk (creators of Entropia Universe) to build a second dam on the Yangtze River…er…I mean they could possibly build a second dam assuming their joint Beijing Cyber Recreation District project (the world’s largest 3D virtual world capable of supporting 7 million concurrent users) throttles up and launches free and clear.

In fact, not only could the Chinese government build a second, third or even fourth dam, they just might figure out how to (competently and securely) connect western consumers and retailers directly to Chinese manufacturers (sidestepping our friends at Alibaba along the way).

As Vic Keegan reports in a recent Guardian article titled “Virtual China looks for real benefits” this is:

“…a bold attempt to repeat what China has done in manufacturing (i.e. conquering the world) in services. Be warned. It doesn’t stop there. This site, now under construction, will have all the infrastructure (server farms, communication links, electricity, banking links, logistics, etc) needed to make this the world’s one-stop shop for consumers and producers.”

Full stop — this “virtual world stuff” is for real and will no doubt have an immeasurable impact on real world commerce. Yup, it could take a number of years to get it right but given the amount of capital, breath and focus China (let alone the rest of the world) is directing at this space the time is yesterday to begin toying around in this field.

Already, virtual commerce is massive (just ask the Korean’s circa 1998) and hitting the bottomlines’ of major listed Internet properties – for example, 65% of Tencent’s revenue is generated from the sales of virtual crap. Furthermore, virtual commerce is already a sophisticated market economy striated into primary (site-to-user) and secondary (user-to-user) markets – the equivalent of a US$2.0 to US$2.5 billion market worldwide.

And, over the next couple of years this industry will only continue to grow and proliferate as bandwidth increases allowing more and more users (in developing countries like China, India, and Thailand) to join 3D virtual communities, such as Chinese start-ups Hipihi and Novoking.

Of course, there are a lot of people who aren’t drinking the 3D Kool-Aid, and by some measure, they’re right…but not entirely. My most excellent friend and brother Frank Yu writes that graphics and experience has less to do with a successful roll-out than understanding the local culture. Frank writes:

“…anecdotal evidence seems to indicate that Chinese MMORPGs and Casual Games can more easily be integrated into the markets of Vietnam, Indonesia, Russia and India easier than the more higher end Western games that most industry analyst are familiar with. If this is the case, there is a revolution in gaming based not on graphics, performance or even features but one based on distribution, cultural affinity and low barriers to entry…”

Recognize! If I’m a Western gaming or virtual community operating in Asia – sure, point well taken…but what if I’m local? What if we’re all local and operating on a level “cultural” playing field? What if Beijing tosses up a platform that support 150 million avatars and recommends (in a “velvet glove, iron fist” sort of way) leading manufacturers sign up? What will happen is you’ll be forced to compete – so rather than hang around – waiting – just get going because that virtual runway is pocked marked and difficult to navigate in the best of times.

I’ve been waiting to use this video titled “Are Virtual Goods the Next Big Business Model?” for a while, granted it is from this past June’s Virtual Goods Summit 2007 hosted at Standford University, but it is really quite good (assuming you like to listen to a group of entrepreneurs, VC’s and other tech industry people who got together to talk about the emerging market opportunities for virtual goods and economies).

In the late 90s, I was an equity analyst with a bank in Hong Kong – my job was to cover listed companies in Southeast Asia – it was an interesting and tragic time thanks in large part to the Asia financial crisis and surging interest in technology/Internet related start-ups.

Around that time, famed global macro (hedge fund) trader Jim Rogers and his fiancée Paige set out on a three year 245,000 kilometer track around the world – aptly named The Millennium Adventure – Rogers & Co traversed the globe in search of blossoming macro trends and investment opportunities.

While mirroring Rogers’ keen investment sense has proven, well, very challenging, I’ve been fortune enough to retrace numerous segments of his Millennium Adventure – yet, of all the places I’ve been to, one locale has continued to elude me – Korea – specifically, Democratic Peoples Republic of Korea (loving known as North Korea). That was until this June when several of my friends from Hong Kong, Taiwan and Shanghai decided it was time to visit the boys in the North – the plan was to heading into DPRK first week in September 2006.

But, that was before last night, when we got word from Pyongyang that the 2006 Arirang performance (Mass Games) had been cancelled due to the recent large scale flooding (evidently, the flooding is considerably more serious than the outside world has been led to believe – humanitarian aid might be needed). The connection between this massive propaganda event and our visit is tied to our visa window – US citizens are allowed entry in to North Korea under the umbrella of attending the Mass Games – now that there is no more Mass Games there is no more visa. Drat!

This is totally disappointing – one of my favorite articles written by Rogers during his Millienium Adventure told of his observations in Korea – the article titled “The Curious Shortage of Girls” was written in June 1999. I am completely curious to see how his predictions have played out (and while much of what he has to say pertained to South Korea, Rogers seems convinced South and North shared very similar characteristics – viewing the two as a single entity). Below are some excerpts:

Women constitute nearly 40 percent of the labor force, about a third of whom work on family farms. The rest work in services, health care, and textile and electronics manufacture, whose work force is 70-90 percent female. What has most bowled over Paige and I about Korea is the shortage of girls.

This demographic shortfall is true all over Asia, in Japan, Taiwan, and other countries, the first time these civilizations have faced this particular problem. In Korea in 1993 there were 115.6 boys born for each 100 girl babies. In 1995 only 47.9% of primary school children were female, which meant an extra 200,000 6-to-11-year-old boys. Local sources estimate that by 2010 there will be 128 men to every 100 women in the 27-to-30 year cohort.

This presents a serious demographic problem. Oddly enough, a similar situation occurred in Europe just before the year 1000, when for similar reasons girl babies were killed. As a result, back then it wasn’t the bride’s father who paid a dowry, but the husband who paid the bride’s father to obtain his new wife.

Rogers goes on to conclude that not only will this shortage of females mean an Asian imbalance, but it will also mean more and more women would delay getting hitched, opting to remain in the work force longer and longer – translating into growing demand from everything a young woman might desire to set up her own household (e.g. kitchen appliances, furniture) to frozen food and other easy-to-prepare meals.

How is this playing out in China today?

In February 2006, China’s State Bureau of Statistics reported that China’s population grew by 8.1 million people in 2005 to 1.307 billion – whereby there were 119 boys born for each 100 girls (source: Family Planning Commission of China) – in practical terms, this translates into about 40 million Chinese mainland men who won’t be able to find spouses by 2020.

If you walk around the supermarkets, talk to “independent women” or just plain old “people watch” (no peeping tom here) you’ll find that more and more women are getting hitched later in life, and that, yes, in fact, frozen food and ready made meals are gaining in popularity. Furthermore, the number of fitness centers and spas catering (and offering exclusive services) to women have grown exponentially over the past couple of years – and, although the make-up of the clientele at my local gym, Fitness First, breaks evenly across the male-female line (about 51% to 49% according to Fitness First in Shanghai) – the trend is favoring a larger number new female members over new male members.

Where do we go from here?

Already, several foreign companies have picked up on this trend – thanks to data mining – and thus are truly marketing themselves to women (e.g. snack food/ice cream retailer Diary Queen’s core clientele are young women between age 15 and 35). However, the vast majority are still scratching their heads – trying to figure out what to do with a growing number of independent women actively engaged in the work force – that I ex-ladies social hour at the tea house segment.

But, maybe we need to take a step back – maybe we’re getting too far ahead of ourselves – perhaps we need to resolve the macro picture first before trucking down the segmentation highway – my general view is that Chinese companies/organizations/government bodies are still trying to figure out how to deal with needs of the overall population (talk about full circle)…

Here is what I’m talking about. This week, Chinese airlines reported first half 2006 (H106) combined loss of US$321 million on the back of what regulators from General Administration of Civil Aviation of China said where “higher fuel costs”. Okay, well, that makes sense – or does it? Not really – there has to be more to it than just fuel costs – especially, during the same period a vast majority of US based airlines that have reported earnings have posted profits –- some that were double Wall Street’s expectations.

Anyone who has flown in China (particularly between Beijing – Shanghai – Hong Kong over the past 12-months) will tell you that delays have not just skyrocketed, but are seemingly out of control. The number of people traveling in H106 ratcheted higher by 18% to 74.3 million people – a pace which is on track to reach analyst forecasts of over 100 million passengers by first quarter 2007.

I don’t see the profitability issue at all related to fuel costs – the problem (big picture) is all about efficiency – or rather the lack of efficiency and proper logistics in China’s airline industry – demand is stretching the limits of existing infrastructure and personnel – well beyond capacity. And, short of banning the number of air travelers, there really is no solution in sight…

China is unique to any other country I’ve ever visited – there are so many business opportunities and niches to exploit that an investor/entrepreneur could spend a lifetime in the trenches – and yet China is still trying to figure out how to connect the dots on some of the most basic services.

So, rather than coming up with yet another virtual wallet or video search engine maybe we should be focusing on the basics – like, entertaining people waiting in a long line or sitting in an airport lounge.

Interestingly enough the boys over at Mr. Softy (Microsoft) are catching on to this as well. Last Thursday, MS CEO Steve Ballmer said “…we’re trying to grow two new cores, one online and one in [digital] entertainment services…which should help…bore deeply into the emerging markets…”

Companies, such as MS (assuming they can pull it off) that offer services that address the needs of regular people – providing them with products/services (and there a lot more out there than simply casual gaming) that they can participate in through the places that already touch their lives – places they are familiar with, such as airport lounges – are going to be winners.

Of the winners, however, there will be a select few who rise to the top – these are the guys who are not just first to establish basic (comprehensive) services but also have the ability to rapidly scale/offer more specialized services/products – addressing the needs of, say, independent women…

USAToday ran a short note on a recent Time magazine e-commerce poll, it reads:

An overwhelming majority, 95%, of affluent Americans have made an online purchase in the past year, according to the latest Time online poll, featured…the most popular items bought online were clothing, accessories and books; 68% of respondents made such purchases in the past year.

This is interesting from the perspective that in China (we imagine this trend holds true for other Asian countries) e-commerce is not only powered by the 18 – 25 year old segment, but also over 80% of these kids are actively engaged in some form of e-commerce.

And thus, compared to the USA (and Europe?), e-ecommerce demographics are completely different here in China as these 18 – 25 year old guys/gals are not all that affluent – basically, spending their time gaming online rather than purchasing electronics online. If we use USA/Time e-commerce poll as a proxy for China’s e-commerce timeline, well, I guess we better dig-in as it is going to be a long wait.

One thing is for sure, we are glad we are not heavily invested in the e-payment space…

Today’s Financial Times (FT) reports South Korean gamers are ganging up on Chinese gamers, whom they view as greedy and rude.

In Lineage, which has more than 3m subscribers, players in the form of knights, wizards and elves chase monsters who drop money and other valuable items that increase players’ strength, such as swords and medicine. These items can be sold for real money through online trading sites.

However, there is an etiquette to be followed: players interact along the way, but you are not supposed to take things dropped by someone else’s monster. Many young Chinese are joining South Korean matches because that is where the most items are traded and where the most money can be earned. But players say they do not follow the unwritten rules.

There have been reports of Chinese [parlors] where gamers play for hours to earn money using South Korean identities. More than 220,000 South Koreans have had their online identities stolen in connection with Lineage, NCSoft said yesterday.

We haven’t fully thought through the medium to long-term implications of this, but it can’t be good, especially because Chinese gaming companies license a majority of their MMORPG from South Korea. One thing is clear, it brings to light both the opportunities and the pitfalls associated to worldwide networking…

Chris Early, Studio Manager for Microsoft Casual Games Group talks with gaming blog Joystix about challenges facing casual gaming and how MS is working to bridge the gap between console players and PC players.

One of the big challenges that–not just Microsoft–people have been working on for years in the online community space is “how do you allow consumers to differentiate themselves? “Because you and I, when we both log in, we are essentially the same, right? In that digital world we’re just a collection of bits.

How do we begin to establish different identities and differentiating ourselves becomes a key element to the community? One of the ways is by allowing people to pick their own avatar and self express in some forms. But another way is to allow people to earn and achieve those differentiators and have that be part of something you can be proud of and show of:

“In fact I am different because even though we may have picked the same avatar and remarkably similar name, I am clearly a much better Geometry Wars player or pick the game player because my score’s higher or I’ve earned more badges or because whichever method you want to go to.” Differentiation ends up being key.

CNN reports that the Los Angeles attorney’s office has sued the makers of highly popular “Grand Theft Auto: San Andreas” for allegedly hiding mature material inside the video game, officials said.

Since being introduced in 2004, Grand Theft Auto has sold more than 13 million units, generating about $700 million in retail sales. Compare this to China’s gaming industry (year-end 2004) which generated US$391 million, of which Shanda and Netease accounted for 39% and 19%, respectively. Morgan Stanley sees China’s gaming revenues expanding at a 3 year CAGR of 37%, eventually reaching US$1.8 billion by 2010.

Okay, so what is your point? Why bring this up? If Grand Theft Auto, a single game, can generate over US$700 million (a little less than half of Morgan Stanley’s 2010 China gaming estimate of US$1.8 billion) in less than two-years, it might be safe to say that as China’s gaming industry matures we can expect even more impressive numbers coming out of China (i.e. Morgan Stanley is low balling it) — furthermore, over the next several years, I believe the line between what is acceptable and what is not acceptable (i.e. mature content in video games) in the “Gaming Universe” will continue to blur — especially given Grand Theft Auto’s success (i.e. give the public what they want, not what is good for them)…

As a final point, I’m not condoning the mature content embedded in Grand Theft Auto, but there is no denying that this is big business, and if mature content sells, well, most likely it is here to stay (whether hidden or not). It is going to be interesting to see how this develops in China — where major Internet and mobile companies earn over 50% of their IVR revenues from mature content — from both a regulatory (the State) and a moralistic (the Investors) standpoint…