The Chinese marketplace for online gaming is set to explode, say the forecasters at DFC Intelligence. The market research group has completed a new study that takes a broad look at the Chinese market, and in spite of the obstacles, its outlook is positive.

DFC analysts forecast that the online game market in China will grow from $580 million in 2005 to $1.7 billion in 2010. However, that additional revenue will come at a cost--the forecasters are predicting a substantial increase in the cost of doing business in China, with a severe decrease in margins surrounding the online game business model.

"Because the top games in China can generate as much as $100 million a year for several years, at first glance the market looks very attractive," says the report's lead analyst, Alexis Madrigal. "However, it is clear that margins are headed down as the business matures."

Reportedly, China-based gaming publishers NetEase and Shanda rake in revenues that reflect margins between 40-50 percent. The DFC analysts suggest maintaining those kinds of margins will likely be impossible.

And while at least one Western game has struck pay dirt in China--Vivendi's World of Warcraft with its 1.5 million Chinese subscribers--it remains the sole success among a string of US products that have tried to crack the Chinese market. For now, the increased revenues will likely line the pockets of existing China-based game operators rather than foreign companies.

"A company entering the Chinese market must compete with the increasingly sophisticated domestic Chinese game companies," the research group said in a statement. "On top of that, there is the rampant piracy problem, extensive government regulation, and a market that is already overcrowded with products."

The report was released earlier this week.