Giant Interactive Group, Inc. (NYSE: GA) is a Chinese company that develops and operates online video games. Giant was founded in November 2004 and has since developed and released 2 online games, including the massively multiplayer online role playing game (MMORPG), ZT. Giant also plans to launch two new online games in the fourth quarter of 2008. Giant's games are run on two different revenue models: Free-To-Play (FTP) and Pay-To-Play (PTP). The company's free-to-play games (like ZT) are available to gamers to play free of charge, while their PTP games charge players a monthly fee to access and play the game online. Giant earns nearly all of their revenue from online games (99.6% in 2007).
Giant's revenue comes in the form of fees for PTP games and from sales within FTP games. Giant also earns a very small percentage of its revenue from international licensing. Giant has been profitable in the online gaming market, reporting an operating margin of 65% in the second quarter 2008.
The company has seen consistent growth in the number of user accounts as well as in their Average Revenue Per User (ARPU) over the last five quarters.
|Active Paying Accounts (000s)||1,248||1,318||1,405||1,447||1,760|
|ARPU ($ per quarter)||$38.80||$40.90||$42.30||$46.40||$41.70|
|Source: "Giant Interactiv Announces Second Quarter Earnings Results", page 9.|
Giant has released two online games since its launch in 2004. Its first release, "Zheng Tu" (commonly known as ZT,) was officially launched in January 2006 as a FTP online game. Giant's second release, "Giant Online", is a 3-D MMORPG that has a modern military theme.
ZT quickly became one of the most popular online video games in China, setting a record for peak concurrent users (PCU) in at 2.1 million. ZT is a 2-D MMORPG with a Chinese martial arts theme.
In January 2008 Giant released ZT Online PTP, which is simply a pay-to-play version of the original game. In the PTP version players can pay a flat monthly subscription fee, or an hourly rate. The PTP version does not offer any items for purchase within the game; instead, players advance their character over time. ZT Online ranked as the second most popular MMORPG (measured by peak concurrent users (PCU)) in China as of Q307 Below is a list of the top 10 MMORPGs measured by PCU in China as of the third quarter 2007.
|1||Fantasy Westward Journey||PTP||NetEase||1,470,000|
|2||Zhengtu Online||FTP||Giant Interactive||1,073,000|
|3||World of Warcraft||PTP||The9||665,000|
|5||Realm of Chaos||FTP||NA||550,000|
|6||Westward Journey 2||PTP||NetEase||505,000|
|7||World of Legend||FTP||Shanda||470,000|
|8||Legend of Martial Arts||FTP||Perfect World||450,000|
|9||Tian Long Ba Bu||FTP||Sohu||400,000|
|Source: "Giant Interactive - Correction: Initiating Coverage with a Sector Outperformer Rating and $15.50 PT", CIBC World Markets, January 4, 2008.|
In the fourth quarter of 2008, the company will release two more new games, "Empire of Sports" and "King of Kings III." Empire of Sports is a MMORPG in which players compete in soccer, basketball, tennis, skiing, track & field, and bobsleigh. Empire of Sports is the first massively multiplayer online game to include multiple sports games. King of Kings III is another MMORPG that is based on the King of Kings series originally developed in Taiwan. Giant's hope is that the already significant base of King of Kings players (from previous versions developed by others) will be drawn to the newest version of the game upon its release.
To date Giant has only released games in the MMORPG genre. MMORPGs are inherently internet based games and as such depend upon players to have the ability to access the internet. In large scale gaming platforms connection speed can play an important role in the gamers' experience: slower connections will cause lag in the game play and can be quite frustrating for players. That is, the faster a player's internet connection, the faster the game will run and gaming experience will be more smooth. As broadband connectivity grows more people will have access to internet connections that allow for lag-free gaming in these large scale games. In this sense growth in broadband internet connectivity is good for Giant. As more people gain access to fast internet connections Giant will be able to attract more users and thus generate more revenue from their games. While more players will generate more revenue for Giant, it also means that their gaming platforms will need to support a larger number of users at a time.
Giant is completely dependent on the Chinese internet market. This geographical dependence has the potential to hurt Giant if the internet connectivity growth in China slows. To date, this has not been a problem for Giant -- broadband internet connectivity in China has grown steadily since 2000. From 2006 to 2007 broadband internet users in China grew from 41 million to 56 million, closing the gap between China and the U.S. for the largest broadband market in the world. Furthermore, China has the largest population of targeted consumers in the world with 320 million people between the ages of 16 and 30. The table below shows China's internet growth from 2000-2006. Note: these figures are for total internet connections, not exclusively broadband connections.
|Chinese Internet Connections|
|Beginning of Year||Number of Chinese|
Internet Users (millions)
|Internet Users As a|
Percentage of Total Population
As is the case with broadband internet connectivity growth, strong economic growth will also help to bolster Giant's revenues. The entertainment industry is generally dependent on the growth in disposable income available to consumers. Thus, Giants ability to grow its active customer base (and in turn, revenues) is affected by the growth in the Chinese economy and in disposable income.
Giant has released games under two revenue models: Free-to-play and Pay-to-play. The FTP model allows gamers to participate in the online game for free, however items can be purchased (using real currency) in the game environment that enable players to advance more quickly. PTP games instead require players to pay a subscription fee in order to participate in the online game. In these games items cannot be purchased within the game. Giant has released versions of its online game ZT under both models. The FTP version of the game has proven to be a successful model for this game, earning greater profits than the widely popular PTP game World of Warcraft (developed by The9 (NCTY)) in China. However, this fact does not necessarily imply that the FTP model will be better suited for all online games -- different games can be more conducive to one model than another based on the game environment. As Giant continues to grow and release more online games their choice of revenue platform for each game will directly impact the revenues they earn from that title.
As the vast majority of Giant's business is originated in China, the majority of its closest competitors are Chinese video game producers, however, Giant also competes with non-Chinese companies that target the same audience. Giant's major competitors include Shanda Interactive Entertainment (SNDA), Netease.com (NTES), The9 (NCTY), NetDragon, Perfect World (PWRD), GigaMedia (GIGM), Tencent (TCEHF), and Sohu.com (SOHU). Giant is relatively young compared to most of its competitors, but this hasn't stopped the company from growing revenues beyond the industry pace. As seen in the table below, Giant has been able to get more revenue out of each customer, and has earned higher ARPU than its competitors over the last five quarters.
|Average Revenue Per User Comparison|
|Source: "Giant Interactive Group - Initiating Coverage", Brean, Murray Carret & Co. Equity Research, September 4, 2008.|
|Gross margin||Operating Margin|
|Source: Analyst report: "Giant Interactive Group - Initiating Coverage", Brean, Murray Carret & Co. Equity Research, September 4, 2008.|
Giant held a 3.25% market share (measured in clicks) during the second quarter of 2008.
|Market Share by Clicks|
|Source:"Giant Interactive Group - Initiating Coverage", Brean, Murray Carret & Co. Equity Research, September 4, 2008.|