Perfect World, Inc. (NASDAQ:PWRD) is a Chinese online video game developer and operator. Perfect World has released six Massively Multiplayer Online Role Playing Games (MMORPGs) and one casual online game since its inception in 1998. With the exception of its first release Perfect World, all of the company's MMORPGs earn money through a free-to-play (FTP) revenue model, which has become the industry standard. Under the FTP model, anyone can play the online game for free, but items can be purchased within the game that will allows players to advance more quickly. Perfect World develops all of its online games on its proprietary 3-D gaming engine known as "Angelica". This has allowed the company to develop its 3-D games more cheaply than many competitors who rely on third party engines to support their games. Perfect World generates revenues from two sources: Online game operations (90% of total revenues) and Overseas licensing revenues (10%). The company earned $314 million in revenue and $152 million in net income in 2009.
Perfect World generates the majority of its revenue from its online games. These revenues come from the players who purchase items within Perfect World's online games and account for nearly 90% of the company's total revenue. Overseas licensing fees account for the rest of the company's revenue, and consist of fees payed by international game operators who run Perfect World's games in other countries.
PW has also developed a proprietary 3-D gaming engine and game development platform known as Angelica. While Angelica does not directly generate revenues for PW, it does provide the company with a competitive advantage within the online gaming industry. With its own development engine, Perfect World is able to produce new titles at a lower cost than its competitors by eliminating third party companies that provide these types of resources.
Since its inception Perfect World has released six 3-D MMORPGs: Perfect World, Legend of Martial Arts, Perfect World II, Zhu Xian, Chi Bi, Hot Dance Party, Pocketpet Journey West, Battle of the Immortals, and Fantasy Zhu Xian. These MMORPGs vary in their themes and in the characters of the game. In each game, players can choose a character type and interact with other players within the game's virtual world.
Before Perfect World was developing 3-D video games for mass markets, its founders focused on creating their own 3-D gaming engine. A game engine is the basis for any video game -- it is what creates and renders the physical environment of the game "behind-the-scenes" while players play. Gaming engines consist of three components: a graphics engine, a network engine and a logic frame, or AI engine. The graphics engine creates and updates what players actually see during game play. The networking engine is responsible for transferring all the data between the players' PCs and the game servers. Finally, the AI engine is responsible for continually evolving the environment as changes occur within the game.
PW is the only major game developer with a proprietary 3-D game engine. Furthermore PW's game engine, known as Angelica, is the industry leader in China, providing more features and server capacity than its competitors. Other game developers in China rely on gaming engines developed by third party companies. This fact limits many game developers' options when they create new titles -- the features of their games are limited to those that are available in the gaming engine. For PW, this is not the case -- with Angelica they can modify their gaming engine and incorporate new features to suit new titles. Angelica also offers PW another key technological advantage over its competitors: Angelica provides the ability to adapt games depending on the hardware that a player is using. That is, different levels of graphics will be sent to gamers depending on the speed and capabilities of the computer they are using, allowing lower-end PC users to enjoy the same game speed as high-end PC users. In the MMORPG market this is a significant advantage for PW. Providing equivalent game speed to lower-end PC users is crucial in a market that is comprised of players with varying PC capabilities.
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 the smoother the gaming experience will be. 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 PW. As more people gain access to fast internet connections PW will be able to attract more users and thus generate more revenue from their games. This will also mean that PW's games will need to support larger numbers of players in the future. However, this concern is not extremely significant as scaling for size is relatively easy in the video game world and only requires more servers and bandwidth.
Perfect World's products are, like most all entertainment products, a luxury good for many consumers. As such, general economic conditions and particularly disposable income are important metrics for companies like PW. In a strong economy where consumers have higher levels of disposable income more money will be spent on entertainment like video games. In China, PW's core market, disposable income has been growing strongly. Between 1990 and 2006 the average household disposable income in China grew more than 75%.
Perfect World competes directly with companies that develop and license video games. The majority of this competition comes from other Chinese companies, who compete with Perfect World to attract the same gamers. Shanda Interactive Entertainment (SNDA), Netease.com (NTES), The9 (NCTY), NetDragon, Giant Interactiv ADS (GA), GigaMedia (GIGM), Tencent (TCEHF), and Sohu.com (SOHU) are among the biggest competitors to Perfect World in the 3-D gaming industry.