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Shanda Interactive Entertainment (SNDA) |
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| {{hide_logo|path=[[image: SNDA.gif |left]]}}'''Shanda Interactive''' is an online [[Video Game Industry|video-gaming]] company catering to Mainland [[China]] . It sells MMORPGs ('''M'''assive '''M'''ultiplayer '''O'''nline '''R'''ole '''P'''laying '''G'''ames) such as the titles ''Archlord'', ''Woool'' and ''Mir 2''<ref>[http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm#109 Shanda Interactive "Risk Factors" pg. 4]</ref> which tend to sell to hardcore gamers, as well as casual games such as ''Maple Story'' and online chess that appeal to a much broader audience.<ref>[http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm#109 Shanda Interactive "Operating Results" pg. 45]</ref>. Shanda also licenses management software to internet cafes in China and is promoting its new “EZ” platform, a home-entertainment set-top box that delivers games and movies without a required subscription.<ref>[http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm#109 Shanda Interactive "Risk Factors" pg. 6-7]</ref> | {{hide_logo|path=[[image: SNDA.gif |left]]}}'''Shanda Interactive''' is an online [[Video Game Industry|video-gaming]] company catering to Mainland [[China]] . It sells MMORPGs ('''M'''assive '''M'''ultiplayer '''O'''nline '''R'''ole '''P'''laying '''G'''ames) such as the titles ''Archlord'', ''Woool'' and ''Mir 2''<ref>[http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm#109 Shanda Interactive "Risk Factors" pg. 4]</ref> which tend to sell to hardcore gamers, as well as casual games such as ''Maple Story'' and online chess that appeal to a much broader audience.<ref>[http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm#109 Shanda Interactive "Operating Results" pg. 45]</ref>. Shanda also licenses management software to internet cafes in China and is promoting its new “EZ” platform, a home-entertainment set-top box that delivers games and movies without a required subscription.<ref>[http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm#109 Shanda Interactive "Risk Factors" pg. 6-7]</ref> | ||
| - | ==Business Description and Financial Analysis== | + | ==Business Overview== |
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| + | ===Business & Financial Metrics<ref name=10K-F3>{{cite 10k|ticker=SNDA|form=20-F|year=2009|link=http://www.wikinvest.com/stock/Shanda_Interactive_Entertainment_(SNDA)/Filing/20-F/2010/F62488821|pg=F-3}}</ref>=== | ||
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| + | In 2009, Shanda generated a net income of $233.3 million on revenues of $767.8 million. This represents the first year the company reported its earnings in US dollars. | ||
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| + | ===Business Segments<ref name=10K-69>{{cite 10k|ticker=SNDA|form=20-F|year=2009|link=http://www.wikinvest.com/stock/Shanda_Interactive_Entertainment_(SNDA)/Filing/20-F/2010/F62488821|pg=69}}</ref>=== | ||
| The company generates revenue in three primary reporting segments. | The company generates revenue in three primary reporting segments. | ||
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| *'''Other (1.1% of total revenue):''' The company sells software associated with running internet cafes, and also is attempting to launch its “EZ” series of home-entertainment devices. However, revenues any one of these minors business are not significant. EZ’s sales come from bundling with computer manufacturers, and is thus dependent on Shanda’s agreements with computer manufacturers. While it has a number on board<ref>[http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm Shanda Interactive FY 2007 20-F "Our EZ Initiative" pg. 33]</ref>, Shanda does not have support from China’s #1 computer manufacturer, Lenovo. Such a type of agreement would likely dramatically improve sales figures for this new business. | *'''Other (1.1% of total revenue):''' The company sells software associated with running internet cafes, and also is attempting to launch its “EZ” series of home-entertainment devices. However, revenues any one of these minors business are not significant. EZ’s sales come from bundling with computer manufacturers, and is thus dependent on Shanda’s agreements with computer manufacturers. While it has a number on board<ref>[http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm Shanda Interactive FY 2007 20-F "Our EZ Initiative" pg. 33]</ref>, Shanda does not have support from China’s #1 computer manufacturer, Lenovo. Such a type of agreement would likely dramatically improve sales figures for this new business. | ||
| + | |||
| + | [[IMAGE:SNDA-Segments2009.jpg]] | ||
| ==Trends/Forces== | ==Trends/Forces== | ||
Revision as of 15:36, June 22, 2010
Shanda Interactive is an online video-gaming company catering to Mainland China . It sells MMORPGs (Massive Multiplayer Online Role Playing Games) such as the titles Archlord, Woool and Mir 2[1] which tend to sell to hardcore gamers, as well as casual games such as Maple Story and online chess that appeal to a much broader audience.[2]. Shanda also licenses management software to internet cafes in China and is promoting its new “EZ” platform, a home-entertainment set-top box that delivers games and movies without a required subscription.[3]
Business Overview
Business & Financial Metrics[4]
In 2009, Shanda generated a net income of $233.3 million on revenues of $767.8 million. This represents the first year the company reported its earnings in US dollars.
Business Segments[5]
The company generates revenue in three primary reporting segments.
- MMORPG (86.8% of total revenue:) The MMORPG segment caters to “hardcore” Chinese gaming youth, with an immersive game experience that typically requires and commands a significant amount of time from Chinese youths. "Younger" games typically have lower revenue per subscriber since users have not been in the game world that long and don't have as much reason to spend money. The company can earn more revenues by compelling customers to spend more time in the game, thus motivating them to consider making purchases and improving their characters in game. This improves the performance of both metrics at the same time. This business is exposed to the age of the primary two titles, and is seeking a new replacement blockbuster title.
- Casual Gaming (12.1% of total revenue): Casual games require less user-game time and typically can be played to conclusion within a shorter period of time in one session. These simpler games appeal to a larger demographic than the MMORPGs and thus diversify the company’s earnings. These games also use the free-to-play model, as well as earnings earned from internet-revenues.
- Other (1.1% of total revenue): The company sells software associated with running internet cafes, and also is attempting to launch its “EZ” series of home-entertainment devices. However, revenues any one of these minors business are not significant. EZ’s sales come from bundling with computer manufacturers, and is thus dependent on Shanda’s agreements with computer manufacturers. While it has a number on board[6], Shanda does not have support from China’s #1 computer manufacturer, Lenovo. Such a type of agreement would likely dramatically improve sales figures for this new business.
Trends/Forces
Primary two MMORPGs are games nearing end of life, and new businesses are largely licensed from foreigners and unproven
Woool and Mir 2 are both very old titles, running on older graphics and slowly losing parts of their user base. The company does not provide a title breakout, but revenues from Mir II sequentially decreased in the third and fourth quarters of 2005, and revenues from Woool sequentially decreased in the fourth quarter of 2005 and first quarter of 2006 under the old pay-to-play business model.[7] Gamers are turning to other alternatives, such as World of Warcraft, operated in China by The9 (NCTY), that use more sophisticated 3-D graphics running on newer computers in Chinese internet cafes. As a result, in 2006 Shanda began exploring the free to play model in order to stay relevant to gamers in the short term while looking for another title to serve as the company's flagship game. To this end, it has been developing its own as well as licensing foreign games such as Dungeons and Dragons Online. It is necessary, but difficult, for the company to find a new "hit" title, and this will be dependent on a number of soft factors that accumulate into end-user appeal.
Business model transition to free-to-play appears to be generating more revenues, but further exposes company to individual games' popularity
The free-to-play model works in the case of Woool and Mir 2 because they were old games with large user bases. Since gamers had already spent a large amount of time in the game, they were "invested" in their characters and thus more willing to pay for premium content. The free-to-play model requires these "hard-core" users in order to pay for the operation of servers and to subsidize for the users who are not willing to put additional money into their characters. Acquiring these paying subscribers is dependent on each individual game's popularity, as gamers are less likely to invest in an online-gaming character without other people to socialize with and compete against online. Therefore an unpopular game will not ever recoup its initial capital outlays in the free-to-play model.
EZ media and entertainment business big potential for revenue growth
The EZ entertainment platform is a dramatic shift in the company's strategy. Although as of FY 2006-2007, it represents only a very small part of the company's revenues (~¥29MM out out of over ¥1B in FY 2006[8]), the platform is an ambitious one, seeking to put entertainment boxes in many homes. The company has not yet figured out how to best distribute the EZ platform, packaging it in an agreement with smaller Chinese computer manufacturers but without landing a deal with a truly major player. As such it has yet to see significant market penetration. The EZ platform competes to some extent with computers, delivering media content to end-users in their homes, at a lower price point. The device caters directly to home entertainment growth in the Rise of China's Middle Class.
Shanda exposed to currency fluctuations as it has operations earned in RMB for a USD denominated shares
Shanda's shares are listed on a U.S. exchange despite the fact it has no US operations. As such, an investor would be paying in US for operations in RMB. Based on valuation of the RMB, and the Chinese "float" on the exchange rate, an investor is also exposed to potential appreciation of the RMB against the dollar.
Competition
Primary competitors are Chinese operators of online-games. Although there is some competition from foreign companies, they are limited by Chinese law from achieving market penetration, since any Mainland Chinese venture has to be more than 50% Chinese owned/operated. Therefore, Shanda’s primary competitors are:
- Perfect World (PWRD) - Another developer and operator of online games in Mainland China, using its own technologies. Its main product is self-titled Perfect World.
- Netease.com (NTES) - the second largest company. However, concerns in 2008 surrounding the company indicate that its development pipeline is weak.
- The9 (NCTY) - The9 operates World of Warcraft in China on behalf of Vivendi Games. World of Warcraft is the world's most single popular MMORPG title.[9]
Market Share
In 2007, the Chinese MMO market size was estimated at $1.66 BN.[11] The major players in this market were Shanda, Netease, Giant Interact, The9, and Perfect World. Shanda's Market share was approximately 20% by revenue generation.
| China MMO Revenue Share ($MM) | 2007 |
| Shanda | 338 |
| Perfect World | 94.5 |
| Netease | 265 |
| Giant Interactive | 209 |
| The 9 | 175 |
| Other | 578.5 |
| Total | 1660 |
References
- ↑ Shanda Interactive "Risk Factors" pg. 4
- ↑ Shanda Interactive "Operating Results" pg. 45
- ↑ Shanda Interactive "Risk Factors" pg. 6-7
- ↑ SNDA 2009 20-F pg. F-3
- ↑ SNDA 2009 20-F pg. 69
- ↑ Shanda Interactive FY 2007 20-F "Our EZ Initiative" pg. 33
- ↑ Shanda Entertainment FY 2007 20-F "Risk Factors" pg. 6
- ↑ Shanda Interactive FY 2007 20-F "Other Net Revenues" pg. F-24
- ↑ GigaOm "Is WoW the Most Popular MMO" June 10, 2007
- ↑ SeekingAlpha "It's a Perfect World for Chinese Gaming Developers" October 3, 2007
- ↑ SeekingAlpha "It's a Perfect World for Chinese Gaming Developers" October 3, 2007
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