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Shanda Interactive Entertainment (SNDA) |
| Revision as of 21:44, May 22, 2008 (edit) Ajhsieh - Sr. Director (Talk | contribs) (→Primary two MMORPGs are games nearing end of life (2001 and 2003), and new businesses largely licensed from foreigners and unproven) ← Previous diff |
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| - | [[image: SNDA.gif |left]] '''Shanda Interactive''' is a diversified online [[Video Game Industry|video-gaming]] operation catering to Mainland [[China]] . It operates both popular and sophisticated 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>, as well as casual games such as ''Maple Story'' and online chess that require less user-time to play and are typically less sophisticated<ref>[http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm#109 Shanda Interactive "Operating Results" pg. 45]</ref>. These games typically appeal to different markets and the diversification allows for maximum revenue generation. Shanda is also involved in associated business, licensing software to manage internet cafes in China, as well as promoting its new “EZ” platform, a home-entertainment set-top box that delivers entertainment content to to end users 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> |
| - | MMORPGs make up Shanda’s largest reporting segment, with 82% of revenues in FY 2007.<ref>[http://sec.gov/Archives/edgar/data/1278308/000130901408000087/exhibit1.htm Shanda Interactive FY 2007 Results Press Release, February 25, 2008]</ref> However, these sales are largely earned from two MMORPG titles, ''Mir 2'' and ''Woool'', which were released in 2001 and 2003, respectively.<ref>[http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm#109 Shanda Interactive "Information on the Company" pg. 25]</ref> These two titles are nearing their end-of-life and as such the company has begun licensing new games from foreign companies in efforts to find a new blockbuster hit, in addition to its other operations (casual gaming, associated gaming sales, as well as the EZ initiative). | + | ==Business Overview== |
| - | In 2007, Shanda was the #1 market player in the Chinese Online-gaming market by revenues<ref>[http://seekingalpha.com/article/71533-china-s-online-games-market-grab-a-joystick-and-enjoy-the-ride SeekingAlpha "It's a Perfect World for Chinese Gaming Developers" October 3, 2007]</ref> , despite its transition to a new business model, competing against [[The9 (NCTY)]], [[Netease.com (NTES)]], and other gaming operators that monopolize the time and money of many Chinese youths. The company chose to move from a pay-to-play model based on play time, to a new free-to-play model where revenue is earned from micro-transactions made in the game for premium content.<ref>[http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm#109 Shanda Interactive FY 2006 20-F "Business Overview" pg. 26]</ref> This move was largely made due to the end-of-life of their main titles. This move initially dented revenue and margins in 2006, lowering from ¥1,896.6MM (FY2005) to ¥1,654.5 (FY 2006), and operating margin from 33% to 23%.<ref>[http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm#109 Shanda Interactive FY 2006 20-F "Consolidated Statements of Operations and Comprehensive Income" pg. F-3]</ref> However the margin structure has improved in 2007, with revenues growing 50% and margins expanding to 41%.<ref>[http://sec.gov/Archives/edgar/data/1278308/000130901408000087/exhibit1.htm Shanda Interactive FY 2007 Results Press Release, February 25, 2008]</ref> as the new-business structure matured and gamers be came comfortable with the new transaction model. It remains to be seen how the title end-of-life and the development of new businesses will play out in Shanda’s future, but the markets' expectations for China’s #1 online-gaming player are very high | + | ===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>=== |
| - | ==Business Description and Financial Analysis== | + | 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. |
| - | The company generates revenue in three primary reporting segments. | + | |
| - | *'''MMORPG''' – 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. Due to the new free-to-play model, revenues are earned from paying subscribers who buy premium content. The Average Revenue per paying subscriber in 2006 and 2007 was ¥55.1 (FY 2006)<ref>[http://seekingalpha.com/article/26817-shanda-q4-2006-earnings-call-transcript Seekingalpha Shanda FY 2006 Earnings Call Transcript February 12, 2007]</ref> and approximately ¥58 (FY 2007)<ref>[http://seekingalpha.com/article/66017-shanda-interactive-entertainment-ltd-q4-2007-earnings-call-transcript?page=-1 Seekingalpha Shanda FY 2007 Earnings Call Transcript February 26, 2008]</ref>, respectively. However, this was accompanied by an increase in over number of paying subscribers due to new game launches, which led to a growth in MMORPG revenues. "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. | + | ===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>=== |
| - | *'''Casual Gaming''' – 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. The Average Revenue Per User is typically lower than that for MMORPG, for example, ¥18.1 in FY 2007<ref>[http://seekingalpha.com/article/66017-shanda-interactive-entertainment-ltd-q4-2007-earnings-call-transcript?page=-1 Seekingalpha Shanda FY 2007 Earnings Call Transcript February 26, 2008]</ref> and ¥12.4 in FY 2006.<ref>[http://seekingalpha.com/article/26817-shanda-q4-2006-earnings-call-transcript Seekingalpha Shanda FY 2006 Earnings Call Transcript February 12, 2007]</ref> | + | The company generates revenue in three primary reporting segments. |
| - | *'''Other '''– 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, with advertising earning about ¥21MM in 2006, and EZ earning ¥29MM in revenues.<ref>[http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm#111 Shanda Interactive FY 2007 20-F "Other Net Revenues" pg. F-24]</ref> EZ’s sales come from bundling with computer manufacturers , and sis 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. | + | *'''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. |
| - | [[image:SNDA_SegShare.png|frame|center|<ref>[http://sec.gov/Archives/edgar/data/1278308/000130901408000087/exhibit1.htm Shanda Interactive FY 2007 Results Press Release, February 25, 2008]</ref><ref>[http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm#109 Shanda Interactive FY 2006 20-F "Consolidated Statements of Operations and Comprehensive Income" pg. F-3]</ref>]] | + | *'''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. |
| - | {| {{table}} | + | |
| - | | align="center" style="background:#f0f0f0;"|'''Revenue Share<ref>[http://sec.gov/Archives/edgar/data/1278308/000130901408000087/exhibit1.htm Shanda Interactive FY 2007 Results Press Release, February 25, 2008]</ref><ref>[http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm#109 Shanda Interactive FY 2006 20-F "Consolidated Statements of Operations and Comprehensive Income" pg. F-3]</ref>''' | + | |
| - | | align="center" style="background:#f0f0f0;"|'''FY 2005''' | + | |
| - | | align="center" style="background:#f0f0f0;"|'''FY 2006''' | + | |
| - | | align="center" style="background:#f0f0f0;"|'''FY 2007''' | + | |
| - | |- | + | |
| - | | MMORPG|| ¥1,255.3 || ¥1,240.1 || ¥2,040.9 | + | |
| - | |- | + | |
| - | | Casual Gaming|| ¥403.0 || ¥302.8 || ¥329.7 | + | |
| - | |- | + | |
| - | | Other|| ¥238.3 || ¥111.6 || ¥96.7 | + | |
| - | |- | + | |
| - | | MMORPG Contribution||66%||75%||83% | + | |
| - | |- | + | |
| - | | Casual Gaming Contribution||21%||18%||13% | + | |
| - | |- | + | |
| - | | Other Contribution||13%||7%||4% | + | |
| - | |- | + | |
| - | | | + | |
| - | |} | + | |
| - | As seen above, MMORPG's make up the majority of the company's revenue contribution. The change in business plan affected both the MMORPG as well as the casual gaming segments, as the company moved to an all free-to-play model, decreasing their revenues. However, both segments have begun recovering in terms of revenue in 2007. The "Other" business segment has been declining, as a result of Shanda's decreased focus on a number of supplemental businesses, such as the internet cafe software. | + | |
| - | Fore more information about the company's gaming titles, see the [http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm 20-F] | + | *'''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. |
| - | For the overall business, the effects of the business model change can clearly be seen below. | + | [[IMAGE:SNDA-Segments2009.jpg]] |
| - | + | ||
| - | [[image:SNDA_RevOpInc.png|frame|center|<ref>[http://sec.gov/Archives/edgar/data/1278308/000130901408000087/exhibit1.htm Shanda Interactive FY 2007 Results Press Release, February 25, 2008]</ref><ref>[http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm#109 Shanda Interactive FY 2006 20-F "Consolidated Statements of Operations and Comprehensive Income" pg. F-3]</ref>]] | + | |
| - | {| {{table}} | + | |
| - | | align="center" style="background:#f0f0f0;"|''' ¥MM<ref>[http://sec.gov/Archives/edgar/data/1278308/000130901408000087/exhibit1.htm Shanda Interactive FY 2007 Results Press Release, February 25, 2008]</ref><ref>[http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm#109 Shanda Interactive FY 2006 20-F "Consolidated Statements of Operations and Comprehensive Income" pg. F-3]</ref>''' | + | |
| - | | align="center" style="background:#f0f0f0;"|'''FY 2005''' | + | |
| - | | align="center" style="background:#f0f0f0;"|'''FY 2006''' | + | |
| - | | align="center" style="background:#f0f0f0;"|'''FY 2007''' | + | |
| - | |- | + | |
| - | | Revenues|| ¥1,896.6 || ¥1,654.5 || ¥2,467.3 | + | |
| - | |- | + | |
| - | | Operating Income|| ¥621.9 || ¥377.6 || ¥1,005.6 | + | |
| - | |- | + | |
| - | | Operating Margin||33%||23%||41% | + | |
| - | |- | + | |
| - | | | + | |
| - | |} | + | |
| - | Revenue's decreased due to the new business mode change to free-to-play, and margin's decrease partially because gamers weren't prepared to pay for new content in the new game worlds. However, in FY2007 both revenue and margins increase dramatically, as gamers responded favorably to the new business model. | + | |
| - | + | ||
| - | ====Geographic Revenue Contribution==== | + | |
| - | Shanda's operations are conducted entirely in Mainland China as of FY 2008, and as such, it does not report any geographic break-out of revenues. | + | |
| ==Trends/Forces== | ==Trends/Forces== | ||
| - | ====Primary two MMORPGs are games nearing end of life (2001 and 2003), and new businesses largely licensed from foreigners and unproven==== | + | ====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. This is because gamers have more and more alternatives, such as ''World of Warcraft'', operated in [[China]] by [[The9 (NCTY)]], that use more sophisticated 3-D graphics that newer computers in Chinese internet cafes can take advantage of, as well as just general decreased popularity due to age. As a result, Shanda began exploring the free to play model in order to make them more relevant to gamers for the time being, while it looks for another title to serve as the company's flagship title. To this end, it has both 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. | + | ''Woool'' and ''Mir 2'' are both very old titles, running on older graphics and slowly losing parts of their user base. 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. 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==== | ====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 larger user bases. Since gamers had spent a large amount of time in the game already, 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 pay additional money into their characters. Acquiring these paying subscribers is dependent on each individual game's popularity, as gamers would be less likely to invest in an online-gaming character without other people to socialize with and compete against online. Therefore an unpopular game would not ever recoup its initial capital outlays in the free-to-play model. | + | 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 ¥1BN in FY 2006 <ref>[http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm#111 Shanda Interactive FY 2007 20-F "Other Net Revenues" pg. F-24]</ref>), the platform is an ambitious one, seeking to put entertainment boxes in many homes. The company has not yet figured out how to best distributed it, currently packaging it via agreement with Chinese computer manufacturers, but without landing a deal with a truly major computer manufacturer. As such it has yet to see significant market penetration. Moreover, the EZ platform to some extent competes with computers, delivering media content to end-users in their homes, at a lower price point due to a less flexible device. That being said, the device caters directly to [[Growth of Home Entertainment Sector|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== | ==Competition== | ||
| - | Primary competitors are Chinese operators of online-games. Although there is some competition from Foreigners, 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: | + | 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. | *'''[[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. | *'''[[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 (EPA: VIV)|Vivendi Games]]. ''World of Warcraft'' is the world's most single popular MMORPG title. | + | *'''[[The9 (NCTY)]]''' - The9 operates ''World of Warcraft'' in China on behalf of [[Vivendi (EPA: VIV)|Vivendi Games]]. ''World of Warcraft'' is the world's most single popular MMORPG title.<ref>[http://gigaom.com/2007/06/10/is-wow-the-most-popular-mmo/ GigaOm "Is WoW the Most Popular MMO" June 10, 2007]</ref> |
| - | + | ||
| - | ===Market Share=== | + | |
| - | In 2007, the Chinese MMO market size was estimated at $1.66 BN.<ref>[http://seekingalpha.com/article/71533-china-s-online-games-market-grab-a-joystick-and-enjoy-the-ride SeekingAlpha "It's a Perfect World for Chinese Gaming Developers" October 3, 2007]</ref> The major players in this market were Shanda, Netease, Giant Interact, The9, and Perfect World. Shanda's Market share was approximately '''20%''' by revenue generation. | + | |
| - | + | ||
| - | {| {{table}} | + | |
| - | | align="center" style="background:#f0f0f0;"|'''China MMO Revenue Share ($MM)''' | + | |
| - | | align="center" style="background:#f0f0f0;"|'''2007''' | + | |
| - | |- | + | |
| - | | '''Shanda''' ||338 | + | |
| - | |- | + | |
| - | | Perfect World||94.5 | + | |
| - | |- | + | |
| - | | Netease||265 | + | |
| - | |- | + | |
| - | | Giant Interactive||209 | + | |
| - | |- | + | |
| - | | The 9||175 | + | |
| - | |- | + | |
| - | | Other||578.5 | + | |
| - | |- | + | |
| - | | Total||1660 | + | |
| - | |- | + | |
| - | | | + | |
| - | |} | + | |
| - | + | ||
| - | + | ||
| - | [[image:ChinaMMOmshare.png|center]] | + | |
| ==References== | ==References== | ||
| Line 117: | Line 42: | ||
| [[category:China]] | [[category:China]] | ||
| [[category:Video Games]] | [[category:Video Games]] | ||
| + | [[Category:Mature]] | ||
Current revision
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. 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. 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.
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.[7]
References
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