Shanda Interactive Entertainment (SNDA)

	SUMMARY

	BULLS

	BEARS

	TOPICS

	DATA CENTRAL

	STOCK CHART

	SEC FILINGS

	BALANCE

	INCOME

	CASH FLOW

Revision as of 16:49, May 22, 2008

Shanda Interactive is a diversified online video-gaming operation catering to Mainland China . It operates both popular and sophisticated MMORPGs (massive multiplayer online role play games) such as the titles Archlord, Woool and Mir 2^[1], as well as casual games such as Maple Story and online chess that require less user-time to play and are typically less sophisticated^[2]. 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.^[3]

MMORPGs make up Shanda’s largest reporting segment, with 82% of revenues in FY 2007.^[4] However, these sales are largely earned from two MMORPG titles, Mir 2 and Woool, which were released in 2001 and 2003, respectively.^[5] 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).

In 2007, Shanda was the #1 market player in the Chinese Online-gaming market by revenues^[6] , 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.^[7] 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%.^[8] However the margin structure has improved in 2007, with revenues growing 50% and margins expanding to 41%.^[9] 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

1 Business Description and Financial Analysis
2 Trends/Forces
3 Competition
- 3.1 Market Share
4 References

Business Description and Financial Analysis

The company generates revenue in three primary reporting segments.

MMORPG – The MMO RPG 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)^[10] and approximately ¥58 (FY 2007)^[11], 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.

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^[12] and ¥12.4 in FY 2006.^[13]

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.^[14] 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^[15], 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.

^[16]^[17]

Revenue Share^[18]^[19]	FY 2005	FY 2006	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%

Fore more information about the companies gaming titles, see the 20-F

For the overall business, the effects of the business model change can clearly be seen below.

^[20]^[21]

¥MM^[22]^[23]	FY 2005	FY 2006	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.

Trends/Forces

Primary two MMORPGs are games nearing end of life (2001 and 2003), and new businesses largely licensed from foreigners and unproven

Business model transition to free-to-play appears to be generating more revenues, but further exposes company to individual games' popularities

Government intervention on online-gaming and internet a risk to revenue growth

EZ-Play new business big potential for revenue growth

Shanda exposed to currency fluctuations as it has overvalued operations earned in RMB for a USD denominated shares

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:

Market Share

In 2007, the Chinese MMO market size was estimated at $1.66 BN.^[24] 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

Retrieved from "http://www.wikinvest.com/stock/Shanda_Interactive_Entertainment_(SNDA)"

Categories: Internet | Technology | Internet Software & Services | China | Video Games

Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.

Mobile | Advertise | Licensing & Partnerships | Blogger Tools | Jobs

 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).
-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 "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 "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
+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 Description==
+==Business Description and Financial Analysis==
 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.
+[[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>]]
+{| {{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%
+|-
+|
+|}
 Fore more information about the companies gaming titles, see the [http://sec.gov/Archives/edgar/data/1278308/000114554907001122/h01302e20vf.htm 20-F]
-==Financial Analysis==
+For the overall business, the effects of the business model change can clearly be seen below.
-Margin structure changes due to business model
+[[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.
 ==Trends/Forces==
 ====Primary two MMORPGs are games nearing end of life (2001 and 2003), and new businesses largely licensed from foreigners and unproven====