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Shanda Interactive Entertainment (SNDA) |
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WIKI ANALYSIS
Shanda Interactive is a diversified online-gaming operating 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, as well as casual games such as Maple Story and online chess that require less user-time to play and are typically less sophisticated. 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.
MMORPGs make up Shanda’s largest reporting segment, with _% of revenues in FY 2007. However, these sales are largely earned from two MMORPG titles, Woool and Mir 2, which were released in 2001 and 2003, respectively(CITE). 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, 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, where gamers pay for premium content. This move was largely made due to the end-of-life of their main titles. This move initially dented revenue growth and margins in 2006, (numbers) but the margin structure has improved in 2007 as the new-business structure matured and gamers ecame comfortable with it. It remains to be seen how the end-of-life and new structure, as well as the development of new businesses, will play out in Shanda’s future, but the markets expectations China’s #1 player are very high
Business Description
- MMORPG – The MMO RPG segment caters to “hardcore” Chinese gaming youth, with immersive typically require and command a significant amount of time from Chinese youths. Due to the new free-to-play model, revenue earned as based on paying subscribers who buy content, as well as the average revenue earned per subscriber. 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 wella s earnings earned from internet-revenues.
- 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 and the internet café software each earnings about 80MM rmb in 2006, and EZ earnings about 20MM rmb in revenues. EZ’s sales come from bundling with computer manufacturers , and sis thus dependent on Shanda’s agreement with computer manufacturers. While it has a number on board, Shanda does not have support from China’s #1 computer manufacturer, Lenovo. Such an agreement would likely dramatically imrove sales figures for this new business.
Fore more information about the split between licensed/unlicensed, see the 20-F
Financial Analysis
Margin structure changes due to 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:
References
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