MMORPGs make up Shanda’s largest reporting segment, with 82% of revenues in FY 2007. However, these sales are largely earned from two MMORPG titles, Mir 2 and Woool, which were released in 2001 and 2003, respectively. 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 for premium content. 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%. However the margin structure has improved in 2007, with revenues growing 50% and margins expanding to 41%. 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
The company generates revenue in three primary reporting segments.
|Revenue Share||FY 2005||FY 2006||FY 2007|
|Casual Gaming Contribution||21%||18%||13%|
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 20-F
For the overall business, the effects of the business model change can clearly be seen below.
|¥MM||FY 2005||FY 2006||FY 2007|
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.
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.
Woool and Mir 2are both very old titles, running on 2-D 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.
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 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 ), 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 home entertainment growth in the Rise of China's Middle Class.
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.
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:
In 2007, the Chinese MMO market size was estimated at $1.66 BN. The major players in this market were Shanda, Netease, Giant Interact, The9, and Perfect World. Shanda's Market share was approximately 20% by revenue generation.
|China MMO Revenue Share ($MM)||2007|