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Shanda Interactive Entertainment (SNDA) |
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WIKI ANALYSIS
Shanda was the #1 market player in the Chinese Online-gaming market by 2007 revenues[4], beating out competitors like The9 (NCTY), Netease.com (NTES), and other gaming operators that monopolize the time and money of many Chinese youths. MMORPGs make up Shanda’s largest reporting segment, with 82% of revenues in FY 2007.[5] These sales are largely earned from two MMORPG titles, Mir 2 and Woool, which were released in 2001 and 2003, respectively.[6] These two titles are nearing the end of their lifespans, and so the company has begun licensing new games from foreign companies in efforts to find a new blockbuster hit.
In 2006, Shanda 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 additional content.[7] Players download the game for free, but can buy upgrades to their character's physical appearance and game-playing abilities. 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 became comfortable with the new transaction model.
Business Description and Financial Analysis
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)[14] and approximately ¥58 (FY 2007)[15], 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[16] and ¥12.4 in FY 2006.[17]
- 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.[18] 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[19], 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.
| Revenue Share[20][21] | 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% |
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[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.
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
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. 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[24]), 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 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:
- 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.[25]
Market Share
In 2007, the Chinese MMO market size was estimated at $1.66 BN.[27] The major players in this market were Shanda, Netease, Giant Interact, The9, and Perfect World. Shanda's Market share was approximately 20% by revenue generation.
| China MMO Revenue Share ($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
- ↑ SeekingAlpha "It's a Perfect World for Chinese Gaming Developers" October 3, 2007
- ↑ Shanda Interactive FY 2007 Results Press Release, February 25, 2008
- ↑ Shanda Interactive "Information on the Company" pg. 25
- ↑ Shanda Interactive FY 2006 20-F "Business Overview" pg. 26
- ↑ Shanda Interactive FY 2006 20-F "Consolidated Statements of Operations and Comprehensive Income" pg. F-3
- ↑ Shanda Interactive FY 2007 Results Press Release, February 25, 2008
- ↑ Shanda Interactive FY 2007 Results Press Release, February 25, 2008
- ↑ Shanda Interactive FY 2006 20-F "Consolidated Statements of Operations and Comprehensive Income" pg. F-3
- ↑ Shanda Interactive FY 2007 Results Press Release, February 25, 2008
- ↑ Shanda Interactive FY 2006 20-F "Consolidated Statements of Operations and Comprehensive Income" pg. F-3
- ↑ Seekingalpha Shanda FY 2006 Earnings Call Transcript February 12, 2007
- ↑ Seekingalpha Shanda FY 2007 Earnings Call Transcript February 26, 2008
- ↑ Seekingalpha Shanda FY 2007 Earnings Call Transcript February 26, 2008
- ↑ Seekingalpha Shanda FY 2006 Earnings Call Transcript February 12, 2007
- ↑ Shanda Interactive FY 2007 20-F "Other Net Revenues" pg. F-24
- ↑ Shanda Interactive FY 2007 20-F "Our EZ Initiative" pg. 33
- ↑ Shanda Interactive FY 2007 Results Press Release, February 25, 2008
- ↑ Shanda Interactive FY 2006 20-F "Consolidated Statements of Operations and Comprehensive Income" pg. F-3
- ↑ Shanda Interactive FY 2007 Results Press Release, February 25, 2008
- ↑ Shanda Interactive FY 2006 20-F "Consolidated Statements of Operations and Comprehensive Income" pg. F-3
- ↑ 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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