Update on Shanda Entertainment and MMORPG’s

Shanda is the largest online game company in China and currently manages more than 20 online games. Shanda’s products range from massively multiplayer online role-playing games (MMORPGs) and casual games to the family entertainment platform and online game platform. In 2008 Q1 net revenue rose by 9.2% QoQ and operating income increased 11.9% QoQ.

MMORPGs remained the most profitable line and generated approximately 81% of its quarterly revenue. In addition, revenue from casual games grew by 36.5% QoQ, partially due to the Chinese New Year and student holiday. Under the Come-Stay-Play (CSP) revenue model, Shanda’s active paying accounts (APA) have increased by 19.2% to 6.03 million, but at a low conversion rate of 8% (to paying customers).

Meanwhile average monthly revenue per active paying account (ARPU) of MMORPGs decreased 10.10%. Also, Shanda has decided to delay the launch of Tianxia in consideration of the recent catastrophe in Sichuan. A further concern about the business model Shanda will apply to the launch of Tianxia brings more uncertainties about the game’s profitability. Looking at competition, there are nine major game operators in China at present with ever increasing competition.

And just how strong competition remins, let’s just take a look at operating and net margins of four large game operators: Shanda Internactive (SNDA), The9 Ltd (NCTY), NetEase Inc (NTES) and Giant Interactive (GA).

In the 1st Qtr 2008, revenues from MMORPGs and casual games increased by 6.3% and 36.0% QoQ, respectively. The sharp rise in casual games was partially driven by the seasonal effect, the Chinese New Year and school holiday. A 13% fall in other revenue was caused by loss from some subsidiaries. Furthermore, Active Paying Accounts (APA) and average monthly revenue per active paying account (ARPU) for casual games climbed 21.3% and 12.1% QoQ, correspondingly. Although APAs of MMORPGs increased by 18.30%, a low spending from new APAs of MMORPGs diluted its ARPU, leading to a decrease of 10.10% in MMORPGs’ ARPU.

The problem Shanda faces is twofold. For one, total revenue growth of 9 percent on average is slow. China’s online gaming industry is the most profitable and the largest among all internet business segments, overtaking online advertisement. Assuming Chinese internet user growth of 15% during the same period, the 9 percent rise is lagging behind.

The other problem for Shanda is the composition of the revenue growth. As the following piechart displays, Shanda’s largest and most profitable gaming segment, the MMORPGs segment, grew only by 6 percent! This segment made Shanda China’s largest game operator and if this segment gets ill, it will certainly have a tremendous impact on the rest of the company.

Read on here!

Published by Reinout te Brake

Reinout is a games investor and strategic business consultant specializing in the games industry. Reinout established his credentials through his own successful investments, start-ups, consulting and (advisory) board positions that led through time to strong bonds with key stakeholders in this fast paced industry. He is known for his outstanding results in the gaming industry. He has worked with many game studios around the globe and is therefore well known in the international gaming industry. Check out his games podcast; https://www.game-consultant.com

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