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May 11, 2007 1:16 am

Shanda resumes the role of player one

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There have been times in the last few years when China’s online games business has been little fun for investors in Shanda Interactive Entertainment, which saw its share price slump from more than $40 at the start of 2005 to just $12 by mid-2006.

Perhaps even more painfully for Chen Tianqiao, founder and chairman, fellow Nasdaq-listed rival Netease.com usurped Shanda’s long-held title as China’s leading provider of “massively multiplayer online role playing games”, or MMORPGs.

But in an interview at Shanda’s leafy Shanghai headquarters, a cheerful Mr Chen insists Netease’s dominance was a brief aberration that game revenues for the first quarter will show is already history.

“Shanda has been number one for five years of the six-year history of online gaming in China. And now Shanda is number one again,” he says. “I am extremely confident.”

For Shanda and Mr Chen it has been a remarkable turnround.

Behind last year’s loss of investor faith lay in part the failure of in-house efforts to develop big-ticket new MMORPGs to replace ageing swords-and-sorcery games .

Netease seemed to be doing much better at building its own hit titles, while it was another Nasdaq-listed rival, The9, that won the affections of the Chinese role-playing game elite with a licenced local version of US-developed blockbuster World of Warcraft.

Meanwhile, Mr Chen's ambitious bid to become a leading supplier of entertainment through China's hundreds of millions of television sets was foundering amid regulatory opposition and consumer indifference.

But Mr Chen says that long before sales began to slow, he had been preparing a fundamental shift in the way Shanda makes money. Instead of charging its millions of users for the time they spend immersed in its vast online worlds, Shanda would, from late 2005, let them play for free while trying to sell them optional virtual goods and services.

South Korean games companies had already pioneered this "free-to-play" approach – which Mr Chen prefers to call "come-stay-pay" – and it offers a lower barrier of entry to new players in an already crowded market, while removing the upper limit on revenues per user.

If game playing by subscription fee is like a buffet restaurant, then come-stay-pay is like a shopping mall, says Mr Chen.

"At a buffet...you can eat as much food as you want – but you have to pay a set Rmb100," he says. "In a shopping mall you can just wander around and only buy if you see some clothes you like – (but) a rich person might spend Rmb100,000 in a moment."

The transition was hard, however. “[The] punishment was very heavy,” says Mr Chen, blaming the initial loss of subscription income for letting Netease take first place in the market.

But he says Shanda games are now generating record revenues even though only
5 per cent of its registered users pay it anything at all. And the company is gearing up to monetise the remaining 95 per cent by selling “in-game advertising”.

Mr Chen, who sees Shanda as a media company rather than a mere games operator, is also moving to diversify his product line, with more "casual" online games and new MMORPGs. Shanda is even planning a title inspired by the popular US game Second Life.

The 34-year-old entrepreneur, once dubbed China's Bill Gates, has certainly not been humbled by Shanda's recent woes. He dismisses Netease and The9 as stuck with the wrong business model and an inability to balance in-house game development and licencing.

Unsurprisingly, they disagree. While declining to comment on comparative sales, a Netease official says the Guangzhou-based company currently boasts the world's biggest online game, Fantasy Westward Journey, with up to 1.5m players online at the same time.

Meanwhile, The9 points out that it is also producing its own games to operate alongside World of Warcraft, with up to 400,000 players at a time taking part in online testing.

Edward Yu, chief executive of Analysys International, says Shanda’s success with the free-to-play model will put increasing pressure on its Nasdaq rivals. “Shanda has very good momentum and has already passed Netease,” he says.

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