APRIL 6, 2012 •

 

 

 

 

 

These are momentous times for online game companies based in China. Their home market continues to show impressive growth, and the quality games that are coming out of the country are well suited for distribution throughout Asia and beyond. As one of China’s big three, Shanda Games is constructing the foundation for a run at first place through an ambitious program of developing new franchises and growing into new platforms and networks.

The company well understands that old ways of engaging users must be augmented by different means to reach consumers with different circumstances. That is why almost 12% of Shanda titles now employ micro-client downloads to make it easier for people to get into their games. For the same reason, Shanda is also boosting its available browser game business.

Giving DFC a better picture of how Shanda Games has poised itself for achieving greater in its home market, as well as how the publisher is expanding into new markets, is chief executive officer Alan Tan.

DFC: Please give us an overview of Shanda Games today. How did the company get started, what are your major products, and how many consumers do you serve?

AT: Shanda Games Limited is a leading online game developer, operator and publisher in China. Our online game business was founded in 2001 In November 2001, we launched our first MMORPG, Mir II, which quickly became most popular online game in China.  Since then, Shanda Games continued to seek to provide fun and quality content to game players and grew into a company that provide a leading portfolio of online games to users. On September 25, 2011, Shanda Games was listed on NASDAQ under the ticker GAME.

We offer a diversified game portfolio, which includes some of the most popular massively multiplayer online role-playing games (MMORPGs) and advanced casual games in China targeting a large and diverse community of users. Shanda has one of the deepest and most diversified portfolios of online games in China with 37 games in the platform and 17 games in the pipeline. Our games are developed in-house, co-developed with world-leading game developers, acquired through investments or licensed from third parties.

Our long-term sustainable growth will be fueled by our continued ability to leverage on Shanda Games’ unique operational experience, innovative technology and strong pipeline, and we believe we are now especially well positioned in the ever-evolving online gaming industry.

As to overseas expansion, Shanda is capitalizing on its extensive experience and expertise in the industry to move forward with our overseas expansion plans through our global service platform, or GSP. This GSP is critical to our overseas aspirations as it brings Shanda Games to foreign markets and allows us to launch games abroad. We currently export to over 49 countries and regions globally and are seeing a significant increase in revenue and new account creations abroad. Our overseas revenue increased 49.3% YoY to RMB72.1 million in 2011Q3.

On August 17, 2011, Dragon Nest was the first game to be launched by our Southeast Asia GSP in Singapore and Malaysia where we began directly operating the game to great fanfare. Our successful entrance into the global market not only highlights our superior R&D capabilities but also our successful strategies for investments and acquisitions abroad. Along with our All Star and All Platform strategies, we plan to launch our diverse portfolio of games, including MMOs, SNGs, SMGs and web games abroad to capture global market share and increase Shanda Games’ brand recognition.

In addition to launching in-house developed games abroad, we have taken advantage of opportunities to license our games to foreign operators. On July 26, 2011 Nexon America began open-beta testing for Dragon Nest in the U.S. On September 9, Game on began open-beta testing for our 3D fantasy MMORPG Luvinia Online in the U.S. In the future, we will make full use of our content to license more games to American market.

As of September 31, 2011, we operated 37 online games in China. Mir 2 family, Woool Family and Dragon Nest contributed 44%, 17% and 13% of total revenue in the third quarter, respectively.

As for our users, the average Monthly Active Users (average MAUs) for all games operated in China were 21.0 million in Q3 2011.Average Monthly Paying Users (average MPUs) for all games operated in China were 4.6 million in Q3 2011.

DFC: Moving into 2012, what strategic opportunities are presenting themselves to Shanda Games?

AT: In China, Internet is gaining popularity rapidly and the number of netizens continues to grow. By the end of 2010, the Chinese netizens numbered 457million, among whom 110 million were gamers, making up 24%. The annual growth rate of gamers’ population is 58.7%. Shanda Games will continue its efforts to launch high-quality games that meet the demands of players with various preferences.

With the growing popularity of smartphones and the mobile Internet, the entertainment platforms for game players have become more diversified. Shanda Games is intensifying its development and investment in this space, and intend to develop more games tailored to the mobile platform.

The integration of the global economy has created more opportunities for Shanda Games to bring its rich experience in different regions, to replicate its success, and provide more interesting game experience to more gamers.

DFC: And conversely, what are the major challenges facing Shanda?

AT: Market diversity and the ever-changing demands of gamers are the two major challenges for the industry, and for Shanda Games. In the past decade, with our extensive industry experience, diversified product lines, continued innovation and edge-cutting technology, Shanda Games has maintained its competitive advantages in this ever-changing market, and has continuously meeting various demands from our gamers, while taking a lead in market development.

Right now, social-networking and mobile devices are the biggest major forces impacting the market landscape of online game market, and there is also a shift in gamers demand. Our Triple-A strategy (All-Star, All-Platform, All-Region) is exactly designed to ride on the tide to meet the market changes. We are dedicated to making both popular games and good services to achieve continuous success.

DFC: The last time we looked, both Shanda and Netease held market share just under 20% each in China. What is your strategy for getting comfortably past Netease, and making strong gains on Tencent, which is currently at around 30% market share of the online gaming market?

AT: In 2010, we underwent adjustment for some of the major games and did not launch any new games, which was the reason for a decline in market share. However, since Q3 2010, our legacy games Mir 2 and Woool have stabilized. Moreover, we have successfully launched new games, such as Dragon Nest, Legend of Immortals and Mir3.

Looking into 2012, we will release a handful of high-quality titles including 3D first-person shooters (FPS) Point Blank and Rapid Fire, Next-generation MMORPG platform World Zero, and 3D MMORPGs Dragon Ball Online and Final Fantasy XIV.  At the same time, we also pay attention to mobile games since more and more gamers tend to access online content and play games through mobile devices. In the fourth quarter of 2011, we started beta testing of four mobile games, including Heat on, Magic World, and mobile versions of Latale and Woool on our mobile game platform Gamelive. And we expect to launch these titles in the year 2012.  Furthermore, we export our games to over 49 countries and regions globally and are seeing a significant increase in revenue and new account creations abroad. For example, Dragon Nest is one of the top online games in Singapore, Malaysia, Japan, Taiwan and many other regions. With all those efforts, we believe we will maintain a leading position in the market.

Our primary target for running the business is to provide best content and service to our users. We believe if we can achieve this target, we will maintain a leading position in the industry finally.

DFC: What have been the major trends and changes in the online game market in China the last 10 years?  How has Shanda adapted to these trends and changes?

AT: The emergence of new business model:  Shanda Games was the first to launch the free-to-play model, and that was in November 28, 2005. Later in 2006 and 2007, numerous free-to-play games, instead of time-based games, appeared in China market, and ultimately, that has become the mainstream business model in China’s online game market.

Content enrichment and fierce competition: In the past decade of online game development, we have seen growing number of gamers and game products. High-quality games and innovative gaming techniques have become the two major directions that game development is heading into. Our recently launched games fit in with those two directions, and that’s why we have succeeded. For example: Dragon Nest provides innovative 3D action-based game play; Legend of Immortal incorporates social network functions; Mir3 offers innovative micro-client to users.

More social networking features: The popularity of social network sites has changed the user pattern and habit a lot. We have also adopted a “communitization” strategy to incorporate social network functions into our MMOs to enhance gameplay and user stickiness.

Going Mobile:  More and more users tend to access online content and play games through mobile devices in China, regardless of where they are. We intend to capitalize on this massive revolution in online social interaction and gaming market. We began beta testing of four mobile games, which include Heat on, Magic World, and mobile versions of Latale and Woool, on our mobile game platform “Gamelive” in the fourth quarter of 2011, and expect to launch these titles in the next 6 months.

Overseas expansion: Certain online game companies in China have developed a number of high-quality games and yielded good results in the overseas markets. In 2008, Shanda Games also started to speed up exporting its games. Today, our games have a global reach of 49 countries and regions. In 2011Q3 our other revenues (with is primarily overseas revenues) was 11.4 USD million, representing a year-over-year growth rate of 49.3%.

DFC: What are the current numbers on broadband penetration, and PC penetration in China? Also, what is the status of online and mobile payment systems? What kind of growth are you seeing and how are new payment options helping to boost online games?

AT: As of June 30, 2011, Internet population in China is 505 million, broadband user number is 390 million, representing a penetration rate of 29.1%, based on a Chinese population of 1.34 Billion.

For payment system, there are mainly three payment options for our gamers, including online payment via bank card, E-Sales (Virtual Game Card distributed mainly via Internet Cafes), and physical game cards distributed mainly through retail distributers. Please see the distribution of payment channels as follows:

 

 

 

 

 

 

 

 

PC-based payment system for online games is quite mature in China, but mobile payment system is still under development.

DFC: As recently as your third quarter reporting, Legend of Mir II accounted for 44% of your revenue. That’s a fairly mature title. How do you explain the continued popularity of the game, and how long can it last?

AT: The popularity of Mir 2 is mainly due to our continued efforts to release new expansion packs and game content that fits users’ demand.  The game releases fresh content from time to time in order to maintain and attract users. We will continue to add into new features into Mir2 by putting out updates and expansion packs.  Our target is to make the Mir 2 stable going forward.

DFC: Of the three games turning in the most significant growth rates, two of them – AION and Dragon Nest – are originally Korean games, while Legend of Immortals was developed by Shanda. Why do Korean titles continue to be so popular in China despite the wealth of online games now being created by Chinese studios?

AT: One importance reason is that we have established a very good partnership with major Korean game developers and we are always in close talks for high-quality contents. In addition, our strong operational expertise and distribution power as well as the rich experience in cooperating with developers, have served us well in localizing and operating these titles successfully in China.

After we acquired Eyedentity Games in September 2010, Eyedentity has been continuously delivering strong results and is expected to release new titles in 2012. This does not only prove our ability to manage a Korean developer well, but also enhanced our overseas R&D capability to a large extent.

DFC: When you license an AION from NCsoft, what steps must be taken to localize such titles for Chinese consumers?

AT: This is fundamental work at its core: translating game content. We incorporate more Chinese elements into Aion by cooperating with NCsoft to optimize gamers’ experience.

Then we add more content and community elements into Aion to make it meet Chinese gamers’ appetite. After that we enhance the anti-cheating and anti-hacking system to make Aion fit into Chinese market.

DFC: What percentage of the games Shanda operates in China are licensed from other markets, compared to the number of titles you develop internally?  Will that percentage stay constant moving forward, or do you anticipate a larger proportion in either category?

AT: The sources of our online games content include in-house development, license, investment/acquisition and others.

 

 

 

Twelve of the 13 licensed games are from Korea one is from Taiwan. Our target is to provide high-quality games to our users, no matter it is developed in-house or sourced from licensing, acquirement/investment, or other potential methods. Thus, we do not have a specific proportion target in the first place, it is rather determined by the quality of the titles finally.

DFC: Mobile devices have become a significant focus for Shanda, please tell us about your mobile platform. Which games are you directing at mobile users, and how many titles do you expect to push to mobile devices in the next 12 months?

AT: We believe over time, with the change of gamers’ habits and the development of mobile payment systems, more advanced social games and online games on mobile platforms will grow fairly rapidly. We started beta testing of four mobile games, including Heat on, Magic World, and mobile versions of Latale and Woool, on our mobile game platform Gamelive. And we expect to launch these titles in the year 2012.  We have dozens of mobile games from in-house development, licensing and investment to be announced for year 2012.

DFC: What kind of growth rates are you experiencing with your mobile games as a group?

AT: We expect the growth rate of our browser game business will be pretty high given that the revenue base is very small now.  It’s still a bit early to give a concrete projection at the moment because the business has just started.

DFC: In developing your “All Platform Strategy,” does that mean the same titles and gameplay across all platforms, or different versions of the same franchises on various devices?

AT: We will offer different versions of the same franchises on various devices to tailor for different preferences in different markets. For example, the mobile version for Woool is tailored for mobile devices and offers different gameplay compared with the original Woool that based on PC platform. In addition, we also develop different types of games that are suitable for each platform and device.

DFC: We have noticed that you are talking more about publishing online browser games in addition to titles that require client downloads.  What is driving this decision? Are you hoping to attract consumers not already gamers? And how significantly will you devote resources toward browser games?

AT: Internet browsers have become another important median through which our online games can be accessed. The current technology and bandwidth also allows us to provide complex browser games to users compared with several years ago. We have thus begun to focus our resources on launching browser games. The browser games business is growing pretty fast in China and has already had a well-established revenue models.

Given gamers can play a browser game without downloading a client, it’s much easier for them to log into the game and play, so the churn rate before they started playing the game will be lower compared with a client based game. We expect the browser games will not only attract non-Shanda Games players, but also attract new users that not already gamers.

In addition to develop brand new browser game titles, we have also begun to develop micro-client and web versions of our existing MMORPGs, including some of our legacy games such as Mir2, Latale and Crazy Kart, and the newly-launched Mir3. This not only enables MMORPGs to be downloaded and played as if they were browser games, but also provides browser games with the better graphics and gameplay that define MMORPGs. We believe this approach will lower the barriers to entry for MMORPGs, creating a simple, yet effective way to reach out and introduce a new generation of gamers to our core content.

DFC: What kind of growth rates are you experiencing with your browser games as a group?

AT: We expect the growth rate of our browser game business will be pretty high given that the revenue base is very small now.  It’s still a bit early to give a concrete projection at the moment because the business has just started.

DFC: A great many other game companies in China are also focusing on mobile and browser games these days. How will Shanda differentiate itself from these competitors?

AT: We believe that over time gamers who play social and mobile games will begin demanding higher quality and increasingly interactive games. Our expertise in the MMO field should give us advantage to ride on this trend and to replicate our success. For example, given the experience we learnt from operating MMOs, we will be able to provide deeper storyline, better game play and more interactions between users. We also have a better knowledge of monetize the user base and prolong the game lifecycle.

Also, we have collected rich operational resources by running MMOs, including extensive distribution channels, customer management systems, data mining systems, anti-cheating technologies, in-game economic management system, etc. All these resources will serve as a big point of leverage for us.

In addition, as a member of Shanda Group, Shanda Games will leverage our group’s resource and platform as well.  For example, we can develop games based on popular online novels from Shanda Literature, share technical support and channel support from Shanda Online, and share marketing support from online video websites like Ku6.

DFC: As of the third quarter, Shanda’s net revenue grew 23.4% year over year to $212.9 million. What product lines contributed most to that revenue growth?

AT: The year over year growth is mainly attributed to new games launched including Dragon Nest and Legend of Immortals, and the steady growth of two legacy titles Mir2 and Woool. As Q4 is normally a weaker season with fewer holidays, we expect our revenues to be approximately flat quarter-over-quarter.

DFC: Many of your most popular online games were not developed by Shanda. Are you content with that strategy, or would you rather rely more on your own IP moving forward. And if you do want to rely more on your own content, do you prefer reaching that goal internally, or by more acquisitions such as Eyedentity Games?

AT: We believe good game titles can come from everywhere and do not necessarily have to be our own IP. Going forward, we will continue to source game titles through multiple channels including in-house development, licensing, investment and acquisition, and platform approach.

DFC: Both Legend of Mir 3 and Sudden Attack were launched in China by other firms. Please describe what measures must be undertaken for a successful relaunch by Shanda. What are the issues with database migration, etc.? What kinds of marketing are needed to ease the transition, and how extensive does that marketing need to be? How do you improve services compared to the previous operators, and grow the user base?

AT: We simply relaunch the game on our own servers so there are no issues with database migration. We put out online promotion and advertisement on several major online portals including Sina Weibo, Tencent Weibo and BBS.

We also will revamp the original version by adding new content and improving usability. In particular, we offer micro client for Mir3 to reduce the download time and hence lower the entry barriers for the game. Thanks to those efforts, Mir3 and Sudden Attack have managed to galvanize original Mir3 and Sudden Attack players to return to the games and attract a new generation of users.

DFC: Shanda’s online games in China contributed $201.5 million to your third quarter net revenue. Non-Chinese revenue generated was $11.4 million.  Please give us a rundown of these other markets. Where else are you operating, and what is your market share like?

AT: We currently export to 49 countries and regions, including:

●  Asia: Korea, Japan, Singapore, Malaysia, Taiwan, Hong Kong, Philippines, India, Macao, Indonesia, Thailand, Vietnam, United Arab Emirates, Saudi Arabia, Jordan, Sudan, Yemen, Egypt, Algeria, Morocco and Tunisia.

●  North America: Canada and America.

●  Europe: Russia Federation, Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova, Tajikistan, Turkmenistan, Ukraine, Uzbekistan, CIS countries Ukraine, Belarus, Azerbaijan, Tajikistan, Kyrgyzstan, Moldova, Abkhazia, South Ossetia and The Baltic States

●  South America : Brazil

Among these countries and regions, Korea, Taiwan and Japan account for the majority of non-Chinese revenue. Our market share is fairly small in the rest of the markets as we are in early stage of development in these markets.

DFC: What percentage of that $11.4 million is accounted for by advertising and game licensing?

AT: Approximately 70% of other revenue is accounted for by advertising and game licensing. The other 30% is mainly from direct game operation in overseas markets.

DFC: How do you define “micro-client?”

AT: A comparably small client with a size of less than 100MB. Gamers can log into the game quickly and play the game while downloading the remaining elements. Now we have 6 games with micro-clients such as Mir 2 Return, Mir2 Side Story, Woool: Raider of Gems, Latale, Crazy Kart and Mir 3.

DFC: As we understand it, one reason you are making increasing use of micro-clients is that you perceive an inherent barrier with gamers unwilling to switch from games they have installed already because they dread having to download additional full clients. What percentage of Chinese gamers really feel deterred from trying new content?

AT: The reason why we are making increasing use of micro-clients is our data and experience suggests that for every additional 500MB added to a client translates into a 4% drop in the gamers’ rate of registration to login.

DFC: What percentage of your titles use full clients, micro-clients or are browser-based?

AT: The current breakdown is:

81.4% of our titles use full clients

11.6% of our titles use micro-clients

7.0% of our titles use browser-based

DFC: What is the strategy behind your virtual item sales?  What items and services are most well received by consumers who play your games?

AT: We sell virtual items that enhance the gamers’ playing experience. We determine the price of each virtual item before it is introduced, generally based on an analysis of certain benchmarks, such as the extent of the advantage to the player’s character that the virtual item brings, the demand for the virtual item and the price of similar virtual items offered in other online games. We track the number and price of each virtual item sold as well as user behavior in response to the launch of a virtual item. We adjust the pricing of certain virtual items based on their consumption pattern and other factors.

Generally we deliver services via the virtual items. We offer two major kinds of items: functional items and vanity items. Among the vanity items, clothes and weapons are the most popular. Among the functional items, Teleport is the most popular.

DFC: What payment systems do Chinese gamers prefer to use when purchasing virtual items? Is there a difference between those who play client-based titles, and browser titles?

AT: For payment system, our gamers have mainly three payment options including online payment via bank card, E-Sales virtual game cards distributed mainly via internet cafes, and physical game card distributed mainly through retail distributers. There is no pronounced difference in gamers’ preference between those who play client-based titles and browser titles.

DFC: We understand that Dragon Nest is the No. 1 MMO in Singapore. By what standard: revenue earned, number of simultaneous logons, most active players, etc.?

AT: Dragon Nest is the No. 1 MMO by number of simultaneous logons and most active players.

DFC: Please tell us more about the online game market in Singapore. What are the other top games, what works well with gamers there, what virtual items really sell well there?

AT: Generally cute graphics appeal to a wider audience. Popular game genres include MMORPG, FPS and casual games. MMORPGs that are popular are those with PVP/PVE gameplay and high-quality graphics that are easy to play. FPS game titles that are more popular include Blackshot and Sudden Attack. Main attraction is realism and good graphics and game control. Facebook games are still very popular in South-East Asia. Many casual gamers spend a lot of time on these games due to the social element. Costumes, decorative accessories and Gachapon items are top virtual item sellers.

DFC: How is Shanda approaching localization in non-Chinese markets? Are you taking on this job internally, or contracting the work out?

AT: We translate game content, incorporate more local elements into the title to optimize gamers’ experience, and enhance anti-cheating and anti-hacking system by putting in our self-developed programs. We mainly contract the work out.

DFC: Similarly, who handles customer service support for Shanda games outside China?  How are you making sure international gamers are well served?

AT: Except for Dragon Nest Singapore, which we operate by ourselves, all of the other games that we license to other regions are operated by local operators who provide customer service support.

Before the games are launched overseas, we will send our R&D personnel to do training for licensees. After the games are launched, we will closely cooperate with licensees on technical support and customer services.

DFC: How far has Shanda embraced social networks so far?  What social networks have you placed games on, and how big part do you want social networks to be in your overall business?

AT: With Legend of Immortals, we have been leading the industry by building in-game community and by connecting our MMO games with third-party SNS sites such as Renren, Kaixin, Sina Weibo, Tencent’s QQ and Sohu’s Weibo.

Going forward, we plan to build similar communities for our other games that will eventually create a single cross-game community that is connected to third-party platforms. We have also placed our social games on Sina Weibo, Kaixin and Renren and will continue to launch social games on more third-party platforms.