Continuing a trend in China’s online gaming business, Shanda Interactive Entertainment Ltd. (NASDAQ: SNDA) and its game unit Shanda Games Ltd. (NASDAQ: GAME) have produced a lackluster report on second quarter earnings. Shanda Interactive said its net profit fell -60%, while Shanda Games saw net profits fall -16%.
Game-maker Netease.com Inc. (NASDAQ: NTES) reported earnings last week that beat estimates and earned the company an upgrade from ‘Hold’ to ‘Buy’ at Roth Capital and from ‘Neutral’ to ‘Overweight’ at HSBC. Changyou (NASDAQ: CYOU), the games unit of Sohu.com Inc. (NASDAQ: SOHU), met analysts’ expectations in the second quarter and raised its guidance for third quarter EPS from $0.83 to $0.86.
In the world of online games, it’s the titles that matter, and that is where Netease has a huge leg up, with exclusive rights to
Activision Blizzard Inc. (NASDAQ: ATVI) World of Warcraft. Shanda lacks a compelling title and has seen its revenues and profits fall as the market for online games matures.
Part of the problem is demographic. The ‘baby boom’ in China created an opportunity about 10 years ago as those children reached the age where they could play online games. And it didn’t matter much what games were on offer. As the kids grew up, they had less time for games and the demand for games has shifted to more recognizable brands, such as ‘World of Warcraft’.
Shanda Games has taken another route, trying instead to boost revenues by offering more online literature and videos. The company also has kicked off a joint venture with China Network Television to develop new games and online videos. All this has raised the company’s expenses, and has eaten into its profits.
Shanda Games also said it would acquire Korean game developer Eyedentity Games for $95 million in cash. Eyedentity created Shanda’s successful ‘Dragon Nest’ game.
In an interview with Forbes, a Chinese analyst noted that revenue growth in the online gaming industry grew 8.8% in the second quarter, much less than the full-year 2009 growth rate of 30%. He also thinks Shanda Games’s move to create a literature business has a chance of being a big success if the company can integrate that business into its gaming business.
That analysis makes sense, especially because it also plays to the demographic shift in China. Whether a game based on a Chinese novel can beat out World of Warcraft remains to be seen.
As of this writing, Paul Ausick did not own a position in any of the stocks named here.
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