China’s growing online gaming market got some sobering news this morning with the quarterly and full-year report from Shanda Games (GAME). The parent company, Shanda Interactive Entertainment (SNDA) reported record revenue, but weak profits for the quarter. Shanda Games accounts for about 88% of its parent’s revenue and 75% of its profit.
Last week, competitor NetEase (NTES) beat quarterly forecasts, but the beat was due mainly to strength in the company’s online advertising business, not its online games. Earlier in February, Sohu.com (SOHU) and its online games unit Changyou (CYOU) got hammered on a weak quarterly report that showed online advertising down and online game revenue stalled.
NetEase is expected to recover, mainly on the strength of its deal with Activision/Blizzard (ATVI) to offer World of Warcraft’s “The Burning Crusade” game. The Chinese government, which banned foreign investment in China’s online games industry last year, finally gave its official sanction to NetEase’s release of World of Warcraft in September.
Part of the problem in China’s games industry is the lack of new titles. Changyou doesn’t have a new game ready to go, but it did get a revenue boost from an expansion pack to its most popular game. That won’t carry that company very far in 2010, though, because shareholders in tech stocks anticipate growth that beats expectations.
Shanda Games is trying to buy its new product pipeline, having agreed to buy Shanghai-based Goldcool Games and Mochi Media, Inc., which provides a distribution and payment platform for online games. Still, with the exception of Changyou, which lost revenue from a drop in advertising, the advertising part of Chinese internet companies seems to be keeping the ship afloat.
Sina Corporation (SINA) and Baidu, Inc. (BIDU) steer clear of games in favor of portals and search, respectively. Sina posted a flat third quarter and is not expected to do much better in the fourth quarter. The company reports fourth quarter earnings on Wednesday.
Baidu, which owns the largest share of the search market in China, posted a solid fourth quarter, but the overall numbers were quite small. Revenue for 2009 totaled just $636 million. Perhaps search and search advertising don’t appeal to Chinese consumers.
Apparently neither does any other kind of online advertising. That leaves just the games business to generate some profits. But that, too, seems stalled, except for NetEase and its World of Warcraft franchise.
China’s estimated internet-connected population is larger than the total US population. But it doesn’t appear that the revenue and profits from that enormous market are materializing yet. Maybe the Chinese are waiting something different to really make internet profits take off.
So far, the standard model doesn’t seem to be generating the money everyone has been expecting. The Chinese can afford to be patient. The numbers are in their favor. But how patient can investors afford to be?
