Novice Investing - Shanda Interact with Gamers

Date: Monday 01st 2008f December 2008 05:34:31 PM

Shanda Interact with Gamers - 11/10/2006

By: Novice Investing Staff

Shanda Interactive (SNDA), the number two China online game operator, reported third quarter earning this past Thursday. For the three months ended on September 30th 2006, Shanda reported earnings of $ 18.1 Million or 26 cents per share. Analysts was forecasting earning of $ 12.9 Million or 18 cents per share. Total revenue fell to $ 55.2 Million, a decrease of 12.6 percent from a year ago but rose 7.7 percent sequentially. Gross margin for the quarter is down to 56.2% from 68.9% a year ago.

While in the surface, things look bad, actually it isn't. Late last year, Shanda dramatically change its revenue model, allowing gamers to play its franchise games for free. It instead charges money on additional features such as advanced weapons or avatars. After almost a year of implementation, Shanda's revenue decrease merely 12.6%, which is a good turnaround, we must say. Let's picture this. When one day Apple decides to give out its iPod for free and then charge for the song you downloaded, will they be able to reduce revenue by a mere 12.6% a year later? Perhaps, it is doable but it is not an easy thing to do. Further, it would probably incur a huge loss due to the high cost of freebies it gave.

So, now the case with Shanda, the company is able to squeeze out 26 cents per share of profits during the third quarter of 2006. That gives it an annualized profit of $ 1.04 per share. This is the simplified version, however. As Shanda executed its free-play revenue model, revenue and profit is expected to increase more and more. At this point, competitors such as NetEase (NTES) and The9 (NCTY) still not embraced the free-play revenue model. Thus, it is interesting to see what happened when the new games become old and gamers had to pay to play for older games. Meanwhile, Shanda had experimented with free-play revenue model for almost one year now and it can probably buy the license of older games from these companies at a discount. In short, Shanda may be able to monetize worthless old games; turning lead into gold.

For now, Shanda should not get cocky yet. They have achieved wonderful thing with their free-play revenue model. Competitors are also busy acquiring new games and charging users for game play. When competitors one day woke up to find that the free-play model is the way to go, that is when Shanda should be vigilant to guard their fences. For now, the company can continue earning $ 1.04 per share for shareholders.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Shanda Interactive Inc. (SNDA) or any other securities.

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