Shanda turns around as play-for-free strategy pays off

PUBLISHED : Wednesday, 14 February, 2007, 12:00am
UPDATED : Wednesday, 14 February, 2007, 12:00am

Shanda Interactive Entertainment, the mainland's second-largest online game operator, intends to offer at no charge most of the six new titles it is launching this year, as its bet on free games proved to be a winner, helping the firm return to profit in the fourth quarter.

The Shanghai company posted a better than expected net profit of 240.3 million yuan - including a 66.8 million yuan one-time gain from selling shares - for the three months to December, against a loss of 538.9 million yuan a year earlier. Profit excluding the one-off gain from the sale in November of 3.7 million shares in Sina Corp, the mainland's biggest Web portal, was 173.5 million yuan. Its revenue rose 30 per cent to 470.6 million yuan.

'The new direction seems to be working. Now, Shanda is winning new paying customers and enjoying increasing revenue,' said JP Morgan internet analyst Dick Wei.

Shanda, which pioneered online games in the mainland, surprised the industry when it announced in December 2005 that it would allow users to play its top three titles free of charge. The firm made money instead by charging users adding special features, such as extra power or colours, to their avatars.

Most analysts doubted the move, deeming it a last gasp for struggling Shanda before it retired its once popular games such as World of Legend and Magical Land.

In the last two quarters, however, Shanda registered a jump in the number of paying customers, each on average increasingly spending more on playing, especially for its Legend of Mir II.

In the fourth quarter, the number of paying customers increased 7 per cent quarter on quarter to 2.29 million and their average spending jumped 7 per cent to 55.1 yuan.

But chief financial officer Daniel Zhang warned that gaming revenue should peak this quarter.

He said first-quarter sales should be between US$63.9 million and US$65.7 million, compared with the average estimate of US$58.7 million by eight analysts compiled by Bloomberg.

The average spending of 55.1 yuan per player is high compared with the typical paid online game user who tends to spend 30 yuan to 40 yuan per month.

'It's uncertain how much users are willing to pay. There are studies showing players can spend more than 100 yuan a month [on subscription and extra fees to enhance] their characters,' said Mr Wei.

Shanda's shares rose 7.26 per cent to US$23.93 in after-hours trade on Monday after closing 2.53 per cent up. Early this month, Shanda offered to sell another four million Sina shares for up to US$133.6 million, said arranger Citigroup.