Game on: Shanda touts studio acquisition plan

Reaffirms FTP-based philosophy

In an effort to attract a greater share of the 37.5 million mostly young, male Chinese who play at least one online game a month, Nasdaq-listed Shanda Interactive Entertainment Ltd. said it plans to add new games and subscribers by acquiring existing studios with hot titles.

Shanghai-based Shanda president Jun Tang told guests of the ChinaJoy gaming show, which wrapped here Sunday, that his company's war chest of nearly $264 million will be applied to purchasing companies outright, rather than merely buying controlling shares.

This month, Shanda bought Chengdu Aurora Technology Development Co. Ltd., developer and operator of massively multiplayer online role-playing games like "Fengyun," its leading title, which draws nearly 1.5 million active users.

Shanda also will consider investment in a new game studio if it comes with a powerful enough offer, Jun said. "The presentation has to be exceptional because Shanda is not a venture capital firm," he added. "We would prefer to take on established studios."

Jun also expressed the company's commitment to the free-to-play model, a move away from the fee-based online games it pioneered but then abandoned.

In fee-based games, downloading the game program is free, but play requires a monthly subscription or purchase of additional hours of play. FTP games, on the other hand, are free to download and charge no subscriptions or hourly fees but charge players for in-game items and services, such as extra powers for their computer game characters.

"While many companies are adopting a mix of fee-based and FTP titles, it is a bold move by Shanda to revolutionize the online game business model," said Lisa Cosmas Hanson, managing partner of San Jose, Calif.-based market research firm Niko Partners.

Jun said about 20 million of China's active gamers play at least one of the 25 games Shanda offers, from fighting games and MMORPGs to casual games, a number that he hopes will help the company earn more than $250 million in 2007 — a figure he extrapolates from the firm's most recent quarterly earnings of $60 million.

Hanson is optimistic about online gaming in China as broadband connections mushroom and the country's median income rises.

China's overall video game market jumped 68% in 2006, with online games generating $995 million in revenue, up 74% from 2005, driven in part by an increasing number of gamers willing to spend more per game, which is ideal for FTP games, Hanson said.

By 2011, China's population of gamers is expected to swell to 71.9 million people, data from a recent Niko report showed.

With this growth in its sites, Shanda also is exploring the field of in-game advertisements since inserting ads costs very little and nearly all the revenue goes to profit margins.
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