CHINA VIEW: Game Companies Prepare To Report Earnings
By Sage Brennan A Dow Jones Column
SHANGHAI (Dow Jones)--After Sina Corp. (SINA) last week confirmed suspicions that its online game Lineage2 is gradually losing its luster, intense focus will fall on competing online game companies Netease.com Inc. (NTES), Shanda Interactive Entertainment Ltd. (SNDA), Tom Online Inc. (TOMO) and The9 Ltd. (NCTY), all due to report in the heart of earnings season.
Heated Week For Gamers
Netease.com's online game Fantasy Westward Journey logged 900,000 peak concurrent users two weeks ago, and the company's stock price continues to climb - almost suggesting a "meteoric" moniker - having gained approximately 120% since February lows.
Google Inc. (GOOG) last week included Netease's news feed -- along with those of Sina and others -- as a content option in the search powerhouse's new personal homepage service for Chinese users. As Google solidifies an already strong user base in China through the introduction of new service offerings, Netease can expect to garner additional traffic and revenue from this deal.
Netease and other game operators may soon feel the digital wrath of Tencent Holdings Ltd. (0700.HK), as China's dominant instant messaging provider plans to leverage its enormous user base to enter the online game fray with its in-house-developed role-playing game "QQ Fantasy."
QQ Fantasy logged 220,000 peak concurrent users last weekend, just days into its beta-testing phase, in the latest example of a company effectively cross-promoting services. Tencent's QQ instant messaging platform has on several evenings approached 20 million peak concurrent users (nearly equaling the total number of AOL subscribers in the US), many of whom apparently like to play online games.
Shanda continues to try in vain to stem the flow of rumors in China's online gaming community surrounding the company's beleaguered EZ Station console project. Last week's rumors included a $840 price target (false) and the launch of a live trial of several thousand EZ Stations (apparently true). Investors will nervously watch Shanda's earnings announcement on Wednesday, looking for signs that the EZ Station project will impact short-term profitability.
Tom Online has greater exposure to any future changes to the revenue sharing models of mobile telecom operators China Mobile Hong Kong Ltd. (CHL) and China Unicom Ltd. (CHU) than some of its competitors have. Tom Online operates approximately 100 mobile games in addition to online role-playing games, a leading Internet portal and the Chinese version of Skype.
A large group of players in The9's licensed online game World of Warcraft, developed by Vivendi Universal's (V) Blizzard Entertainment, recently committed coordinated mass suicide in the game to protest against a "fatigue system" that was mandated by regulators to combat addictive play by limiting the number of hours that gamers can play. The carnage occurred on the third day after the experimental system's launch at the end of October, when players lined up along a road in the game and littered the scene with cadavers.
Creative protests notwithstanding, investors will be listening to earnings conference calls for any indication that the fatigue system is impacting the performance of the most popular "massively multiplayer" games such as Netease's Westward Journey II and The9's World of Warcraft. Industry watchers suspect that gamers' creation of multiple game characters will serve to limit the effectiveness of the fatigue system.
Sohu Rumors Fly
Rumors swirled at the end of last week about a major announcement from Sohu in conjunction with its earnings report on Monday. The subject of the announcement was still unclear at press time, but was purported to center on either a 2008 Olympics sponsorship or the acquisition of an online game company.
Sohu's stock is down around 14% for the year, reflecting investors' uncertainty about the company's strategic direction in the face of rapid Internet development in China. Sohu has sat quietly on the sidelines as former portal competitor Netease has thrived after morphing into an online game operator. Perhaps Monday's announcement, if there is one, will encourage otherwise cautious investors.
Regulations Threaten Travel Stars
Ctrip.com International Ltd. (CTRP), the perennial leader in travel-related e-commerce in China, and competitor eLong Inc. (LONG) will both report earnings this week. Look for strong sales from the weeklong National Day holiday in early October to provide support to Ctrip and eLong revenues, although Ctrip appears to be making the most of its leadership in the market, of late.
Investors were concerned that new policies limiting online payments to less than 1,000 yuan released by the People's Bank of China last week might squeeze the big online travel players, but it turns out that the rules are not being enforced. Although regulators are unlikely to enforce regulations that promise to stifle economic growth, the effects of a sudden clampdown would surely be dramatic.
