A new legend of the game
Shanghai Shanda Networking is set to revolutionise China’s booming gaming industry,wirtes Richard McGregor, FINANCIAL TIME
If Chen Tianqiao, the precocious poster boy for China's rapidly-growing video game industry, wanted to be perverse, he could pitch his latest product as an allegory for his own company's development.
New Legend has an epic quality befitting video games in an era of hobbit revival and middle-earth chic. Monks are turnedsintosvampires and men become beasts, before the three ancient states of the New Legend kingdom seek redemption in a journey east to a mysterious, tranquil landswheresthe beasts disappear.
Chen's company, Shanghai Shanda Networking, is hoping to chart a similar path to redemption, or at least independence, with the release of New Legend on May 28.
Although the company's tale is not quite the good-versus-evil saga of this imaginary world, the release will represent a landmark for Mr Chen, the company he founded in 1999 and the Chinese computer games industry.
New Legend is the first significant game that Shanda has developed itself, and will allow the company to end its reliance on Korean gaming companies, with which it has been locked in a nasty financial dispute.
"This has been a very important decision for us - a year ago, everyone doubted that we could develop a game in such a short time," says Mr Chen.
The 30-year-old economist has had a stellar career. Selected as "an outstanding student" at Shanghai's prestigious Fudan University in 1993, he graduated a year ahead of schedule, one of only 18 to do so in the institution's history.
In 1999, after rising rapidly at the body developing the city's financial district and working, briefly, at a cigarette company, he and his university friends chipped in Rmb500,000 (,400) to form a tech company. They experimented with "virtual communities", "interactive entertainment" and other fashionable nostrums, before settling, with impeccable timing, on becoming a platform for online games.
Chinese youth, like their counterparts around the world, are hooked on video games, with one significant difference. None of the giants of the global industry has released its games in China because of pervasive software piracy. (Sony has promised to release the PlayStation later this year.)
As a result, the Chinese, in their tens of millions, play games for the most part online, a development which has paradoxically allowed the industry to flourish on a solid business footing.
The raw numbers, as ever in China, are dazzling. Shanda, which has a little over half the market, has 80m registered users and about 3m-4m paying players a month. At any one time, upwards of 800,000 people are playing a Shanda game.
Large volumes all too rarely translatesintosreal profits in China, because of cut-throat competition and tight, or often non-existent, margins. Shanda, for example, sells Rmb35 cards for 120 hours' online playing time, or Rmb0.29 (3.5 US cents) an hour. However, Mr Chen says Shanda already records healthy profits - in 2002 of m on revenues of m. "We think this year profit and revenue will double," he says.
The online gateway sidesteps the piracy issue, which has devastated the movie and music industries, and affords companies a sure way to collect money. That has given investors sufficient confidence to put moneysintoscompanies like Shanda, because they calculate they can generate a return from content development. As a private company, Shanda does not get the same scrutiny as listed enterprises, but its figures are credible enough to have attracted m from Softbank, the Japanese tech investor, in March.
The growth of the online game industry has also shown up in the books of China's three overseas-listed internet portals - Netease, Sina and Sohu - all of which are investing heavily in online games.
The best performing portal in the past 18 months, Netease, is the one that threw itself firstsintosthe online game business, both as a platform and as a game developer.
"The players actually fit the demographics of our portal very well - 65 per cent of our users are between 15 and 25, exactly the kind of players for online games," says Ted Sun, Netease's acting CEO.
For both Netease and Shanda, developing their own games means they are no longer at the mercy of the industry leaders in South Korea, who had been demanding ever-greater premiums for their games.
"When we signed the contract for the "Legend of Mira" [an earlier game from South Korea], the royalty was only 27 per cent of net revenue, but it was raised to 35 per cent of the gross revenue," said Mr Chen.
Shanda's former Korean partner, Actoz, accused the Chinese company of not paying royalties, and has terminated their relationship.
Shanda has other problems to deal with, not least the government's dislike of internet cafes,swheresmost of its customers congregate and which are now closed because of the Sars virus.
But for the moment Shanda is awash in cash, busily employing software engineers and searching for acquisitions.
Mr Chen, who owns more than half Shanda's shares, says he didn't need Softbank's money but thought the experience of outsiders would be valuable.