When China's biggest online game operator Shanda Interactive Entertainment announced on February 18 that it had acquired about 19.5 percent share in Sina Corp, China's biggest Internet portal and one of the top wireless VAS providers, many people believed it would be a perfect match.

This was based on the assumption that the businesses the two firms are engaged in are complementary, and that the marriage of these two giants would see the birth of a Chinese Internet behemoth.

However, some other analysts also thought that the rushed nature of the coming together of the two firms reflected the situation in their two major businesses: increasing competition in online gaming and a continuing slowdown of the mobile VAS market.

Heated game

When Shanda, NetEase and The9, the three most important online game operators in the world's second-largest Internet market, announced their financial reports for the fourth quarter of last year, the results merely affirmed the growth potential existing in the online gaming business.

Shanda's fourth-quarter revenues from online gaming grew 21 percent over the previous quarter to US$49.8 million. NetEase's online gaming revenue rose by 23 percent to US$23 million in the fourth quarter. The9's online gaming revenues also increased slightly to US$710,000 in the past quarter.

Shanda and NetEase's diluted earnings per share reached 38 US cents and 45 US cents respectively.

Beijing-based Internet industry analyst Lu Wiegang believed that the barriers to entering the online gaming market are quite high and that it usually takes at least two years for a game operator to get established in the market. So, for companies like Shanda and NetEase, their early entry to the market has started to pay off.

He believed their experience in operating games and the popularity of certain games has helped the three companies profit from their preparations made two or three years ago.

But last year's fast growth does not mean that these firms have rid themselves of all risks.

Jim Sun, an Internet analyst with London-headquartered Evolution Securities, predicted that the massive multi-player online role play game (MMORPG) market is becoming saturated and that competition will be fierce this year.

"The market has surpassed the peak of its growth and increases will now become more moderate," said Shanghai-based Sun.

As more and more operators continue to enter the market, leading firms also face the problem of a lack of new-generation games, as some players are getting tired of the old titles and the new games are attracting attention from these people and new players.

He maintained his "buy" rating on NetEase, as it mainly generates revenues from games developed in-house and effectively controls pirate servers, which damage the incomes of many game operators.

However, he warned that a risk that NetEase faces is its excessive reliance on two MMORPG games, but that market has already become an arena of intense competition.

For Shanda, Sun believed that the major challenges are that the Shanghai-based firm is also heavily dependent on two game titles and it faces the erosion of pirate servers. If a large number of players are tired of the two games and new games lure them away, it would be a serious blow to the firm.

Compared with a slowing-down of the MMORPG market, Sun pointed out that casual games - such as cards and chess - will become the next growth engine.

He believed Shanda is well-positioned within the market with its famous Poptang casual game portal, and the business will play a more significant role in Shanda's revenues.

Casual games already account for 16.6 percent of Shanda's total revenues in 2004, compared with a mere 1.4 percent in 2003.

NetEase also said last month that it will launch its casual gaming platform in the next quarter with nine games, and release a total of 20 such games during the year.

Continuing slowdown

Although the wireless value-added business has been in the center of a regulatory whirlwind for the past two years and the most important product - the text messaging service known as SMS - has witnessed a continuous decline over the past year, NASDAQ-listed Chinese firms saw strong growth in the past quarter.

Sina Corp saw its revenues from wireless businesses grow 35.7 percent quarter-on-quarter to US$35.7 million in the fourth quarter of last year.

Tom Online's revenues also grew 13 percent to US$31.99 million.

Two minor players - Kongzhong and Linktone - also reported 33 percent and 17 percent quarter-on-quarter growth in the fourth quarter of last year.

However, their revenues from short messaging services have been continuously declining and some other services like multimedia messaging and interactive voice response were also punished or fined by the country's dominant mobile operator China Mobile for cheating subscribers or containing pornographic content.

Sina's TV advertisements about its wireless horoscope services were banned by the State Administration of Radio, Film and TV in January, which was estimated by Evolution Securities' Sun to have caused Sina's wireless revenues to fall by one-third in the first quarter.

Sun warned there are still some bubbles in wireless services and if all of them are burst, it will slash the revenues of many wireless service providers by at least half.

Beijing-based Lu agreed there are still some cheats or sex-related content in the services offered by those firms, but the scale remains around the same as many other industries, so regulators have no need to further tighten their control over content.

Tom Online Chief Executive Officer Wang Leilei added that the entire content of his company's services are based on legal print or multimedia publications.

Another uncertainty in terms of wireless value-added services is the attitude of China Mobile, through which mobile service operators send their services to subscribers' phones and bill them.

Sun predicted that the focus of the market will shift to mobile carriers, which may require a bigger profit from the business.

Mobile operators and service providers currently share their revenues by a ratio of 15-85, but with China Mobile shifting all its service providers to a unified service platform named the mobile information service center (MISC), the mobile operator will have tighter control of content and bills, which will lead to a decrease in service providers' revenues.

At the same time, as China Mobile is playing a greater role in the industrial chain and learning from the example of NTT Docomo, a leading service provider in Japan's mobile VAS sector, it might seek to get more revenues from service providers.

"It is very likely that it wants to get part of the 85 percent given to service providers and the ratio can be even changed to 30-70 between China Mobile and service providers," Sun added.

Lu also had a different view of the change in the ratio and believed China Mobile already gets a lot from the partnership and it should not try to squeeze service providers' profit margins.

However, he agreed China Mobile will try to tighten its control of the industrial chain.

(China Daily March 23, 2005)