What Did Shanda Networks Do Wrong?! A few advices...

A big story that caught my eyes last night was the big earnings surprise from Shanda Networks. I still have bad taste in my mouth because I’m a shareholder of the company. I expected low earnings figures but not this bad. The company reported a net loss of $66.8 million for Q4 2005, or 94 cents a share, compared to 38 cents a share for Q4 2004. This was its first quarterly release since it made several announcements last year about strategic shifts including adopting new business models that rely on the sales of value-added and premium features, instead of the traditional pay-for-play model and introducing hardware products including the EZ Pod. Apparently many people are paying attention to the release and not surprisingly the shares took a big hit today after the market opened today.

I don’t want to comment on Shanda’s numbers and the details about the earnings reports. You can find that information in its earnings release. I want to talk about what I think the company could have done better to go through this transitional period. It’s true that companies make important strategic decisions all the time and such transitional periods are always painful but Shanda should have learnt a few things from its precedents.
• The company should not have introduced the new business model for all three of its most successful games, including the Legend of Mir II, Magical Land, and the World of Legend. It should have experimented with one game or a less popular game. Such a phased approach will help it smoothen the learning curve and reduce the earnings shocks.
• The company should have waited for a better time to launch the new model, perhaps after it starts promoting and distributing Dungeons and Dragons Online, a much anticipated MMOG game developed by Turbine. Of course Shanda might be concerned that this will create conflicts among the different games it offers but I think on one hand, gamers looking forward to DDO and those opting for the new models might be different crowds and on the other, many new games are in other operators’ pipelines and some cannibalization is inevitable.

BTW, Leila Abboud at the Wall Street Journal wrote an article about DDO and Atari today and quoted my MMOG numbers. You can find the article online.

• Shanda should have launched the EZ Pod with a blockbuster MMOG game. Maybe the company will do that for the EZ Station when it starts shipping sometime this year.
• Shanda seems to be losing its strategic focus. It is trying to diversify too quickly. Internet cafés, casual gaming, digital music, set-top boxes and portable game devices, food… you name it. In the meantime, it is trying to stay a competitive online game operator. They should have done one thing right before moving to the next. You have to wonder how many capable bodies they need to hire and how much money they have to burn.
• The last but not least, judging from the big gap between its numbers and consensus analyst estimates, Shanda perhaps did a poor job communicating with the Wall Street folks. As a public company, you need their support.

Maybe with the successful IPO, certain executives at Shanda have grown their wallets along with their egos to a point where they felt that they are on top of the world. Now its time to face the reality and better execute its strategies. I still have faith in its management and sincerely wish the company will get out of this hole and score on multiple fronts.

Speculations abound for China's 3G market outlook

China Securities Journal published an interesting article speculating the adoption of TD-SCDMA and other 3G technologies in China. The article reports that the Chinese government is asking China Mobile, Telecom, and Netcom to build TD-SCDMA test networks, covering 3,000 people each.

“Construction is expected to be completed by the end of March and network tests finished by the end of June. Meanwhile, the Ministry of Information Industry (MII) has tightened its control over W-CDMA network trials and ordered the three operators, particularly China Mobile, to stop the current constructions of W-CDMA pre-commercial networks.”

It seems that even though TD-SCDMA is getting more international vendor support and is becoming a more mature technology, the government still wants to “help” the standard gain market traction among the main operators. China Mobile, China Telecom, and China Netcom have all been building a number of WCDMA trial networks, many unapproved by the MII. The MII has ordered them to stop building new WCDMA networks.

There are still plenty of uncertainties regarding who will get the 3G licenses first and who are likely to adopt the standard. Although China Mobile has publicly voiced its preference for W-CDMA, it’s still possible that it could operate a hybrid TD-SCDMA and W-CDMA network. I believe Siemens and other vendors have been touting the complimentary nature of the two technologies and the easy migration from GSM to TD-SCDMA. There are also companies working on dual-mode chipsets.

Related, there is another interesting article from Unstrung. You can find a link here.
The article talks about the speculations from Jefferies & Co. analyst George Notter, who formed his thesis based on the information he collected from 3GSM. He believes that the government may break up Unicom and give the GSM piece to China Telecom, which will then combine it with TD-SCDMA. China Netcom, the second largest fixed line operator, will acquire the CDMA piece. Currently, China Mobile has more than 250 million subscribers (4.1 million in Jan. 2006) and China Unicom has close to 130 million (1.3 million in Jan. 2006).

There are always plenty of conspiracy theories about China’s telecom market, since the market is less transparent than western markets. Many of such theories will be proven wrong in the end but I do believe that first TD-SCDMA will happen-the government has great hope for it, has waited for so long, and won’t let go, and second, the market will become more open and Chinese companies, especially public companies. have to learn to become more accountable for shareholders, not the government.

Sweet Music for China Mobile

Wang Jianzhou, the chairman and CEO of China Mobile, the largest mobile carrier in China, announced at 3GSM that his company is already generating 20% of its total revenue from data services. On average, the company’s subscribers send 0.7 billion short messages a day, which translate into close to 9 million dollars. If part of the messages are multimedia messages, the revenue figure will be even higher. Mr. Wang also mentioned that in China, total revenue generated by mobile music download has surpassed the total sales of the traditional music industry. Although China’s traditional music industry is beleaguered by piracy issues and is still much smaller than the US market, people are still buying records. On average, an authentic CD would cost $1-2. In contrast, a single mobile track will cost about $0.25. So, the cost for 10 mobile tracks is quite comparable to a CD with ten songs. Mr. Wang mentioned an interesting anecdote-one song was downloaded 15 million times in less than half a year, beating a typical best-selling CD by 15 times. By my calculation, that song alone generated close to $4 million in revenue for the company.

Too bad I was not there to see the surprising faces in the audience. Mobile data services are very popular among users, helping the carriers generate better ARPU. Chinese TV stations are covered by advertisements about mobile music download, SMS, and MMS from the major carriers. In addition, the growth of subscribers maintains good momentum. China Mobile now has more than 250 million subscribers, the largest in the world. In 2005, the company added 42 million subscribers and it’s been adding about 4 million subscribers a month for the last three months of 2005. China’s mobile penetration rate stands at around 30%. Even considering the gap between urban and rural areas, there is still strong growth potential.