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Tuesday, February 28, 2006

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.


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