Monday, October 29, 2007

Can Giant Ring In A Perfect World

The third largest online games operator in China, Giant Interactive(GA) is ready to set it's feet on the US market. The proposed IPO is likely to be on Nov. 1, the day that a prestigious gaming award ceremony will be held in China.

The IPO is looking for at least $600 milllion which will be a record for Chinese tech companies. The issue has alredy been hyped by many analysts. Some predict the issue will command a premium over what Perfect World(PWRD) has done recently. One reason is that ZTonline(the only game from GA) was the number one online game in 2006 in China on it's first year of release.

The founder of GA, Shi Yuzhu is a math genius with tremendous instincts of marketing. He came down from one of the top 10 riches in China to the "poorest man" in China with hundreds of millions in debt a few years ago. He started his entrepreneurship with ambition to build China's IBM. But later he took a big opportunistic gamble to sell nutritious supplements or "fish oil". He failed miserably by mismanaging the businesses. The old Giant fell to the ground.

Ironically, he fell in love with online gaming business when he played the games under "depression". He started his own online gaming business. He also won high remarks for successfully paid his mountainous debt.

In the past, online gaming businesses in China made money mainly by charging playtime. Shi made a very innovative move by releasing ZTonline free for playing. He liked the idea that players trade virtual gaming wares online so he tried to make money by offering the gaming wares such as costumes, weapons, and even skills for a fee.

The move proved to be a big success. ZTonline became the most popular multiplayer game in China last year. Giant Interactive has made so much money that by only with one game, they ranked third in revenue among Chinese online gaming operators behind Shanda and Netease. Perfect World later pursued a similar business model as GA's free playing model.

However, comparison between Giant and Perfect World favors Perfect World in many respects.

From Baidu's online gaming industry report:

Category 1, top ten hottest online games: Wulin 4, Zhu Xian 7,(both from PWRD), ZT 8(from GA).
Category 2, top ten hottest new online games: Zhu Xian 1, ZT comes out in 2006 and "Giant Online"(from GA) comes out later this year.
Category 3, top ten hottest MMORPG games: Wulin 2, Zhu Xian 5, and ZT 6.
Category 4, top ten downloaded online games: Zhu Xian 8.
Category 5, top ten most watched game producers: PWRD 2, GA 8

Perfect World has four games. Giant has One.

Perfect World games use their 3D game engine. Giant has 2D and will have 2.5D game released soon.

In GA's favor, ZT has been a wild success. In the June quarter, GA recorded revenue of 370 million yuan while Perfect World only had 87 million yuan. Though Perfect World's grew faster with 43% higher revenue than previous quarter. GA's grew 15%.

Both players are trying to enter international market. However, PWRD has already seen rapid uptake by international players with license fees of $1.4 million in March quarter and $2.3 million dollars in June quarter. GA only recorded $240,000 in international license fees in June quarter.

Rumors that the IPO is already "many times" over subscribed. Unless you bet the new game "Giant Online" will repeat ZTonline's success, it may be wise just to sit on the sideline. If you really like online gaming industry in China, buy some Shanda or Netease with much less risk or just pick some PWRD shares for future growth prospect.


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