Column: 'The China Angle: Tale of Two Game Companies'

CDC Corporation subsidiary CDC Games surprised everyone last week when it announced that it has obtained the license to operate Turbine’s Lord of the Rings Online in China. The surprise was not that CDC Games received the license, but that rival game company Shanda Entertainment did not. The Old Shanda was Turbine’s beachhead into the China market in 2005, when it signed a licensing deal for Turbine’s Dungeons and Dragons Online (DDO). At that time, Shanda was China’s premier online game company, in terms of market capitalization, revenue, and total users. The firm has since faced severe challenges and saw its stock decline to around US$15 from a peak of over US$40. In late 2005, the company made a disastrous attempt at console hardware sales when it had no content. Around the same time, users for its aging game Legend of Mir 2 started declining, forcing the company to switch to a free-to-play and charge for virtual item model. With the free-to-play model, the company hoped it could retain enough of its users for its future games. Shanda’s game launches for 2006 were DDO and NHN’s Archlord. Archlord recorded over 150,000 peak concurrent users during open beta testing in June, but has since seen a mass user exodus after the emergence of bots in the game. The future of DDO in China is uncertain, but most analysts were skeptical about the game’s viability under a subscription model without box sales. However, the DDO license was still a positive for Shanda as it placed the company on the inside track for Lord of the Rings Online. Shanda desperately needed a big name game to boost its thin pipeline. Lord of the Rings Online was Shanda’s to lose, and Shanda lost it. Despite Shanda’s recent misfortunes, the company still has one of the best distribution systems in China, and has tremendous brand recognition among Chinese gamers. Shanda should have been Turbine’s natural choice for Lord of the Rings Online. According to industry rumors, Shanda is no longer willing to pay large up-front licensing fees for potential hit MMORPGs. Under its new licensing strategy, Shanda believes its marketing and distribution prowess allows it to turn mediocre games into hits. Shanda overestimated its marketing prowess. While Archlord recorded 150,000 peak concurrent users, the number was only average for 2006 game launches in China. Several games reached six digit PCU numbers in their first week of open beta testing. Wu Lin Wai Zhuan, the latest game to start testing, recorded 210,000 peak concurrent users in the first eight hours of testing on September 29. The New CDC Corporation made waves in China in early 2005 when it launched its licensed MMORPG Yulgang under a free-to-play model. The company was relatively new to the online game market, and was battling for scraps against a dozen other new online game companies all looking for a piece of the leftover pie from Shanda and Netease. It hoped that the revolutionary free-to-play model will provide the catalyst to reach a critical mass of gamers. Yulgang’s PCU number reached 100,000 during the first week of open beta in April 2005, and currently hovers around 300,000. The game proved the viability of the free-to-play model, and the operating model has since been adopted by the majority of lower tier online game companies. With Lord of the Rings Online, CDC has a chance to compete directly with the premier game companies in China. While CDC has not announced what operating model it will use with the new game, the company will likely try the traditional pay by the hour model first. With the success of Yulgang and the brand behind Lord of the Rings, CDC no longer needs to use the weaker free-to-play strategy. [Shang Koo is an editor at Shanghai-based Pacific Epoch, and oversees research and daily news content on China's new media industries, with a concentration in online games. Pacific Epoch itself provides investment and trade news and publishes a number of subscription products regarding the Chinese technology market.]