Changyou.com Ltd, which went public last month posted a 1Qprofit of $33.5M.
Economist piece on Changyou:
Changyou is making a fortune selling items in a virtual world
PERHAPS it should not be a surprise. In the midst of a global capital shortage, the first company to list this year on New York’s NASDAQ exchange not only needs no money; its source of profit is receiving cash for items that do not exist.
Changyou is a three-year-old online-gaming business being spun out of Sohu, China’s second-largest internet portal. The deal was due to be priced on April 2nd, as The Economist went to press, in a nostalgic reminder of what the stockmarket used to look like. At the top of the expected price range Changyou will be valued at about $820m, after a special distribution of $100m to its parent. The opening price may be higher still, given strong demand.
The enthusiasm for Changyou is understandable. Unlike much of the internet, where services have to be free in order to be popular, Changyou makes money. In short order, revenues have risen to $202m and profits to $108m. That is because Changyou is one of several Chinese firms to have stumbled upon a remarkable niche that has grown into a multibillion-dollar industry. Video-gaming developed in America, Europe and Japan largely around console hardware and its associated packaged software. China initially banned games consoles, and by diligently failing to enforce intellectual-property laws, it wrecked the economics of the console business by allowing pirated games to be sold for pennies, thus undermining any incentive to market them.
China took a similarly firm line with other forms of entertainment, allowing only limited local production of films and television programmes, and sharply restricting imports (legal ones, at least). In this desert, the internet has flourished, at first as a place for pirated foreign films and shows, but over time for online multiplayer games, too. Companies created a business model based on allowing access from any computer—customers pay as little as 25 cents an hour at internet cafés—but where the computational heavy-lifting is done on their own servers. These provide the background environment and connect the players—in Changyou’s case, as many as 738,000 at a time.
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| In a world of their own |
Popular games in China typically feature elves, dwarves or characters that predate the past century of political turmoil. Changyou’s most popular offering, “Tian Long Ba Bu”, began as a book about the travails of a prince, a monk and a beggar, with lots of martial arts. At first Changyou charged subscription fees to play, but abandoned them because multiplayer games are generally more fun with more players. Like most other firms, it now provides free access to its games, collecting revenue from the 10% or so of players who are prepared to pay for in-game extras such as weapons, medicine and shields, says Benjamin Joffe, chief executive of Plus Eight Star, a technology consultancy in Beijing.
These extras typically cost a few cents, but some are much dearer: Changyou sells a virtual gem, which can be used to enhance a virtual sword, for $180. Demand for these virtual goods depends on their cost, properties and availability, exactly as in the real world, says Mr Joffe. Clever gaming companies constantly monitor demand and tweak supply to maintain their revenues, in a sense fine-tuning their own virtual economies.
There are risks to Changyou’s business, most notably from competition. Growth recently slowed abruptly. There are more than half a dozen publicly listed Chinese gaming companies, and over 100 more with viable products, according to BDA, a consultancy based in Beijing. Hundreds, if not thousands, of other companies are eyeing this promising market.
Still, the battlefield is not as dangerous as it might appear. Before 2006 South Korean and American companies dominated the market, and the world is full of clever programmers, all of whom are theoretically linked by the internet. But as was the case in console-based gaming, the Chinese government has intervened, says Ning Liu, an analyst at BDA. Licensing of new versions of foreign games has been delayed, and local firms have gradually learnt to develop their own products. In the Chinese business environment, even the virtual world has real walls.
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