China's Net Gamers: Ready to Rumble

Shanda Interactive is set to launch a hostile takeover bid for rival Sina -- a spectacle that's exceedingly rare in the country

By Bruce Einhorn

Among Chinese Internet entrepreneurs, few companies are as admired as Sina. The Beijing-based portal has long operated one of the most popular Web sites in China. When it went public in 2000, it was among the first Chinese dot-coms to do so.

After the Internet bubble popped, Sina (SINA ) weathered the storm without the near-death dramas of such rivals as NetEase (NTES ), a portal that sank so low that it came "this close" to getting booted off Nasdaq. Like its major competitors, Sina saw its stock soar in 2003 when investors realized that it had come up with a new business model that reduced its reliance on online advertising: sending its content to China's vast population of cell-phone users, the world's largest.

Compared to Sina, Shanghai-based dot-com Shanda Interactive (SNDA ) is an upstart. In 1999, when Sina was preparing for its Nasdaq debut, Shanda, which offers online games, was just getting launched. Unlike Sina, Shanda was a niche player, focusing on games that let users enter virtual fantasy worlds where they engage in pretend swordplay with computer dragons.


  And unlike several Sina executives who have lived and worked in the U.S., Shanda co-founder and CEO Chen Tianqiao had no experience living outside China. After graduating from Shanghai's Fudan University in 1994, Chen worked for a real estate company in Shanghai before he, his wife, and brother launched Shanda in 1999.

So why is Shanda looking like the heavyweight now? It went public on Nasdaq last year and has quickly made up lost ground. It has a market cap of $1.99 billion, vs. $1.36 billion for Sina. On Feb. 18, the Shanghai gaming company revealed that it had quietly accumulated almost 20% of Sina's stock. That made Shanda the largest shareholder and has set the stage for something that China has rarely if ever seen: a hostile takeover battle.

The battle could be all the more hostile because Shanda and Sina are competitors to win the allegiance of China's growing population of online gaming fans. Just as in the U.S., the number of gamers in China is growing explosively. But while most Americans are playing on their Sony (SNE ) PlayStations or Microsoft (MSFT ) Xboxes, few Chinese have those consoles.


  Counterfeiting is so pervasive in China that it makes little sense for Sony or Microsoft to sell their machines there. The business model depends on companies being able to sell not just the consoles but also the software -- and due to rampant piracy, they can't make money in China selling software.

Hence the popularity of online games, where the operator keeps the software relatively safe and secure on corporate servers and players only need access to a PC and an Internet connection. Last year 26 million Chinese were playing online games, some made locally and many others imported from South Korea, the field's global pioneer.

The Chinese government, recognizing that online gaming has the potential to be a blockbuster business, is pushing several measures to support the industry. Beijing has launched an online-gaming project. In typical communist fashion, it's a five-year plan to publish 100 homegrown games. The government is also setting up Internet innovation centers to help boost the capabilities of game programmers. China's leaders even plan to establish a professional game college to train software engineers in the arts of developing online games.


  This isn't to say Beijing is embracing the new phenomenon wholeheartedly. The regime, no great fan of free speech, has always had an ambivalent attitude toward the Net in general, and online gaming is no different. The government is establishing a committee that will review games and censor them if they have material that the mandarins find objectionable.

That could mean not only games with too much sex or violence but also those that offend regulators' sensibilities in other ways. For instance, the government has already nixed the Swedish game Hearts of Iron. Its sin? Portraying Tibet and Manchuria as independent nations. Another blacklisted title is Project IG12: Covert Strike. The Norwegian shoot 'em up features a mercenary who takes aim at China's soldiers.

With so many of its games set in mythical fantasy worlds, Shanda hasn't encountered such problems. One of the first companies to realize gaming's potential, it today offers some of the most popular titles in the China. Shanda developed some itself and imported some from South Korea.


  But other companies have caught on, too. Another Shanghai-based operator, The9 (NCTY ), recently went public on Nasdaq. And Sina has struck a partnership with NCsoft, the premier Korean gaming company. The increased competition means Shanda must find ways to grow and diversify.

One way is to reduce reliance on PCs by making Shanda's games available on TV. Shanda has been working with Intel (INTC ) and graphics-chip designer ATI (ATYT ) to develop a set-top box to do just that. In an interview with BusinessWeek last year, Chen Tianqiao that his goal was to make Shanda not just an operator of PC games but rather "an interactive entertainment media company." (See BW, 11/15/04, "China Plays For Keeps Online".) Taking control of Sina would go a long way toward helping him reach that goal.

Einhorn is Asia Economics editor for BusinessWeek, based in Hong Kong

Edited by Patricia O'Connell

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