About this Blog

The purpose of this blog is for my personal use. It serves as my personal diary as I investigate Chinese internet/gaming companies for investment purpose. If you have any comments or disagreement, please give me feedbacks.

Blog Archive

Tuesday, September 30, 2008

China's Goldilocks Economy

Did China just achieved Goldilocks economy?

I am no economist. But two recent news make me wonder that China's economy had achieved (or is not its way to achieve) soft landing.

After bedeviled by high inflation, inflation in China had declined for 4 straight months.

After three straight months of declining manufacturing activities, the Purchasing Managers' Index just rose to a seasonally adjusted 51.2 in September from 48.4 in August.

Because of the global (near) recession, cost of the raw material decreased and that helps with China's inflation problem.

Because China has so much money (trade surpluses, etc.), it is able to invest (into infrastructure) its way out of any economy decline.

I think China is on her way to change from a export economy (like Japan) to a continental economy (like USA).

What do you guys think?

Wednesday, September 24, 2008

NTES XYW status – Closed Beta

My last article on XYW can be found here:

From the following article, XYW,

XYW will start the 2nd closed beta on 9/25/2008. This closed beta is open to the public. In addition, the player characters are going to be permanent. Basically, this 2nd beta test will fit all the definition of an open beta testing.

If they want, they could start to charge money on 9/25/2008. NTES did some minor marketing for this closed beta.

In addition, from what I reported before, TX2 had its final closed beta on yesterday, 9/24/2008. There is a little marketing for that game also.

It surprises me that NTES had those two games out for the closed beta so close to each other. But those two games are in different categories. XYW is a cartoonish turn based free to play game, while TX2 is a 3d real time free to play game.

It is going to be difficult to tell when the commercialization of a game starts. For all practical purpose, TX2 had already started charging players for items starting 6/6/2008. NTES will most likely start to charge for items for the XYW soon.

After XYW, FF2 shall be out by the end of this year. After that, the new game DT2 shall be ready soon afterward. That game will probably be ready by the 1st quarter or 2nd quarter 2009. In addition, there are also the licensed game the two Warcraft games as well as the Starcraft 2 game. All of these games will probably be ready in 2009.

The next 3 quarters are going to be extremely busy for NTES.

Tuesday, September 23, 2008

NTES – FF2 status part2 – Open Beta

Part 1 of this article on FF2 can be found here:

From the last article, it is clear that FF2 is ready by 9/9/2008. But the exact schedule will be determined by upper management for marketing reason.

NTES released another article a couple of weeks later:

From the above article, NTES set two firm dates for FF2. On 10/15/2008, FF2 will start the players’ migration from the FF1 to FF2. The official open beta will come after that.

From my previous status updates on the NTES’s games, TX2 will have official Closed Beta on 9/24/2008. XYQ and XY3 will have major expansion pact out on October and November time frame. My best guess is that FF2 will go into commercial operation (Open Beta) in late November or early December 2008.

Monday, September 22, 2008

NTES – FF2 status part1 - Game development finished by 9/9/2008

My last post on FF2 can be found here:

There are significant developments for this nice new game NTES is developing. This development also illustrated the jekell and hyde personality of NTES the company.

On 8/13/2008, NTES had the 2Q earning conference. In it, it provided virtually zero information to the Wall Street analysts.

A week later, on 8/20/2008, FF2’s lead designer spent a whole day on FF2 official forum to answer players’ questions. It provided extremely detailed answers on the game design, play features, and schedule of FF2.

This is actually rather typical for NTES. The amount of details NTES’s game designers gave to game players is extraordinarily thorough and is definitely much more meticulous than other game companies.

FF2’s lead designer written the following 5 threads (be warned, it will be a very long read):

The amount of information included in the above links is extraordinary. In addition to the wealth of information on the design philosophy and game playing features, the lead designer also has a firm date of 9/9/2008 for when his design team will finish the development. He however has no idea when the actual open beta will be. NTES may have other (marketing related) consideration that will impact the schedule of FF2’s open beta date.

A Korean company originally developed Fly for Fun. At the beginning, it was really just an advanced casual game.

NTES purchased the right to the software source code as well as the right to modify its software programming. NTES spent quite a few years completely re-worked this game from the ground up. They even completely re-do the underlining game engine.

From the above links, it is clear that this version of FF2 is completely different than the one outside of China (the original FF1 game).

Rather than an advanced casual game, FF2 had been completely morphed into a full fledged MMORPG game.

Like TX2, it is a 3D game. Like XYQ, it is a Q-style game. But unlike all other Netease games, it is purely a western style game. It is also a real time game. It will be a free to play game. Therefore, FF2 will occupy an unique place (all Netease games have traditional Chinese themes).

No Wall Street analysts had even mentioned this game at all. Maybe they didn’t realize that NTES had converted this game into a full-fledged MMORPG game. I will go against the grain; I will predict that FF2 will be a very successful game (in terms of contributing to the revenue mix).

Again, this is another perfect example that NTES just won’t provide any information to the Wall Street analysts.

NTES - XY3 status – new expansion pact

My last article on XY3 can be found here:

According to the following article, XY3’s new expansion pact will be out somewhere around October, November time frame

From the above article, there will be two major parts and multiple smaller parts comprised of the expansion pact. Out of the two major parts, the first part will be out in early to middle October and the second part will be out in November.

The official web site for this expansion pact can be found here:

This will be the first expansion pact since XY3 goes into commercial operation on 9/12/2007.

This is going to be an extremely important expansion pact for XY3. After struggling for the first two quarters, XY3 had started to stabilize. Actually, it had started to grow again. It actually achieved a new PCU of greater than 170k on 8/15/2008.

For the first 6 months of its operation, there is great doubt on the success of XY3. But XY3 caught a second wind and start to behave like it will grow into a major title. I think this expansion pact will confirm whether XY3 has legs.

If XY3 turns out to be a success, I believe it will then be the only paying game that will find success in China in the last two years. It will be extremely significant. It will indicate that there are still markets for new paying games (as opposed to free-to-play games) in China.

Thursday, September 11, 2008

NTES - TX2 status part 2 – Official Closed Beta on 9/24/2008

Part 1 of this article can be found here:

I had been quite critical of NTES’s management in their lack of marketing for TX2. From the way the game is played and the way it is received by the players, it is obvious that NTES has a potential mega-hit in TX2. But I thought with the lack of marketing for TX2, NTES could ruin a great game.

Well, I might be way too harsh on NTES. It is probably not a good idea to go against NTES on how a game is developed and is ran.

From the following article:
and from the official web site of TX2:

NTES is going to set 9/24/2008 as the date for the “Official Closed Beta” for TX2. They are going to opens up multiple game servers for the Official Closed Beta.

TX2 had been in commercial operation since 6/6/2008. But they never had a formal major marketing campaign to announce their “grand opening”. TX2 was supposed to be the next major project for NTES and I thought it is crazy for NTES to start commercial operation of TX2 without any major marketing campaign.

Well, it turns out there might be good rationale behind it.

Even though there were no mass of players playing TX2 on 6/6/2008. Unlike other games with massive marketing campaign and has a couple of hundreds of thousands of players within the first 2 weeks, TX2 never have that.

But it is building momentum continuously. It had slowly building so that it has 25 servers now. That would probably translate to a PCU of about 80k to 90k players. Unlike most other games that fade quickly after a few months, TX2 is actually getting stronger and stronger.

In addition, because it is only closed beta, there are still opportunities for NTES to do marketing if it is needed.

The jury is still out. But TX2 is starting to act more like a major hit that has long legs.

Wednesday, September 10, 2008

NTES - TX2 status part 1 – 1st expansion pact

My last article on TX2 can be found here:

Starting September 2008, NTES had started to release TX2’s first expansion pact. See the following site on the contents of the expansion pact:

This expansion pact is going to be released in three stages. Each stage will consist of about 3 to 4 major new functions. The first stage will be released on late August 2008. Out of three major functions, its most important function is the new battlefield playing feature will be released. In addition, multiple fighting-specific servers will be opened. Features emphasize fighting will force players to upgrade their equipment (swords, shield, elixir, etc). Those equipments cost money to purchase.

The second stage will be released in late September. Out of four major new features, the most important will be the maximum player level will be increased from 60 to 70. Of course, there will be new (more powerful) equipments that will come with the higher level. For example, a 70 level player with 40-level equipment will probably lose to a 50-level player with 70-level equipment.

The third stage of the expansion pact will only have one major feature. But boy, is that an important feature. It will be the signature feature of TX2. The castle siege feature will be released. This is scheduled to occur on October.

When NTES fired the old head designer of TX2 on 4/30/2007, I was actually happy they did that. I never thought the old TX2 could be a mega-hit. I never thought a paying game centered on castle siege can be a mega-hit.

Now after NTES revamped TX2 completely, TX2 becomes a free-to-play game. Castle siege will be absolutely ideal for a free-to-play game.

The new TX2 is now much more friendly to single player (players who are not part of a clan), but at its core, it is still going to be a game dominated by the clans. And Castle siege will be the singular calling card for TX2.

I regard the difference between paying game and free-to-play game as the difference between Communism and Capitalism. In the paying game, everybody is the same (just like Communism). Even if a player wants to spend more money, he can’t in the paying game because the cost is fixed (for old TX2, the cost is fixed at 0.4 RMB per hour). But in the free-to-play game, there is no limit on how much a player can spend.

In a normal free-to-play game, most players spend money on his character. But there is only so much one can spend to make his character powerful. Of course, TX2 also has pets/mounts/rides. That is another area the players can spend money on.

But to get big money from the super rich, TX2 will have to get the player to spend money not on himself but on his clan. The big money will be made on players who are willing to spend for the clan (that have thousands of members). This is where castle siege comes in.

TX can be translated as “under heaven”, “kingdom”, or “empire”. Just the name of the game will tell you that it is a global domination game. The game starts out with no empire or kingdoms. These clans are the kingdoms. To become the singular empire under heaven, the clans have to fight it out among themselves. There are multiple castles in each server. The clans will be fighting it out for these castles.

TX2 will be a game that will be completely unscripted. The game designers don’t control the story. The game players (clans) determine the story of the game.

One clan has to forcibly take the castle from another clan. When a clan takes over a castle, it also takes over the shops in the castle. It also needs to defend the castle. The castle needs to be fortified. The gate needs to be thickened. Specialized weapon need to be made. Those upgrades require special trade smith (carpenters, steel smith, etc.). It therefore keeps clans members busy. In addition to labor, these upgrades also require raw materials. Those raw materials will need to be purchased.

As clans starts to expand, specialty castle siege weapons need to be build. Again, those require labor from the clan members and money for the raw materials. Therefore, a successful clan leader needs to be both charismatic as well as rich. He also has to be willing to spend.

TX2, with castle siege at its core, will be a game that will satisfy both NTES and the super rich players. NTES gets to have those super rich players open their wallets. For the super rich players, they get to experience true power thru the game. They get to have thousands of clan members under their control. For the clan members, they get to experience camaraderie as well as be part of something bigger than they are. They get to shape the destiny of the future of the game. For non-clan players, they get to experience the life of a lone kung fu master during a war ravaged time.

And the best part is that nobody knows how the future holds. Game designers don’t control the story. Everybody have influence on the future of the game, but nobody determines it.

TX2 will be an intoxicating game to play. That will make it into a very popular game. More importantly, TX2 will be a game that attract rich players and help them to spend their money.

Tuesday, September 9, 2008

NTES - XYQ status - expansion pack in October

My last XYQ article can be found here:

I am not quite sure most people know the accomplishment of XYQ. It is the most popular MMORPG in the world, not just in China. Better yet, it is still growing and having no signs of slowing down at all. For example, it achieved a PCU record of 2.08 million players on 4/27/2008. Then four months later, it achieved a PCU record of 2.32 million players on 8/3/2008.

More impressively, NTES is able to grow paying games such as XYQ, XY2 as well as start another in XY3 while all of China had converted to free-to-play games.

It is clear paying games are here to stay in China. Actually, as all the games going the free-to-play route, paying games like XYQ, XY2 and XY3 as well as NCTY’s WOW (World of Warcraft) benefits as many Chinese players started to get tired of the severely player un-balance that are un-avoidable in the free-to-play games.

From my server monitoring, XYQ had been very strong so far. But it is time for XYQ to get an update. The last expansion pact was released on 9/25/2007. There had not being any major update to XYQ for one year.

From the following article:

A new expansion pact will be out on October 2008. This will be the eighth expansion pact for XYQ. It will be the first major update to the game from more than one year ago.

In keeping with NTES’s tradition, they are not going to be bothered to give this information to the Wall Street.

Anyway, this new expansion pact will be very helpful to NTES’s revenue growth for the 4th quarter 2008 and 1st quarter 2009.

Monday, September 8, 2008

NTES – XY2 status – expansion pact out on 8/28/2008

My last post on XY2 can be found here:

I had been following NTES for quite a few years now. I had never seen so many activities for NTES’s games. Every major NTES games have some significant activities in the next couple of months. I am going to spend the following 4 or 5 days to go through every one of them.

The following is another example of NTES’s aversion to the Wall Street analysts. On 8/13/2008, NTES had its 2nd quarter earning conference call. It didn’t bother to tell the wall street analysts that XY2’s next expansion pact will be out on 8/28/2008 (even though one wall street analyst had specifically asked for detailed schedule for the expansion pacts). See the following link:

Unlike most other Chinese companies where they would come out with expansion pacts once every quarter, NTES’s expansion pacts are much more extensive. This is the first expansion pact for XY2 for about one year. Every other company would have proudly pronounced it in the earning conference, but not NTES.

XY2 had just broken a new PCU record on 6/1/2008. From my server checking, it had been very strong lately. After the new expansion pact is released, it will be even stronger. The full effect of this expansion pact will be evident in the 4Q2008. I can’t wait for the 4th quarter earning conference.

Sunday, September 7, 2008

Status on Sohu’s next two games

My last post on the status of Sohu's games can be found here:

Sohu's next major game, LDJ, will enter first closed beta on 9/17/2008. See the following news:

Sohu had also opened the official game site:

I don't think Sohu will get LDJ out this year. I am guessing that we shall see the game becoming commercial in either 1Q or 2Q 2009.

In addition, there is news that Sohu will license and operate another title, JianXian. Please see the following news:

Sohu will start internal beta for this game at the end of September 2008. This game shall be in commercial operation in 2009.

In the 2Q2008 earning conference call, Sohu called LDJ as "The Duke of Mount Deer" and JianXian as "Legned of Ancient War".

Friday, August 29, 2008

NTES – XY3 status and a TX2 movie

My last post on XY3 can be found here:

There are significant developments on XY3. First, on 8/15/2008, XY3 had a new record. It achieves a new PCU record of greater than 170k. See the following link for the official announcement:

This is significant because the jury is still out on XY3 on whether it will be a successful game. If we tabulate the statistics of XY3 ever since its birth, we would have the following table:
4Q2007 1Q2008 2Q2008 3Q2008
XY3 PCU 163k 108k 123k > 170k
XY3 ACU 53k 46k 51k

From the above table, it is clear that after going through the initial weakness, XY3 is starting to grow. It is going to have two consecutive quarters of growth.

It is especially significant that the new record happened during the Olympics where most people are concentrated on the Olympics game. It is also significant that this new record didn't come about because of a new expansion pact. As matter of fact, NTES is going to come out with an expansion pact either late 3Q or 4Q. That means it will have continued strength through the 4th quarter 2008.

I remember that the CEO of GA (Giant Online) once said that he believed in blockbusters and when a game achieved a community of 200k, this game would then become self sustaining and will then becoming a blockbuster.

I think XY3 is starting to get there.

By the way, there is a new player movie that can be downloaded. This movie illustrates how beautiful is the game TX2. Better be hurry, the download link will only be available for three more days.
TX2 Download link.

Tuesday, August 26, 2008

Who won the Olympics?

My last Olympics related post can be found here:

Now that Olympics is over, so who won?

Certainly, there are independent survey organizations in China that will survey the popularity of China’s portals. Yes, there are.

But there is too much information, it is virtually impossible to make anything out of it. In addition, every portal would use part of these surveys to justify why they are number 1.

The following two independent articles give pretty good summaries of the confusion involved:

For qq.com (or Tencent), it quoted Alexa and Nelson rating to justify that they are the winner on China’s internet war during the Olympics. For Sina, it quotes Chinarank and CTR to say that it won. For Sohu, it quoted 8 different organizations’ (CNNIC, DCCI, iResearch, Analysys Internation, Tsinghai University, etc.) survey to justify that Sohu is the winner.

The following are articles from each portal to justify why she is the winner.

From Sina:

From Sohu:

From Ntes

From Tencents:

It is so confusing that it is virtually impossible to say for certain who won. I went though these articles a couples of times each and still having trouble making much sense.

But if I have to make a judgment, I would have to give the following impression.

Tencent has the dominant instant messaging service, qq. It uses qq to push the Olympics news to its users regardless whether its users want it or not. If you include the information that is delivered to the users (whether it is solicited or not), QQ would definitely be the number 1.

But if you only count the web traffic that is initiated by the users themselves, then it seems Sohu has the upper hand. Most of the survey results seem to give a slight upper hand to Sohu with Sina be the number 2.

In addition, the top two (Sohu and Sina) have traffics that are significantly greater than the next two (qq.com and Ntes).

While I think the biggest winner is Sohu, Sina definitely benefited greatly from the Olympics as well.

Tencent is an up and coming threat. It is able to leverage its dominant position on the instant messaging service to push into the portals. Every Chinese netizen has a qq IM on his/her desktop. When a text bubble with interesting Olympics news comes up, it is so tempting for the user to click on it. When they do, they would go into Tencent’s portal.

Having a stand alone desktop application gives the company so much leverage, it is also the reason Sohu is sparing no expense in its next secret weapon, Sogou Chinese Pinyin Input system. (But that is another story for future date).

While Sohu, Sina, and QQ.com have similar look and feel for their portals, Ntes’ portal is very distinct. Much like McIntosh in the US, Ntes’ portal has a very loyal following. In addition, while Ntes portal used to cater to the second and third tier companies, during the Olympics, I noticed that there are a lot of ads from 1st tier multi-national corporations on Ntes portal.

Monday, August 25, 2008

China’s WAP survey

My last post on the WVAS (Wireless Value Added Service) can be found here:

iResearch had just released a survey on China’s WAP (Wireless Access Point) market. It can be found here:

WVAS had been hammered badly in the last couple of years. But when all the bad news had been out, there is nowhere to go but up.

In addition, as China getting into 3G, the next frontier is in the area of mobile internet. Whoever has established a position on WAP would get the first bite of the big apple.

From the iResearch survey, its result can be summarized as follows:

QQ mobile (Tencent) has 34.9% of market
3G Portals have a combined market share of 18.5%
Sina mobile has a market share of 11.9%
Baidu mobile has a market share of 5.8%
China Mobile’s WAP has a market share of 5.0%

I was a little surprised at the strength of qq WAP. Sina had always been very strong in this area and this survey confirmed it.

This is going to be a very lucrative area in the next few years. In addition, as all the telecom operators busying re-organize, there will be a period of few years for other players such Sina, QQ and others to get established.

Sometimes iResearch’s survey can be inaccurate. But if this survey is accurate, QQ and Sina will be handsomely rewarded in the future. Sohu and Ntes need to start to get busy.

Wednesday, August 20, 2008

NTES - TX2 Recent Status 3. – Marketing

This is the third part of an article. Part 2 can be found here:

On 6/6/2008, NTES started the final “closed beta” of TX2. On 8/14/2008, during the 2nd quarter earning conference call, NTES call that was an “open beta”.

For the expansion pact, it would be released in three parts. The first part will be released by the end of August. The second part will be released by 9/24. The third part will be released by October.

The contents of the expansion pact are extremely substantial. In addition to the usual higher levels, new maps, new quests, new assignments and new equipments typically found in an expansion pact, it also has multiple new combat systems. Most importantly, it would come out with the calling card of TX2, the castle siege system.

For companies such as SOHU or GA who are much more sophisticated in marketing, they would have combined the three parts into two parts. Then they would have released it in two parts. The first part would be called open beta and second part called the first expansion pact. Then they would market the heck out of it. They would had start the marketing 6 months before the open beta. Have a great opening. After a couple of months, when the traffic is slowing, they would come out with an expansion pact (with another big marketing campaign).

But that is not NTES’s style. They tried to do it for DT and DT was a failure. They are going back to their root. They are not doing big marketing campaign at all.

It becomes clear to me that TX2 didn’t have the same big opening of NCTY’s WOW or Sohu’s TLBB. But that is by design.

Netease ignored all kind of opportunities to do marketing campaign. They did very little marketing for their final close beta on 6/6/2008. They don’t even bother to have an official open beta and go straight to the first expansion pact. And so far, they are not doing much marketing for the expansion pact as well.

So there are two ways to gauge the success of TX2. If you are expecting a great opening like that of GA’s ZhengTu, NCTY’s WOW, or Sohu’s TLBB, TX2 is a failure.

But if you are expecting a slow and steady growth until it becomes a mega-hit such as NTES’s XYQ and XY2, then TX2 is right on schedule.

Tuesday, August 19, 2008

NTES - TX2 Recent Status 2. – Public Relation

Part 1 of this article can be found here:

Given this background, you would think NTES’s management could have easily explained what happened. A great opportunity for them to do so is on the 2nd quarter earning conference call on 8/14/2008.

Let’s see what happened on the 2nd quarter earning conference. First, they stopped giving revenue breakdown per game (even though they had always done so before). This continues a pattern where they are providing less and less information to the wall street analysts.

In the question and answering session, an analyst specifically asked a question on the expansion pact schedule. Netease managers refuse to provide exact date.

The very next date, 8/15/2008, NTES announced on their web site they are coming out with the expansion pact of TX2 by the end of this month. See the following link:

During the earning conference, another analyst asked about the “perceived” recent weakness of TX2. Rather than explaining that is due to the strength of Netease’s anti-piracy technology, Netease’s management sneered and said something to the effect of what weakness and what confusion. That wall street analyst had to bring up the announcement made by NTES’s CEO that TX2 would be a million player (in PCU) mega-hit in one year. NTES’s management then basically just repeat that announcement again. No additional information is provided.

I know NTES’s management are all programmers and engineers. Their antipathy and aversion to the bean counters of wall street is palpable.

Of all the Chinese game companies, NTES had always been the one that provide the most information to their game players. It continues to be the case. They are open and friendly to the game players.

But it is also the company that would freeze out the wall street analysts.

Monday, August 18, 2008

Online ads outlook from FMCN

My last advertising related article can be found here:

Last night, 8/17/2008, FMCN reported its 2nd quarter earning conference call. It derived most of its revenue from LCD screens, etc. But it also has a big slice of internet online advertising business.

Because it serves as the middle man between the portals and the advertisers, FMCN usually has information about the state of online advertising before the portals.

I will provide some quotes from the FMCN 2Q conference below. Then I will conclude with my own comments.

The transcript of FMCN's 2Q earning conference call can be found here:

I will provide some important quote below:
「While we continue to see strong advertising demand from consumer goods advertisers in China, in particular, non-Olympic-sponsor advertisers are increasing their advertising spending in the later half of the year after the Olympic Games. ….. Our outlook for the remainder of 2008 and 2009 is getting stronger.」


Jason Brueschke – Citigroup
」…………there's been growing concern about the demand outlook in advertising in China after the Olympics as the Chinese economy is showing some signs of strain. I know that Tencent and Sina, for example, both gave a relatively cautious outlook after the Olympics for the Internet, and qualitatively in the prepared remarks you had indicated that you thought the demand outlook was going to be strong in the second half of 』08 as well as 2009. Could you maybe give us some more color……..」

Dr. Tan Zhi
「We see that even the Olympic Games are happening right now, we see many, many of our advertisers are not spending money during the Olympics because for those non-Olympic sponsors, they are waiting for doing that to catch up their advertising budget. So we see some big strong demand for those advertisers doing advertising business with us after the Olympics. That's why we feel that we have received some answers from our sales team, so we do believe that we will have a strong growth post-Olympics for our business.」

David Zhu
「You mentioned the demand after the Olympics -- yes, I totally agree with Dr. Tan's comments on that. Most of the advertisers now during the Olympic Games are the sponsors of the Olympics. But these advertisers are a small percentage among all the advertisers, so we've got the information that those unsponsored advertisers do not want to spend money now, just noisy enough among this lot of sponsors. So after the Olympics, those non-sponsors will spend money after that. So we see that will be the growth for the next, the second half of the year. Thank you. 「

Jason Brueschke – Citigroup
「David, just a quick follow-up -- because of your ownership of so much of the interactive agency business, are you in position to see demand sooner than your clients, Sina and Tencent for example? Is that one of the reasons why there might be what appears to be a slight disconnect between what you are seeing and being [inaudible] about their cautious position that they've given recently?」

David Zhu
「Yes, we -- [the amount of agencies] for the digital Internet business, yes, we are closer with the advertiser, so for those they do not spend the money now, they have a plan to place the ads after the Olympic Games. Thank you, Jason. 「

ames Lee - Sterne, Agee & Leach
「And lastly, a question for Dr. Tan -- I just want to get a clarification on your comments about 2009. It seems like you indicated that the slowing economy is certainly on the minds of the advertisers but you feel confident that even if that's the case, the shifting to a more targeted cheaper platform will be a point in your favor. You seem to indicate that the sentiment from the advertiser in general is neutral to cautious and your assessment is if that's the case, this could be benefiting your platform. Thank you. 「

Dr. Tan Zhi
「We feel the confidence on 2009 based on two factors, I think. Number one is that we -- this year, China's advertising budget is about RMB230 billion and in the last three years, the increase every year is about 15% to 20% the last several years. But conservatively speaking, if market [inaudible] goes well, if the economy [situation is going down], it is at last a 10% increase for next -- for overall budget.
However, those increases will be, if the market goes well, economy is good, everybody will be benefiting. If not, if the economy is not good, then people will take on the effective media to do business and we have been viewed by most advertisers as the most effective media for them to do business. Therefore, as a last -- for example, as Q3 of this year, as we talk to our advertisers, we have received the message from them that they want to spend money wisely if the economy goes well. Therefore, they will use us as a major advertising channel. So that's one part.
Second is that right now, we do have a better structure, better system, and best sales team in place. The message I received from my sales team is that they are very confident to achieve the goals set this year, and also we are in the process to define what we are going to do next year. And in fact, we are starting very early, trying to get this as early as possible, the [sense we received] where it's very confident, very strong and therefore our management team is very confident about 2009.
So I cannot give you a number but the feeling I've received is very good. Thank you. 「


I felt this is very significant information. Even though SINA and Tencents had been providing cautious view of the post Olympics time frame, their can't see China's online market as far ahead as FMCN can see.

FMCN gave a very good rational for a very strong (stronger than the Olympics quarter) 4Q for China's online advertising market. It also give a strong 2009 online advertising forecast based on the feedbacks from its ground sales team.

If you read my articles, I had been suspecting (since 6 yo 9 months ago) that Olympics will serve as the kick off point for the acceleration of China's online advertising market.

I had always think Olympics (and 3rd quarter 2008) will not be as great as some people think as far as online advertising revenue goes. But Olympics will serve as the coming out party for all the new online features such as web2.0, online video, streaming video, etc. All of these new features will enable the acceleration of the migration from other advertising venue (such as TV, newspaper, etc.) to online advertising.

As a result, the growth in the 4Q008 as well as 2009 will be much stronger than what analysts had been predicting.

FMCN, as the middle man between the portals and the advertisers, occupies the unique position to foretell the future direction much earlier than the portals themselves. I am glad what FMCN see is what I had been predicting.

Saturday, August 16, 2008

NTES - TX2 Recent Status 1. – Not slowing down

My last TX2 post can be found here:


This is going to be the first part of a three part article.

NTES just came out with the announcement of a new expansion pact for TX2. Usually, I don't write much about expansion pacts. But the timing of this expansion pact and how it is announced says a lot about NTES the company.

Recently, about a couple of weeks ago, a wall street analyst came out with a warning that TX2 is not doing well. It knocked the stock down from $25 back to $21 or $22 in the next couple of days.

If you do the server count, you would have observed this already. There were weakness to TX2 server statistics. The server count seems to indicate that the number of players playing TX2 is decreasing.

Well, what those analysts didn't realize is that it is actually related to the strength of all Netease's games: all Netease's games have very strong anti-piracy features.

Starting about couple of weeks ago, NTES starts to put features into TX2 to combat players that use pirate servers. Those players who use pirate servers get to level-up extremely quick and are able to get lots of power-ups.

They destroy the balance of the game and most importantly, they don't pay anything to Netease.

This is a problem that infects all MMORPG games in China. This problem had destroyed quite a few games in China. But Netease had always be one of the best in combating it.

If you monitor TX2』s server counts, you would have notice an immediate decrease in the number of players. But that is a GOOD thing.

The following is the link to the announcement that shows all the players that were banned from playing TX2 because they were caught using pirate servers:


Of course, the actual number of users who use pirate server is a lot more than shown in the above link. Most of these players either stopped using pirate server (so not to be caught) or left TX2 completely.

But it is something a successful game has to go through. Many popular games failed because they can't find players using pirate servers. It looks like NTES is pretty successful in its attempt at combating piracy.

I consider this a good thing for the long term success of TX2.

Thursday, July 24, 2008

NTES – DT2 and FF2 go into Beta testing

My last post on DT2 can be found here:


My last post on FF2 can be found here:


My last post on TX2 can be found here:


My last post on XYW can be found here:


It is exciting time for NTES. All its major games are going to be out at about the same time.

TX2 went into Closed Beta on 6/6/2008. It is open to everyone and the game characters won't be deleted. Actually, it had already started commercialization already. The game is doing well and is growing steadily. It didn't grow like a block-buster. But that was planned. NTES was not looking for explosive start, but rather slow and steady growth until it reaches PCU of 1 million in 1 year (according to Netease's CEO).

It already started charging for in game items already. More excitingly, starting with a couple of weeks ago, players can now buy treasure boxes. This is similar to GA's ZhengTu game. The treasure boxes are really just online lottery system. It function like online gambling. It is like a slot machine. Every times it opens, items with different values rotates. The probability of getting really good item is very low, but also very tempting. Therefore, it is hard for players to only buy one. They buy one after another until they hit a good item. It may not have very good reputation. But players just can't stop spending money on those.

XYW started Closed Beta on 7/5/2008. In this game, NTES follows the traditional definition of Closed Beta by limiting the number of players. It will delete the game character after the Closed Beta. There is also no commercialization.

DT2 is a new free-to-play game. It went into Final Internal Beta on 7/21/2008. It is not clear whether NTES will kill off DT. It maybe possible that NTES will have both games operating at the same time, with DT2 the free-to-play game and DT the paying game.

Usually, the Internal Beta is limited to players working for NTES. But NTES uses outside players for this Beta. It is limited to about 1000 invited guests. The game characters will of course be deleted after the current beta testing.

Most likely, after the Internal Beta, DT2 will have Closed Beta and Open Beta.

FF2 is a pretty interesting game. It went into Closed Beta on 7/22/2008. It is open to everyone. But the game characters will be deleted. I don't believe it will be commercialized at this point.

I think FF2 will prove to be a very popular game. It will be cater to young players and female players. It might not be able to get a lot of money per players. But eventually, it could be a 5 to 10 million per quarter game.

Now, I am going to make a table on the characteristics of Beta testing on all four games:



Type of Beta

# of players

Delete game Character?




Closed Beta






Closed Beta






Internal Beta






Closed Beta




As can be seen from the above table, it is all over the map. There is no consistency in how NTES determines what is Closed Beta and what is Internal Beta. It is probably up to the chief game designers of each game to decide what he/she wants.

It may be confusing to the investors. But as long as NTES comes out with great games, that is all I care.

With all these major title coming out at about the same time, the next few months is going to determine the future of NTES.

Finally, one can download the official trailer of DT2 from the following address:


Wednesday, July 23, 2008

NTES – CEO predicted PCU of more than 1 million players in 1 year for TX2

My last story on TX2 can be found here:


First, the CEO of NTES thinks that TX2 is doing great. He predicted that it will be the next block-buster and will have a Peak Concurrent Users of more than 1 million one year from now. See the following story:


I always appreciate comments and emails. Some of the comments I had received recently had not been friendly. I was accused that I was way too harsh on TX2’s prospect.

I think there is a misconception. I think TX2 is a great game. In terms of technology and game design, it is probably the single best game in China right now. In terms of playability, it is still weak. But that is purely because of its young age. NTES is busying adding features to it right now. I have no doubt that it will have tremendous amount of playability features in one to two years.

My problem is in NTES’s aversion to marketing.

I think there is some kind of bunker mentality within NTES.

Both XY2 and XYQ had a rough start in their life. NTES had to slowly working on both games before both games caught on 6 to 12 months from the start of commercial operation. More recently, DT1 was heavily promoted, but it was a commercial failure.

XY2 and XYQ happened 4 to 6 years ago. The competition landscapes had completely changed. Whatever works at that time might not work now. Just because DT1 was a failure doesn’t mean NTES shouldn’t do marketing. (I think DT1 just got caught in a time when China’s game environment was changing from paying game to free-to-play game and DT1 is a paying game).

More importantly, all the recent successful games by all other game companies was achieved with the help of heavy marketing campaign.

For example, Sohu has the largest game portal in China, 17173.com. Sohu also has two major games (the existing TL and a new game). Sohu is not just marketing on its own game portal, it also heavily markets its games on other major game portals.

All other major game companies also do heavy marketing campaign for all their games.

Most of these heavily marketed games failed. But on the other hand, in recent years, ALL successful games were promoted heavily.

I think NTES is living in a cocoon and can see only what it wants to see.

As a long term NTES investor, I hope NTES can break out of it. NTES is going to have 4 or 5 major games coming up. Please maximize their chance to success. Don’t kill off their chance of success just because NTES wants to pinch pennies by saving marketing dollars.

Tuesday, July 22, 2008

Sohu 2Q2008 Prediction

My last prediction on 1Q2008 can be found here:

First, let’s see how I did in my last prediction. The following table compares my TLBB prediction on the previous quarter vs. the actual numbers:



My Prediction – ACU QoQ


My Prediction – PCU QoQ

My Prediction – APA QoQ


My Prediction – ARPU QoQ


My Prediction – Revenue QoQ


Actual – ACU QoQ

Actual – PCU QoQ


Actual – APA QoQ


Actual – ARPU QoQ


Actual – Revenue QoQ


The acronyms first -
ACU = Average Concurrent Users
PCU = Peak Concurrent Users
APA – numbers of Active Paying Account
ARPU – Average Revenue per Active Paying Account

From the above table, it is clear that I completely misjudged my prediction. I only have an estimate for the ACU, it is virtually impossible to give reasonable guesses for other parameters.

Now, let’s do the 2Q2008 estimate for TLBB.

The server counts for the TLBB can be found in the following table:

There are 3 months in a quarter. Each month has either 4 or 5 weeks. I only use 2 days in a week. I don’t do server count every weekend. I only put in the number where I have a server count in both quarter. I also pick 3 days of holidays in this calculation.

From the above table, I have a 2Q2008 ACU increase of 4.47% quarter over quarter (QoQ). But I need to take into consideration that the company suspended operation for 3 days. It counts as 2.56% of revenue in a quarter

By taking into consideration of the 3 days off due to Sichuan earthquake, the new ACU increase is only 1.8%

I used Zhengtu of Giant Online as a guide. It has maximum APA = 1.405 million and maximum ARPU = 309.

I am going to have the APA follows my calculated ACU estimate. I am going to predict the 2Q2008 APA = 2% QoQ increase.

Now, for the ARPU, I am going to give an increase of 20% QoQ. 20% is probably a pretty good estimate considering we had an increase of 35% in the 1st quarter.

Therefore, the revenue increase will be 1.02*1.2 = 1.224 or 22.4% increase quarter over quarter.

We can now put my new estimates into the following table:




My Prediction – ACU QoQ



My Prediction – PCU QoQ

My Prediction – APA QoQ



My Prediction – ARPU QoQ



My Prediction – Revenue QoQ



Actual – ACU QoQ

Actual – PCU QoQ


Actual – APA QoQ


Actual – ARPU QoQ


Actual – Revenue QoQ


Given the the 1Q TLBB revenue is 38.9M, 22.4% increase will give it $47.6M.

Now, let’s figure the revenue contribution from Blade Online. The following table is the revenue from Sohu’s other game, Blade Online





Blade Revenue





From the my server count, Blade Online seems to be increasing during the 2nd quarter. I didn’t bother to do a detailed calculation. I am going to give a rough estimate of 2.5M for the 2Q2008. Take off 2.56% (due to the Sichuan earthquake) gives me 2.4M.

Combine the two, we have the total game revenue of 47.6+2.4 = 50M for 1Q2008. This is considerable more than Sohu’s gaming revenue guidance of 43 to 45 millions.

For wireless, it was 9.1M for the 1Q2008. There were no adverse regulations from China during this quarter. China’s telecom companies are busying with merger and 3G technology. They don’t have time to mess with the wireless value added providers. Therefore, I predict 10M for the 2Q2008.

For brand ads, the 1Q2008 revenue is 33.2M (and 26.6M for 2Q2007). Sohu had a very stable year over year growth of 40 to 45% for the last 5 quarters. Most people think there will be a spike (or extreme acceleration) in brand ads as we get close to the Olympics. I never think so. I believe we will still see a YoY growth of 45% during the 2Q2008. Thus, I predict we will have 26.6*1.45=38.57M. This is going to be in the very low range of Sohu’s guidance.

Search, however, is going to be another story. Sohu had started to do some major push in monetizing search. But the push starts at the end of 2nd quarter, so we will not see it reflected too much during the 2Q. Still, I predict we will see the true turnaround in Sohu’s search business. I think 2Q will be the first quarter where it would experience both QoQ and YoY increase. I predicted 1.8M for search in 2Q2008.

If we add them up together, we would get
50+10+38.57+1.8 = 100.37M

This is better than both the Sohu’s estimate of 93M to 96M and analysts’ estimate of 96.12M.

Monday, July 21, 2008

Sohu – What was Sohu trying to tell us

My last post on the Olympics can be found here:

On 6/19/2008, Sohu’s Co-President Belinda Wang, said she expects core advertising to grow by 40% to 45% this year and 20% to 30% next year. See the following article:

The market interpreted as company’s admission of Sohu slowing down after the Olympics. It punished the stock on the same day and push the stock of Sohu down by 14% in a single day.

But what is Sohu actually trying to say to the wall street.

On 6/26/2008, Sohu published an interview with the CEO of Sohu. The article is as follows:

The main points of that article are as follows:
- Wall Street “mis-interpreted” the interview with Belinda Wang.
- The growth rate of 20% to 30% in 2009 is incorrect. The actual 2009 growth rate is unclear at this point.
- During the Olympics, Sohu will get a bigger percentage of internet users. This pattern will continue into 2009. There is absolutely no reason that the growth rate in 2009 is only 20% to 30%.
- Wall Street still don’t understand Sohu. For example, Wall Street didn’t taken into consideration of Sohu future killer product such as Sogou Pinyin Input Method.

What do I think of what exactly happened?

I think there is a basic misunderstanding between the Wall Street and Sohu management. The most likely case is that the Sohu management was trying to send the message to Wall Street that its estimate for 2009 (after the Olympics) is too pessimistic. On 6/18/2008, the average analysts’ estimate for 2009 is 22%.

Sohu’s management wants to up that estimate while still stays conservative. Therefore, it gave an estimate of 20% to 30%. Thus, its medium is 25%.

But somehow, the “whisper number” in Wall Street is probably higher and Sohu’s stock crashed 14% as a result.

It think it caught Sohu’s management by surprise. Thus the second interview on 6/26/2008. It is pretty clear that Sohu’s management is pretty confident that they can beat the 20% to 30% estimate they gave. But it is so far away that they don’t want to give out more precise estimates.

On a side note, it is pretty clear that Sohu regards the Sogou Pinyin Input Method as its ace, or its most important weapon to gain market shares. There are some recent news about it and I will talk about it in future posts.


A test for now