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.

Wednesday, January 28, 2009

Chinese Net Café gamers reduced by 30%

My last article on NTES can be found here:


On 12/28/2008, there is a small article on a local newspaper in southern China. That article can be found below:


It was an extremely short story. In it, NTES's CEO said that there is a 30% reduction on the number of gamers in China』s Internet Cafés. He thinks it is due to the global economic crisis. It caused the stock of NTES to crash from $22.78 to as low as $16.61.

At the time, I don't really believe the authenticity of the story. First, the story is extremely short and doesn't provide any background. I tried to find more details, but I couldn't find any at the time.

China』s news industry is extremely competitive and all the players place great emphasis on quantity rather than quality. In addition, during slow news time, sometimes they create stories rather than just report stories.

But most importantly, my server checks on NTES and SOHU's games don't reflect that at all. The following article is my server checking on NTES's games for 4Q2008:


From my server count, NTES's games had very strong growth in the 4Q 2008. Therefore, I have great doubt on the authenticities of that story.

Today, 1/28/2009, there is follow up on that story. You can find it here:


In it, it repeats of what NTES's CEO has said. More importantly, it provides more colors or details on what he said.

NETS's CEO said that there is 30% reduction of the number gamers in China』s internet café. It is not clear to him whether it is due to the current global crisis or due to those gamers plays at home rather than internet café.

He said the decline started in October 2008, but accelerated in November and December, 2008. He got this data from his 1000 strong ground sales force. He did admit that part of these declines is due to seasonality.

Typically, there are less gamers in internet café during winter. In addition, there are many school holidays in the 4Q.

Gamers from internet café represented about 25% of NTES's games' population.

In response, SNDA's CEO took a completely opposite ways of looking at the same thing. He believe internet gaming is recession proof. He believes whether a game company can prosper in the global crisis depends on the capability of the game company's CEO. Then he uses a pretty loaded term to describe NTES's CEO. He said NTES's CEO has a 「short」 attitude.

We all know what short means. But for NTES's CEO to short its own stock, that is, driving down NTES's own stock with the purpose of buying it later, it could be a strong accusation.

NTES's CEO said, 「If you don't believe me, go ask GA's CEO. GA has even bigger ground sales network than we do」.

The above article didn't ask GA's CEO about this story.

The following is what I think.

I think this story is real. NTES's CEO did say those things. It does make sense that global crisis has an impact to gaming industry.

But from the response from SNDA's CEO, the effect of the global crisis is pretty small on China』s gaming industry.

In addition, NTES's CEO wasn't trying to relate internet café』s gamer population to NTES's performance. He was talking about the affect of global crisis on China and he happens to use the decline of internet café gamers to illustrate his point.

NTES's CEO has never being known for being marketing savvy. He probably has no clue of how other people will interpret of what he said.

Note that he never said anything about his games server statistics. If he said there are much less gamers due to his game's server statistics, it would mean absolutely lower revenue.

There might be 30% less gamers in China』s internet café, but there might be more internet café gamers playing NTES's games due to NTES has more new games on line this quarter. It is also possible that there are now more gamers that play at home rather than in the internet café.

My server check had indicated a very strong NTES's growth. But NTES's CEO's statements definitely had put some doubt into it.

But I think the fundamental stays the same. Global crisis will have some negative affect. But the affect is probably much less than most other industry. For NTES, the fundamental is the same. Its new games are growing extremely strong. It also will have 2 to 4 new games coming on board this year. NTES is in an extremely strong position in China』s gaming industry.

But there does seem to be some short term doubts for NTES. For SNDA's investors, it is nice to see the confidence of SNDA's CEO.

Monday, January 26, 2009

XYW official trailer

The previous article on XYW can be found here:

Netease released one of an official trailer for the new game XYW. From my last article, one can see that the game is receiving great reception by Chinese gamers. One can download the trailer from the following link:

From the trailer, this game is a very pretty 2D game. Unlike XYQ, it draws the characters in a very realistic way. This is in the same way how XY2 and XY3 characters were drawn.

Currently, the last two weeks are the final exam weeks in China. Therefore, as expected, all the servers’ statistics for all Chinese games were very weak. But XYW is the only exception. It is evident that XYW is really gathering momentum.

Saturday, January 24, 2009

China’s search market survey and BIDU’s 4Q estimate

My previous article on the state of China』s search market can be found here:


The following is a survey for 2008 China』s search market. It is from Analysys International. What is interesting is this is published before any companies published their 4th quarter revenue. Therefore, we can calculate BIDU's revenue estimate based on this survey. One can find the survey in the following:


The following graph list the revenue and year over year growth rate for China』s search market:

From the above graph, the total revenue for 4Q2008 is 1.52577 billions rmb. It had a YoY growth rate of 62.2%.

The next plot has the market share data for all the search engines in China

I will list the data below:

BIDU: 62.2% (was 59.3% in 2007)

Google: 27.8% (was 23.4% in 2007)

Yahoo: 5.8% (was 11% in 2007)

Sogou: 0.9%

Zhongsou: 0.9%

Sina: 0.4%

Ntes: 0.4%

Soso: 0.6%

Others: 1.0%

Now, we are able to calculate the Bidu 4Q2008 revenue.

The total search revenue for 4Q2008 is 1.52577 billion. We have an exchange rate of 6.842 as of today. Bidu's market share is 62.6%. Thus, Bidu's 4Q2008 revenue is 1.52577*0.626/6.842 = 0.13871 = 138.71 millions in US dollars. This is the search revenue. Bidu typically adds 0.2 millions for others. Therefore, the total revenue is 138.73 million for 4Q2008.

The 4Q2007 revenue was 78.3 millions. Therefore, the 4Q2008 revenue of 138.7 millions represents a 77.1% YoY increase.

Yahoo finance site's analysts' estimate for the 4Q2008 is 132.48M. See the following:


Therefore, from this calculation derived from Analysys International's survey, we shall see a nice revenue surprise.

Now, in terms of overall search market, Bidu is doing very well. So is Google. Yahoo is losing ground badly. Everybody is basically at a noise level.

At this point, it is a race between 2 horses. I think the race is almost over. Others are just too far behind to catch up unless there are other factors at work. But I do think that 「other factors」 are going to be online soon.

I think there are two dark horses. One is Tencent's Soso search engine. At this point, soso uses google search. Therefore, Tencent is not pushing this service hard. But Tencent is developing its search engine. Once it is developed, it will be pushed by Tencent's powerful QQ IM service.

Another dark horse is the Sohu's sogou search engine. Sohu didn't push its Sogou search engine during the Olympics because it has a much more powerful weapon at its disposal. That weapon is called Sogou Chinese Input Pinyin method. That weapon is ready now and the battle is starting. I will spend some time talk about this exciting new development.

But other than these two dark horses, I think the search war in China is basically over.

Thursday, January 22, 2009

Ntes is developing new games based on DaTang

My last article on DT2 can be found here:

It never ceases to amaze me how different NTES is from other Chinese and American companies. The following is another demonstration of the idiosyncrasy of NTES.

DT had been a failure for NTES. But the game is still in operation. But there are hardly any updates for the game. NTES decided to develop its sequel and on 7/21/2008, DT2 entered into Final Internal Beta.

But it turns out it is not the end of the story. From NTES’s forum:

From the above two posts, NTES is going to start to develop DT again. It is also going to build another game from DT. DT2 development will still be following its original schedule.

I think NTES is mimicking what it had done for the XY2 series of games. I am going to try to draw the two series of games. First, I will draw the XY2 series of games:

One starts out with XY2. It is a serious 2D paying game. Then it branches out to XYQ. XYQ is a cartoonish 2D paying game. XY3 is supposed to be XY2’s sequel. It is also a serious 2d paying game. XYW branches out from XY3. It is a free-to-play 2D game. While the graphics of XYW will be not be cartoonish, its game-play will be closer to that of XYQ and is much more light-hearted.

The XY2 series of games had been extremely successful. XYQ is a 2 million player’s mega game and is the most popular game in China. XY2 is another mega-game that has close to 1 million players. XY3 is pretty solid game while the just released XYW (according to the server statistics) looks to be NTES’s next mega-game.

NTES is going to duplicate what they did for XY2 for DT. Now I will draw the DT series of games:

DT was a game that was left for dead. But NTES is going to re-start the development of DT. DT is a 2.5D marshal art paying game. DT2 is supposed to be its sequel. It is going to be a 2.5D free-to-play game. The new game will be another 2.5D free-to-play game. It is not clear how the two new games will differ. Most likely DT2 will be a more serious game while the new game will have more light-hearted game playing features.

From the two articles, the new game as well as the DT re-development had both been under development for 10 months already.

All these new developments are pretty exciting. TX2 and XYW are brand new games. All the growing will happen in 2009. In addition, FF2 and DT2 will certainly come out in 2009 also. It is hard to know when the new game (derived from DT) will come out. The most likely time frame is later in 2009. In addition, DT will be re-developed.

NTES will be busying adding new games to its staple in 2009.

Those are exciting news. If it is any other companies, it would have sent tons of press releases to Wall Street analysts. But it is not Netease’s way. It lets its games designer tells a few thousands gamers.

Netease makes great games. It continues to make great games. But NTES's investors have to tolerate its aversion to any marketing.

Saturday, January 17, 2009

Sohu.com to Roll Out its Own Web Browser

I had been talking about a project by Sohu that could completely change the landscape of China's Internet industry. That project is called Sogou Pinyin Input System. My last article about it can be found here:

There will be exciting news about that project in the near future. I will write a few articles about the progress of that project in the future.

Similar to the Sogou Pinyin Input System, browser is another application that could fundamentally changes the internet landscape. Remember the fight between Netscape vs. Microsoft.

Sohu is not satisfied with the success of the Sogou Pinyin Input, it has officially entered the browser war in China.

On 12/22/2008, Sohu officially announced the beta version of its Sogou web browser. One can go to its official web site:

In the middle left hand site of the official web site, there is a video. You can play that video. That video gave a pretty good description of what Sohu felt is superior of its Sogou browser over other browsers.

The first part of the video talks about it is much more stable than other browsers. The second part of the video talks about its 6 new features that other browsers don't have.

Sogou browser shares the same browser engine as that of Microsoft Internet Explorer or Maxthon (傲游). Therefore, it is different than Google's Chrome (that is based on Webkit browser engine) or Firefox (that is based on the Gecko browser engine).

I believe Maxthon is pretty big in China. Google has partial ownership to Maxthon. See the following:

From the above article, Maxthon has had over 80 million downloads of its browser, and over half of its users are in China. Maxthon-originated searches may account for up to 25% of total Baidu traffic, according to one source.

The following are some Chinese review articles:

Some education internet users review its acceleration feature.

I will give a quick description of its unique features.

1. Multi-Task Asynchronous Browsing. Sogou Browser is a multi-tab browser. But unlike other mult-tab browsers, it makes every tab independent. That means if one tab become unstable, it won't affect other tabs. You can close the unstable tab without losing your browsing session. This allows for the browser to be much more stable.

2. Independent video broadcast. Lets say you went to youtube.com. You want to view a video. You can pop that video out of the web page. Move it aside or resize it. That way, if you want to watch that video while browsing other (non youtube) web page, you could do that.

3. Smart address bar. It gives you search result as you type in an address.

4. Privacy browsing. Allows you privacy while using public computer.

5. Gives you easy access to your most frequent visited sites.

6. Accelerate browsing for users using the education network in China. It also allows for the users in the education network to access foreign content for free.

Now I will provide my own comments on what I think about the above features, starting from the least important.

The least important new features is number 5. It sounds good, but I don't think anybody will use it. Besides, a lot of other newer browsers have already added that features.

The second least important new feature is number 1. If you go to every review articles, every internet technocrats regard this as the number 1 issue for every browser. But as a stock investor, I don't think this is very important. The most stable browser (Google Chrome and Firefox) have much less market share than the least stable browser (Microsoft's IE). Therefore, as a stock investor, I don't think the stability of a browser is that important to the market share of a browser.

Independent video broadcast is a little neat feature. Most Chinese internet users are young people and they like neat features.

Smart Address bar is a feature that is very important to Sohu. It won't win any market share for Sogou Browsing. But this feature will allow Sohu to monetize the Sogou Browser by directing more traffics to Sogou search. Sogou Browsing will always be free. Therefore, it has to be monetized through indirect features. This is one way to do it and Sohu can make a lot of money through search.

Privacy browsing is a very important little feature that are very attractive to a section of Chinese internet users. There is a big segment of Chinese internet users who don't have computer at home. They get on line either through school, work, or internet café. When they use computers in internet café, they don't want people to find out their browsing history. This feature shall grab quite a few users. Unfortunately, this feature is quite easy to implement. In addition, a lot of other newer browsers are starting to add this feature. This advantage probably won't last long.

But all these little features (features 1 through 5), Sogou browser is just another new browser. It probably won't even get 1% of the market share in China.

The killer feature is however, the accelerated browsing for China's Education and Research network users. It also provide free access to foreign websites for China's Education and Research network users, normally a paid service for campus network subscribers.

This is a great feature. There is seldom any example of a new product in a flooded market that upon its initial release, would already have a big group of users waiting for them.

But unlike some earlier report that Sohu will provide functions that will somehow let its users to indirectly bypass the great firewall of China. It does no such thing. As a stock holder of Sohu, the last thing I want is for Sohu to have confrontations with Chinese government.

All this feature provided is that Sohu will provide dedicated servers so that China's students and researchers will access domestic news much faster and foreign web sites (that are approved by Chinese government) for free.

I am getting more and more impressed with Sohu every day. It seems to do everything right. It knows how to market its product and hype its portal's reputation. It is able to execute tremendous large project in a short time frame (its Olympics coverage). It is able to hire great talents and develop great products (Sogou Pinyin and Sogou Browser). It has a lay back CEO who let its talented marketing, management, and R&D team doing their things. But the same CEO is also able to focus the whole company in high value projects in a timely fashion.

Education network acceleration feature is one such example. There are a lot of companies developing browsers in China now. They all know the importance of the browser market in China (unfortunately, Wall Street has no clue of the significance of applications such as Pinyin Input Method or Browser). But no company had thought of doing this great feature. This feature allows Sogou Browser to lock up 5% to 10% of customer base from the starting gate.

Sogou Browser and Sogou Chinese Input System are potential historical moments. If Sohu can dominate Chinese Input System and Browser, it can dominate China's Internet industry (the whole industry, not just the portals or the advertising) the same way Microsoft uses its Windows operating system to dominate PC software industry in the 80』s and 90』s.

At this point, Sohu just started its Browser war. But the war on the Chinese Input System is almost over. If I have time, I will write a few articles on the progress of Sogou Chinese Input System.

In the 1970』s and 1980』s, it was an exciting time for the PC software industry. You have Word Perfect doing great word processing program. There is Lotus doing great Spreadsheet program. You also have Netscape doing great browser. There are a lot of other companies coming out with great products.

But Microsoft came in with one application (Windows) and just suck the whole industry dry. They basically monopolized the whole industry.

It is very possible that the history will repeat itself here in China. Except the company is not Microsoft and the industry is China's Internet industry.

Saturday, January 10, 2009

Sohu’s TLBB 4Q2008 Prediction

My last article on TLBB can be found here:


In this article, I am going to calculate the percent of growth for the game XYQ from 3Q 2008 to 4Q2008. I will be doing it using the server count.

The acronyms first -

ACU = Average Concurrent Users

PCU = Peak Concurrent Users

APA = Active Paying Account

ARPU = Average (Quarterly) Revenue per (Active Paying) User

QoQ = Quarter over Quarter

YoY = Year over Year

Now, let's do the 4Q2008 estimate for XYQ.

The server counts for the XYQ 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.

I have some computer problem during the months of November and December. That causes me to miss the server count for most of these two months. Therefore, I am not able to get the amount of server counts as I would like.

From the above table, I have a 4Q2008 ACU increase of 5.37% quarter over quarter (QoQ).

To calculate the revenue estimate for the 4Q2008, I use the following table:














Revenue QoQ




















The second row is the ACU QoQ increase (or decrease). SOHU only provides PCU in its earning conference. The ACU are my estimates and therefore is not official. The third row is quarterly revenue in millions of dollars. The fourth row is the QoQ comparison for the quarterly revenue. The fifth row is the APA in millions of players. The sixth row is the QoQ comparison for the APA. The Final row is the ARPU in Chinese currency (RMB).

Note that every number in the last column (for the 4Q2008) are my estimates. From previous table, I derive an ACU QoQ estimate of 5.37%. I use that number to give me a rough estimate for the APA QoQ. I conservatively estimate the 4Q APA QoQ number to be 15%. For ARPU, I think it has reach a stable point. Therefore, I use the last quarter estimate for the current quarter, or, it stays as 178 RMB.

With APA grows by 15% while ARPU stays the same, the revenue will grow by 15%. Therefore, the 4Q2008 revenue is estimated to be 58.65 millions.

Now I need to give derive an estimate for SOHU's other game, Blade Online (BO). The following table is the revenue for BO:






BO Revenue






If any thing can symbolize how can the number 1 gaming vertical, 17173.com (owned by Sohu) and number 2 internet portal can help drive traffic to a game, the recent rejuvenation of BO speaks volumes.

Even though TLBB is not a revolutionary game nor is it very pretty, it is a fun game to play. But a game like BO is a game that really has no redeeming features to it. On top of that, it is a licensed game.

But in the end, a game like BO will not be a major game. I think the recent surge will level off. I think the level off will occur this quarter. Therefore, I predict the revenue of 4 millions dollars.

Adds up the revenue estimates for the two games, we get a quarterly gaming revenue of 62.65 millions for this quarter. It is significantly more than the guidance of 57 to 59 millions SOHU given in the 3Q earning conference.

But I don't have much visibility on how well (or badly) SOHU's other branches (Advertising and wireless) will do this quarter.

Thursday, January 8, 2009

NTES Games 4Q2008 Prediction

This is the final part of a long series of articles.

For the article on XYQ, it can be found here:


For the article on XY2, it can be found here:


For the article on XY3, it can be found here:


For the article on XYW, it can be found here:


For the article on TX2, it can be found here:


Now I have the revenue prediction for TX2 and XYW. I also have the ACU prediction for XY2, XY3, and XYQ. Later on in this article, I will convert the ACU into the revenue estimates.

But first, I need to talk about DT, FF2, and DT2.

DT is a failed game. Its revenue per quarter had been fluctuate around 0.6 million to 0.8 million. I will use an estimate of 0.7 millions of revenue for DT this quarter.

DT2 is still in closed beta testing as of now. There will be no revenue from this game in this quarter.

FF2 is in advanced stages of closed beta testing. It will most likely be released in the 1Q2009. But as of now, I don't think NTES is getting any revenue from this game yet.

XYQ is doing very well. It is still growing at a very healthy clip.

XY2 is a big surprise. An ACU QoQ increase of 24% is simply amazing. XY2 is just a breath away from being the second million players mega-hit game for NTES.

XY3 is disappointing. Its traffic actually decreased in this quarter.

But XYW is the new star for this quarter. It has mega-hit written all over it. Even though its revenue contribution is very small during this quarter. But that is to be expected for a free-to-play game. Unlike paying games (where ACU and revenue have a linear relationships), a free-to-play game tends to explode exponentially during the first few quarters (from very low level of revenue in the first quarter to very high level in the next few quarters). XYW has all the marking to be the next mega-game after XYQ and XY2 for NTES. Most of all, I don't think NTES expected that, certainly not me.

XY2 has a very long lineage. It is one of the very rare mega game in China. Then NTES modified it and make a more cartoon-like game out of it in the form of XYQ. XYQ eventually becomes the number 1 game in China (some say in the world).

As XY2 getting long in the tooth. NTES builds its sequel, XY3, from the ground up. But somehow, XY3 is not as successful as NTES expected.

NTES made the decision to operate both games, XY2 and XY3, at the same time. But surprisingly, it is the older game (XY2) that starts to grow in an exponential way while the newer game languish.

NTES spent a lot of resource to develop the underlining game engine for XY3. NTES wants to get more out of its investment than just XY3. So they build the XYW. To everyone's surprise, XYW took off like a rocket.

Currently, NTES has four lines of games in its arsenals. The XY2 line of games will probably have 3 mega-hit games out of it. All four games are 2D turned based Cartoon style MMORPG game. XYQ is more cartoon-like while XY2 has more realistic cartoon drawing. XY3 is the same as XY2 except it is build on a brand new game engine. XYW is basically the same as XY2 and XY3 except it is the only free-to-play game out of the four.

The FF1 game is a failure so far. Hopefully FF2 will do better. FF1 and FF2 are cartoon like MMORPG games. They are free-to-play games. They are the only western themed games for NTES. They are also the only modern theme games for NTES. I expect FF2 will be released in 1Q (2Q at the latest) this year.

The DT1 game is also a failure. Again, hopefully DT2 will do better. The DTs are the so called 2.5D MMORPG games. They are highly realistic and very beautiful to behold. The underlining game engine was written in-house. DT1 is a paying game while DT2 will most likely be a free-to-play game. I think DT2 will be ready to be released by the 2Q2009. But there is a possibility that NTES will delay that for marketing reasons.

The fourth line of game is TX2. So far it is on its way to be a major game. Whether it be another mega game (half of million or more of players) is hard to tell. TX2 is NTES's first venture into the 3D MMORPG games. It is a free-to-play game. The game engine is licensed from an Australian company. Part of the reason of why this game might be hard to become a mega-hit game is because it requires users to have powerful computers to play this game. But I do think the revenue per users will be very high.

Now, let's find an estimate for the revenue for XY2, XY3, and XYQ. I will use the following table to calculate the estimate:




















Total ACU





Game Revenue




Revenue - DT










The 2nd to 4th row are the ACU number for the three games. When you adds up all three rows, you get the 5th row, total ACU. The 6th row is the game revenue. Assuming DT has revenue of 0.7 million per quarter, the 7th row is the total game revenue – DT revenue. By dividing that number by the total ACU, it will give us the 8th row.

From 2Q2008 to 3Q2008, (Rev –DT)/ACU ranges from 0.104 to 0.11. For the 4Q2008, I pick the middle number (0.107). By multiplying 0.107 with the total ACU of 972k, I got a Revenue-DT = 104 millions.

Now, we can find the total gaming revenue for NTES. It is calculated in the following table:


XY2 + XY3 + XYQ










Finally, we got the total gaming revenue of 110 million for the 4Q2008. Now, to get the total quarterly revenue estimate for the whole company, all one has to do is to add the estimated revenues for advertising and wireless services.


A test for now