TLBB Status Update

My last TLBB specific post is here:

http://chinese-net-gaming-stock.blogspot.com/2008/02/tlbb-expands-oversea.html

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

Month	Saturday	4Q2007	1Q2008
1	1
	2
	3	447	545
	4	450	496
2	1	481	461
	2
	3	502	499
	4	500	526
3	1	500	480
	2	510	482
Holiday	4	395	431
	5	401	436
Total		4186	4356

The first column is the month. There are three months in each quarter. Both 4Q2007 and 1Q2008 have a one-week long national holiday. I compare the holiday between the two quarters also.

The second column is the Saturday in each month. Most month has 4 Saturdays. I also compare the 4^th and 5^th day of the 1-week long national holiday. The third column and fourth column are the peak concurrent user number for that particular Saturday (or holiday).

The last row is the total (or the sum of all the rows).

You may ask why are so many days missing. Well, I can no longer stay up during the wee-hours every day to keep track of the server counts.

From the last row of the table, you can see the average concurrent user has increase by about (4356-4186)/4186 = 4%

But how can we use this estimate (+4% in ACU) to give us an estimate for the game revenue for Sohu? The answer is we need to do a lot of guess work.

Note that since I only have a few data point in calculating ACU, this ACU estimate won’t have any relevance when compare with ACU that were developed using more data points. But it is ok to use it for this particular case.

The following is a table for Giant Online’s (ZhengTu) game statistics

	3Q2006	4Q2006	1Q2007	2Q2007	3Q2007	4Q2007
APA	.698			1.248	1.318	1.405
APA (%)					5.6%	6.6%
ARPU	220		320	295	305	309
ACU	271			515	481	512
ACU (%)					-6.6%	6.4%
PCU	558			1072	880	983
PCU (%)					-18%	12%
Revenue	23.7			48.9	54.1	59.6
Rev (%)					10.6%	10.2%

The second row is APA or Active Paying Account in unit of millions. The third row is the quarter over quarter (QoQ) growth of the APA. The fourth row is ARPU, or Average revenue per active paying customers. The fifth row is ACU (Average Concurrent Users) in unit of thousands. The sixth row the QoQ growth of ACU. The seventh row is PCU (Peak Concurrent Users) in unit of thousands. The eighth row is the QoQ growth rate for PCU. The ninth row is the monthly revenue in millions. Since Giant Online only have one game of significance (ZhengTu), they also represent the revenue generated from this one game. The final row is the QoQ revenue growth.

One thing interesting can be found on 3Q2007 estimate. On 3Q2007, the ACU decreased by 6.6% and PCU decreased by 18%, yet the APA increased by 5.6% and the revenue increased by 10.6%.

This shows that both PCU and ACU are not very reliable estimate for free-to-play games. APA and ARPU are much more reliable. I think since ZhengTu is a relatively new game, both APA and ARPU tend to trend up from quarter to quarter. While increase in ACU tend to for-tell increase in APA, the reverse might not be true.

The following table has the statistics for TLBB.

	2Q2007	3Q2007	4Q2007
PCU	400k	400k	500k
PCU (%)			25%
APA	209k	690k	1100k
APA (%)			59%
ARPU	82	118	147
ARPU (%)			25%
Game Revenue	3.8	12.7	24
TLBB Revenue	2.3	10.9	22
TLBB Rev. (%)			102%

This table is pretty self explanatory. Compare this table with the table for ZhengTu, we can see several points. Compare TLBB’s PCU of 500k and ZhengTu’s PCU of 1072k, TLBB may still have a way to go. Not saying TLBB will eventually has as many users as ZhengTu, but considering how young TLBB is, the odds are TLBB’s PCU will significantly improve.

Compare TLBB’s APA of 1100k with ZhengTu’s APA of 1405k, you would think TLBB’s APA will grow, but not by a very big percentage from quarter to quarter.

Compare TLBB’s ARPU of 147 with ZhengTu’s ARPU of 309, I think TLBB’s ARPU can still have some distance to grow. In the earning conference, Sohu say that they predict the peak ARPU is 170. I think they are way too conservative.

I think in two to three quarters, the APA will probably be something like 1600k (or 45% increase) while ARPU be something like 190 (or 29% increase).

Now, given an ACU increase of 4% quarter to quarter, I estimate we shall have APA increase of 8%. For the ARPU, I estimate we might have 5% increase. Thus, the revenue from TLBB shall have an quarter over quarter increase of 1.08 * 1.05 = 1.134, or 13.4%. or the revenue from TLBB will be 22 * 1.134 = 24.95M

The following table is the revenue from Sohu’s other game, Blade Online

	2Q2007	3Q2007	4Q2007
Blade Revenue	1.5	1.8	2.0

Assuming Blade Online no longer grows, I predict that Sohu will get 2M from Blade Online in 1Q2008.

Combine the two, we have the total game revenue of 24.95+2 = 26.95M for 1Q2008. Compare to Sohu’s guidance of 25.5 to 26.5 millions, I think Sohu gave a pretty good guidance for the gaming portion of her revenue mix.

New TX2 Status Update

I was thinking about doing an update on the progress of games by Sohu and Netease after March, or after the 1^st quarter, but a lot of people had asked for it. So I am going to go through them in the next week or so. (Note, it is kind of strange that people want to know the status of these games now rather than after the 1^st quarter is over, is there anything going on in the next two weeks?)

I will start out with Netease’s TX2. My last post on TX2 is as follows:

http://chinese-net-gaming-stock.blogspot.com/2008/01/tx2-will-be-free-to-play.html

During the 4^th quarter earning conference call, Ntes said that TX2 will be going into closed beta during the 1^st Q 2008.

On 2/29/2008, TX2 went into very small scale closed beta testing. At this point, not much can be said of the game. But information about its graphical quality had dribbled out.

On 3/24/2008, TX2 will start the large scale closed beta testing.

The following are some in-game images captured by close-beta testers. It originally comes from this link:

http://tx2.netease.com/viewthread.php?tid=255790&extra=page%3D1&page=1

I will give a brief description on the images.

The first image is about the female character played by a closed beta tester. She went to a little village and get an assignment.

The assignment is to kill a millipede. The blue scaled horse thing next to her is a mythical Chinese creature called “chi-lin”. It is a very powerful animal. It is also her companion or pet.

Next, she is killing this fish monster.

More fight with the fish monster.

Now, she is talking to some in-game characters.

This is a picture with some interesting looking Chinese mythical beasts

Now, the above give a pretty good indication of how pretty the game is. But since they are still pictures, one can’t get any sense of fluidity and motion of the game.

The following is a video on a boss fight in a TX2 side quest. Don’t pay attention to the graphical quality of the video. There will be a lot of quality loss whenever it needs to be compressed on a youtube-like video.

http://v.youku.com/v_show/id_XMjAyNTE1MTY=.html

Nothing much can be say about this video. A team of 5 players went to this TX2 quest. It has two bosses. They killed the first boss. They had trouble with the second boss (a big spider). They were defeated by this spider boss twice. Eventually, they gave up.

By observing the still image quality of the captured images and observing the motion quality in the above video, one can get an idea about the overall video quality of TX2 game.

First of all, it is a very beautiful game. Probably even more beautiful than World of Warcraft (or at least on par). The style of the game is definitely Chinese. But less Chinese than the older TX2. The backgrounds are more detailed now. The background on the old TX2 game is more like a traditional Chinese drawing.

Actually, this is one of the main arguments on Netease users forum. The old TX2 players hated while the new TX2 players think it is great.

One of the main objective for the game designers is to make this game novice friendly. I honestly don’t see any closed beta players complaining about the difficulty in picking up the game play. That is a good sign. But hardly convincing because most closed beta players are pretty experienced (not novice).

At this point, it is impossible to know about the game play features. The closed beta just get started and Ntes has just started slowing releasing features.

So we know this game have eye-candies. But will this be a blockbuster game? I don’t know. I am pretty sure this will be a very successful game.

I think there are four factors that will determine whether this game will be a blockbuster game. First, the old TX2 is more like a global domination game where gangs (countries, or tribes) of hundreds of players fight castle siege battle.

It sounds great, but that also make it into a niche game. A game more like World of Warcraft has much broader appeal.

Second, the old TX2 is very much technology limited. Only players with newer PCs can play without much stutter. The newer TX2 has to have a much more forgiving game engine that allows much broader players (players with older computers) to play.

From my previous write up, TX2’s programmers use the updated game engine (the Australian game engine) and completely rework all the computer code to make the game more forgiving. We won’t know until more information is out. But a few posts mentioned in the users forum seem to suggest Ntes had done a pretty good job about this.

The third reason that might trip up TX2 is that it is Ntes's first attempt at free-paying game. It is probably less a worry. Other companies had been converting paying game to non-paying game in much more efficiency and under much stringent conditions. Ntes had so much time to work on it, they ought to get it right.

The final possible reason that may hold TX2 back is the lack of marketing sophistication of Ntes. Ntes haven’t marketing its games for the last few months. That is just absolutely unforgivable. It will probably make wall street analysts happen in the short term (less spending), but I care much more about the long term success of TX2. There are so many quality games out now, Ntes is still thinking like an ancient dinosaur.

I am very confident that this game will be very successful (at least a success game with a PCU of 200k). But whether it will be a blockbuster that will have PCU of 1 million or just a successful game with a PCU of 200k, I will have to wait another couple of months to make any prediction.

Statistics from DCCI on China’s Online advertising revenue

The following is an article on some “tigergate” stuff.

http://www.australianit.news.com.au/story/0,,23313705-5013040,00.html?from=public_rss

The original article is from the Wall Street Journal. The following is the Chinese translation of it:

http://community.yikuo.com/discuz/contentpage/200833/20083381241897.html

Nothing much about the story. But it does have the statistics from DCCI (Data Center of the China Internet).

I am sure I can find the information in DCCI site (their site: http://www.dcci.com.cn/List/1.21/2008-1-21.shtml ), but I will just give the important information below:

On China’s ad revenue, Sina, Sohu, Netease, and Tencent are the top four portal (in that order) and together get about 75% of total online brand advertising revenue.

The ad revenue from 2006 to the projected 2009 revenue and their year over year growth rate is as follows:

	2006	2007	2008	2009
Revenue (RMB)	10B	12.35B	16.19B	21.33B
Revenue (USD)	1.4B	1.74B	2.28B	3B
YoY Growth Rate		23.5%	31%	32%

Note: Assuming today’s conversion rate of 7.11 RMB for 1 USD

Now compare this to iResearch’s numbers (can be found here:

http://chinese-net-gaming-stock.blogspot.com/2008/03/iresearchs-china-advertising-market.html).

First of all, revenue of 1.74B for 2007 are just way too high. iResearch report’s portal advertising revenue of .417B for 2007 is more realistic. It is possible that DCCI is adding all the revenues (not just ads) for the companies.

The following table is 2007’s total revenue for the 4 portals:

	Tencent	Ntes	Sina	Sohu	Total
2007 Revenue	479	316	246	189	1.23B

Thus, the four portals’ total revenue accounts for about 1.23/1.74 = .71 or 71% of the total industry.

Unfortunately, total revenue (rather than advertising revenue) is not very meaningful. Tencent and Ntes make most of money in games. Sohu is big on games also. Sina and Tencent has big presence in wireless value added services.

Now, lets look at their prediction on 2008 and 2009. They predicted a nice increase of 31% and an even better 32% increase in 2009. Compare this with iResearch’s prediction of 62% increase in 2008 and 35% increase of 2009. (Note, I am not compare the exact numbers. DCCI’s number of total revenue is composite number. iResearch number of advertising revenue is much more specific. They are not apple to apple comparisons. But I am comparing the trend).

I think there are two school of thoughts here. One believe there will be nice pick in 2008 due to Olympics. But this pickup is not that strong as most people predicted. But China’s internet market is still at its infant stage and the pickup will continue and gathering speed through the next few years. I think DCCI is in this camp.

On the other hand, iResearch seems to suggest the best years for China’s internet sector is over and 2008 is the last year for any strong growth for China. After 2009, China’s internet industry will represent sun-set industry.

Clearly, comparing to US’s internet sector’s experience, considering how fast China is growing, considering only about 15% of Chinese are netizen, and considering how China’s internet companies represents only a tiny percentage of overall China’s advertising industry, it is pretty clear to me that I do not agree with iResearch’s prediction.

When I wrote the video report in September last year, (see my write up here:

http://chinese-net-gaming-stock.blogspot.com/2007/09/sohu-video-tv-stations-opened.html ), I predicted that Olympic this year will give the portals a good year. But starting 2009, there will be a revolution for the portals.

I understand that this line of thinking was against popular thinking. I think most people believe that there will be good growth in 2008 and follow by flat growth in 2009.

I think people are way over-emphasize on the effect of Olympics. I believe the Olympics will give the portal a good pop (though not great). But the real benefit of the Olympics will be to serve as the demonstration platform for what is to come next.

At this point, the portals are largely a text reading experience. But as the portals starts to add video, audio, and web-2.0 contents, they will start to take business away from the traditional TV and radio industries. China’s TV and radio industries are dotted with stodgy state-owned companies.

I believe that Olympics will serve as the demonstration of this new capability and starting 2009, we will start to see this fundamental industrial trend happening.

It was just my gut feeling and I don’t really have much data to back up my prediction. I am so glad an organization like DCCI with its survey results and expert prediction seems to match what I predicted.

Again, in one to two years, I will keep track with both DCCI and iResearch to see which one is right.

iResearch’s China Advertising market survey and prediction

On 2/21/2008, iResearch published their survey as well as their prediction on the China’s internet advertising market. See the following link:

http://www.iresearch.com.cn/html/consulting/online_advertising/DetailNews_id_76730.html

I don’t usually study their survey because I usually have some doubt about their mythology and accuracy. But I will study this one just to see I can see some patterns.

In this survey, they break it out to brand ads, search ads, classify ads, email ads, etc. For now, I just look at the brand ads.

First, I will make a table to make it more understandable:

	2004	2005	2006	2007	2008	2009	2010	2011
Total Ad	2.35	4.07	6.05	10.61	17.23	23.23	29.74	36.99
YoY	78.6%	78.9%	48.6%	75%	62%	35%	28%	24%
Brand Ad (%)	55.6%	50.1%	49.3%	45.9%	45.8%	42.3%	40.7%	39.3%
Brand Ad	1.307	2.04	2.98	4.87	7.89	9.83	12.1	14.54
YoY		56%	46%	63.4%	62%	24.6%	23%	20.2%
Portal %	51.3%	44.2%	39%	28.3%	27.2%	24.3%	22.7%	21.1%
Portal (RMB)	1.206	1.8	2.36	3.0	4.68	5.645	6.75	7.805
YoY		49%	31%	27%	56%	21%	20%	15.6%
Portal (USD)			.33	.417	.65	.784	.94	1.084

The second row is the total advertising market in China. The number is in unit of billions and it is in China’s currency, RMB. The third row is the year over year (YoY) growth rate of China’s total advertising market.

The fourth row is the brand ad as % of the total advertising market. The fifth row is the brand advertising market in China. Again, it has the unit of billions of RMB. It is just the product of the second and the third row. The sixth row is the year over year growth rate of the China’s brand advertising market.

The seventh row is the revenue from the portals (such as Sina, Sohu, etc.) as % of total advertising market. The eighth row is the revenue of the portals in unit of billions of RMB. The ninth row is the year over year growth rate for the portal’s advertising revenue. The final and tenth row is the portal’s revenue in USD. Note it is converted using today’s conversion of 1USD = 7.2 RMB.

Right away, we see something is wrong. For example, the growth rate for the brand ad market in China is 63.4% in 2007.

But how can this be? The following table has the advertising revenue from the top three portals. They are the year over year growth rate for the 4 quarters of 2007. Note that I only have the total advertising number for Sina and Ntes.

	1Q07	2Q07	3Q07	4Q07
Sina Ad	43%	40%	40%	40%
Sohu Ad	27%	24%	32%	35%
Sohu Brand Ad	41%	38%	42%	46%
Ntes Ad	-10%	-4%	2.5%	36%

There is just no way the brand advertising market grow as fast as 63.4% as indicated by iResearch data. But I think the confusion could be easily explained by iResearch doesn’t classify brand advertising, email advertising, multimedia advertising, search advertising, the same way most company does.

Some analysis on iResearch’s data.

The third row of the first table provides the YoY growth rate for China’s advertising market. There is a jump in 2007 and 2008. Then a very dramatic slow down in 2009 and beyond. The jump in 2007 and 2008 is largely because of the rise of the search engine.

But they don’t seem to capture the effect of the Olympics since they predict 2008 will have a slower growth rate than that of 2007. Their prediction of de-accelerating growth rate in 2009 and beyond is a little hard for me to believe. But that is their prediction.

From the ninth row of the first table, it has the YoY portals’ advertising growth rate. From those data, it looks bad! The 21% growth rate in 2009 is horrible!

As a matter of fact, iResearch is painting a very bleak picture of the whole China’s internet market place. That it will only growth at a meager 24% by 2011 is horrible!

I think there are four problems with iResearch’s methodology. First, as I mention before, iResearch seems to classify different advertising segment differently than most Chinese companies. It makes an apple to apple comparison difficult.

Second, their methodology is by observing one hundred thousand Chinese users and 170 Chinese companies over long term. It has its values. But how can that capture the extra-ordinary expansion of China’s internet growth (only about 15% of Chinese are netizens). By only focusing on segment of existing users, how can they capture all the new users.

Another thing is happening right now is the fundamental changes in China of changing from a text based internet to a multimedia based internet. I don’t believe iResearch capture that in its prediction.

Finally, I believe there are tremendous technology advances in China’s internet sector. Those advances will start to such revenues from China’s traditional media (TV, radios) onto internet. I don’t think iResearch accounted for that in its predictions.

But that is just my opinion. But if you believe in iResearch. China’s internet companies will enter nuclear winter stage starting 2009.

I don’t know who is right, but I will keep track of it. It will be interesting to see what iResearch's report will say this time next year.