Interview | The Economist | Changyou on NASDAQ + Some extra views

The online game subsidiary of Sohu, China’s #2 web portal, Changyou, went public last week on NASDAQ, breaking a spell of several months without IPO. Reporting on this story, The Economist asked us some comments and provided interesting angles. We’ll complete the picture with some extra comments.

(0) The IPO

About 15% of the company was floated for 120+ million USD with a nice 38% price bump on the opening day, putting it at a valuation of over 1 billion USD. Did the company left money on the table? Did they need money in the first place? (they had 200 million USD revenues and 100 million profit). Anyway, an IPO like in the old days.

(1) The conditions

Could they be any better?

• Clear sky: No IPO on NASDAQ since November
• Online game: “recession-proof” company (at least many seem to think so) with great numbers
• China factor: strong perceived potential

While we do not want to rain on Changyou’s parade and investors’ enthusiasm, we are not so sure any online game company can maintain easily its position in China’s cut-throat competitive market. There is also significant regulatory risk in this sector in China.

(2) The market

• Online ad market: 2,487 million USD (source: MIIT)
• Online game market: 3,040 million USD (source: iResearch)

| Most of it is digital goods!

• 55.5 million online gamers (source: CNNIC)

(3) What to learn & Possible futures

a. This is just the beginning

As of the end of 2008, there were more Internet users in China than people in the United States, and China is still at the beginning of the “S” curve of adoption, as barely 1/4 of its population is online.
Reflecting the country’s level of development, the average income remains around 400 USD per user, most of them find that online gaming is a very attractive value proposition for entertainment.

b. Why is there no strong online gaming market in the West yet?

Our view is a combination of:

• Legacy of packaged software
• Focus on low-hanging fruits (advertising)
• Slow to understand the idea of digital goods (we still hear “why would anybody pay for that?”)

c. What are the next steps for Chinese hugely profitable gaming champions?

Buy licenses? Fledgling foreign companies? We think there is a chance Chinese companies might shop for foreign brands and licenses in US, Europe and Japan within the next few years. It would be similar to what Lenovo did with IBM laptops, with the difference that there are much less difficulties with distribution.