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Megan: Nuts to Changyou IPO
Financial tempest, everyone's out of the listing pool, one kid decides to jump in and hysteria makes a splash. That is to say, in a time when IPO delays are the norm, Sohu's (Nasdaq:SOHU) MMORPG subsidiary Changyou.com Limited submitted its F-1, and The Wall Street Journal's take on the news is drenched with praise. I take issue because the report ignores the fact that Changyou's "amazing" performance is riding on one product, and The9's (Nasdaq:NCTY) brush with bankruptcy is just one example of how reliance on a single game, no matter how masterful, doesn't spell success.
Considering competitive heat and a redundant pipeline, I'm wondering if Changyou is going to be able to get off TLBB life support -- so far 92% of the company's active paying accounts come from in-house developed 2.5D MMORPG Tian Long Ba Bu (TLBB) -- and offer big returns to investors. The company has five games in its portfolio and all of them are 2-2.5D MMOs based on martial arts and Chinese myth. I realize, thanks to some leisurely lectures from our resident game analysts, that, as a rule, a lot of domestic game companies pump out game after game of the same to create a seemingly never-ending life cycle that industry hands refer to as "rebirth." But, it doesn't always work, and, frankly, I'm not impressed with the lack of variety. Thanks partly to "culture"-obsessed publications bureaus, martial arts games aren't exactly in small supply, and recent game news is being made by foreign-influenced casual games, not MMOs.
Beyond its current pipeline, Changyou faces another problem with product diversification. Sohu and Changyou entered an agreement effective January 2009 that bars the game unit "from entering into any non-MMORPG businesses conducted or contemplated to be conducted by Sohu ... [who] currently offers casual games in addition to Internet portal, search and mobile value-added services." The agreement doesn't define casual games, but whether that means Changyou will serve up applicable content is unclear and increasingly crucial -- JLM data indicates that future growth in the online game industry may be led by casual games.
Obviously, Sohu has a stake, should be about 70.7% after the offering, in letting Changyou thrive, but making it in China's severely overcrowded game market isn't as simple as large population times past growth. TLBB is still alive and kicking, but to make it in China's online game industry, you gotta offer more than more of the same.
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Megan Ko edits reports, interviews and blogs.
