By Gordon Chu | Tuesday, November 17, 2009

Very little surprises me about pop culture in China, but I have to admit it took me a very long time to wrap my head around the magnitude of online games. From MMORPG (massively multiplayer online role-playing games) to fun casual games, online games are a staple in the pop culture of China’s youth.

The latest figure for the online game market is just shy of 27.5 billion yuan – or close to a little over $4B (USD). While the current numbers fall short compared to that of the United States (currently first in the world), China is expected to grow up to 68 billion yuan ($10B USD) accounting for almost half of the world market by 2012. While I do take these figures with a grain of salt, it’s hard to argue against general consensus on the growth opportunity of online games in China.

Currently, the online game marketed by Shanda, ‘Aion’ is the latest buzz – or, at least the very least, for the foreseeable future. While I have the upmost faith in the game’s ability to continue to dominate the online game market, they really have not been around for all that long. Just one year ago, it was all about Blizzard’s ‘World of Warcraft’ until regulatory restrictions and time lag significantly sapped Blizzard’s momentum to continue its growing market share.

And so, Shanda was quick to pick up where Blizzard had left off and poached the online community with Shanda’s adoption of Korea’s most popular MMORPG, ‘Aion’. Just to give you an idea of the magnitude of ‘Aion’ in China today, in a corner of Tai Jiang City (Zheijiang Province) lies the future home of an amusement park around the central theme of the popular game. In the latest report released by Shanda, there are over 6.8M online players and continues to grow since its beta release in April 2009.

I see the game’s growth as more of a strategic move by Shanda and, frankly, am not all that surprised by the initial success. Looking at Shanda, it appears that luck always seem to find its way to them and with the latest news on Shanda’s joint venture with Hunan TV, I would not be surprised if luck strikes again and could very well be the biggest pay off yet.

BACKSTORY OF SHANDA

I admit, I am a big fan of Shanda. They are quintessentially on the cutting edge on both their online game strategy as well as their aspirations to be a true multi-platform media company. They may be the leading entertainment media company, but complacency is certainly is not in their vocabulary and are extremely active in breaking out of their niche and extend their footprint in the media industry.

In 2006, Shanda introduced their Chinese version of the set-top TV box (think Apple TV) called Shanda EZ-Pod. The concept was to integrate the television and PC experience in an interactive entertainment platform. Sounds easy, right? Unfortunately, the EZ-Pod failed to make any significant penetration in the China market mainly due to the fact the China market was simply not ready yet. Regardless, you have to admire the ambitious nature of Shanda to horizontally integrate itself from PC to the television set.

The EZ-Pod is just one example of Shanda’s business history (albeit a good example). They’ve dabbled as a private equity company investing in emerging game studios as well as entering the mobile market with the acquisition of a mobile entertainment service company in June 2009. Some ideas will work, some will not; however, I think this new venture will be the best bet yet.

BACKSTORY OF HUNAN SATELLITE TV

How Shanda is to online games, Hunan TV is to television programming. Really, Hunan TV (as I know it) has only been around since 2002 when it transformed from a news channel to an entertainment channel targeting exclusively at the young demographic. Since then, Hunan TV has pioneered programs that are still being used as the standard in excellence including ‘Super Girl’ (Chinese version of US ‘American Idol’) and, my personal favorite, ‘Ugly Wudi’ (Chinese version of US ‘Ugly Betty’).

These shows excelled beyond just that of production value and concept – these shows revolutionized different programming strategies that all other TV stations are now looking to emulate. With ‘Super Girl’, the idea of integrating mobile text messages introduced the idea of audience interactivity. And, with ‘Ugly Wudi’, the idea of brand integration is certainly the hot key topic in nearly all programming discussions.

So, question in-mind, what does this mean as a joint venture between the two mega-companies? Too soon to predict (beyond launching their original programs); however, the partnership itself has significance and will certainly be an indicator of what the media industry in China has in-store.

SIGNIFICANCE OF THE JOINT VENTURE

More Money, More Problems

The idea of ‘more money, more problems’ really applies to that of Shanda. Shanda Games having gone public at the end of September on NASDAQ (ticker: GAME), they all of a sudden are sitting on a heap of cash and a very strong fiduciary duty to make good returns to their investors. So, the billion dollar question is – what will Shanda do with $2B (USD) in cash?

In this particular case, using the proceeds of the IPO to fund non-game initiatives – such as this particular $88M (USD) joint venture with Hunan TV to produce and distribute movies / television series. Will the investment  pan out as planned? Too soon to make mention, but the best way to mitigate risk is finding the right partner (nice transition to the next point).

Perfect Match

If I was maestro of this deal and orchestrated the different partners who would be put into place, I could not think of a better partner for Shanda than that of Hunan TV. It’s not just about the innovative nature of Hunan TV’s business, but it’s also about the right timing of it all.

‘Ugly Wudi’ was a runaway hit the last two years and advertisers are flooding to Hunan TV to hopefully join the branded content bandwagon. Hunan TV already has in-place four more original series similar in programming style and continues to trail blaze new grounds in Chinese television. Now, here comes Shanda with the same philosophy to push the limits of new media, sitting on a $2B (USD) heap of cash, and ready to make this work for all.

The joint venture’s first project will be a remake of a TV series, ‘Princess Huanzhu,’ which is adapted from a Taiwanese novel of the same name. The second is to produce a movie based on ‘Xing Chen Bian’ – a popular novel from Shanda Literature (how convenient) with an adapted online game soon to follow.

From Games to Television

If it wasn’t obvious enough, this joint venture would be the first example of an online game company making headway into other facets of media. For years, online games and television have been placed in their nice respective silos separate from one another. Yes, there would be cross-platform marketing campaigns and other channels where the two would co-exist, but never has the integration between the two very different markets has been so incredibly meshed together like this joint venture.

To me, the deal signifies more than a mash-up between industries, but is the catalyst of other companies looking to cross barriers and push the envelope of media integration. Who knows what the next ‘big thing’ might be, but creativity is the only limit and this joint venture marks one of the flagship times of history in the making.

Share in Financial Risk

For years, China’s TV industry operated very much on a one-way street: content providers and advertisers worked with (or for) the television stations. Distribution is king in China and has always held the power when working with both content providers and advertisers. After all, they were state-ran and there was no need to necessarily be commercially efficient.

However, as of recent, there is a new world order. Not to say that the power has shifted entirely to the content providers / advertisers, but they are making significant leeway. Case in point – the joint venture involved two parties investing $88M (USD) in total. Now, what the splits were between Shanda and Hunan TV, I really do not know, but the idea that Hunan TV would invest hard cash into any new venture marks a big swing in leverage in China.

CONCLUSION

Nobody really knows if the joint venture will really work as they expect it to. It may be wildly successful, or could be an $88M (USD) flop. Whatever the future holds the macro effects of these deals will define the media industry in China (and with ramifications globally as well). Of course, I’m fairly optimistic on the idea and look forward to a brighter and more dynamic media future.