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If onling gaming is growing so fast, why are the companies not valued more highly? May 6, 2009

Posted by jeremyliew in games, games 2.0, gaming.

Asia is significantly ahead of the US in the development of the free to play MMOG market. If China’s market is an indication, the future certainly looks bright. Says GamesIndustry.biz:

China’s online games market will exceed USD 5.5 billion by 2012, according to Pearl Research, which estimated that the market grew more than 63 per cent to USD 2.8 billion in 2008.

The study, entitled “Games Market in China”, reported that six online game operators, including Tencent, Changyou, The9, Netease, Shanda and Giant each brought in more than USD 200 million in revenue last year.

Peak concurrent user rates are phenomonal, especially when you consider that free to play MMO publishers in the west consider a game successful if they get more than 50k PCUs:

China’s most popular online games were named, with Netease’s Fantasy Westward Journey leading the pack at 1.8 million peak concurrent users, followed by Giant’s Zhengtu Online at 1.5 million.

Tencent’s Dungeon and Fighter hit 1.2 million concurrent users, while Blizzard’s World of Warcraft, operated in the region by The9, came in at 1 million users.

But a rising tide does not raise all boats. 70% of Chinese Gaming companies are operating at a loss according to iResearch Consulting Group:

There are about 200 online games in the Chinese market presently, said insiders. But only several developers can make a profit on their games, such as NetEase.com, Inc. (NASDAQ: NTES), Shanda Interactive Entertainment Ltd. (NASDAQ: SNDA) and The9 Ltd. (NASDAQ: NCTY).

Such estimates may stun those people who believe that the business generates huge profits. But from analysts’ points of view, the huge profits, if existing, have been killed by costs on human resources, hardware, promotion and after-services firstly.

T2 Entertainment Co., Ltd., a Chinese online game operator, invested about CNY 30 million in the South Korean game Freestyle before the open beta testing in China, including over USD 1 million on the operating rights and CNY 20 million on promotion.

Besides, the R&D of an ordinary three-dimension online game often costs CNY 10 million, insiders said, adding that of ten online games, only one is profitable.

Because of the hit driven nature of gaming, if the cost of a “shot on goal” is high (as the examples above suggest) then most launched games will not be profitable. Also each game is a “project” with an end-of-life, rather than having ongoing enterprise value. Some hits have the ability to build sequels, but in many cases a company that created a hit game in the past doesn’t have a guarantee that their next game will be a hit.

As a result, some of the nominally successful online games companies are not that highly valued. Shanda, NetEase, Changyou and Giant are all valued at over a billion dollars. However The9, noted above, currently has negative enterprise value. (See Avista Partner’s video game industry April Briefing – page 6 for online games.) This means that The9 is valued by the market at less than the amount of net cash that they have. (The9 recently lost it’s World of Warcraft license in China to NetEase. WoW represents 75% of The9’s revenue and they have not had a true hit of their own outside of WoW.)

The9 is an extreme case, but in general the median multiple for the online gaming category is just 7.0x 2008 EBITDA. Even for the four online gaming companies with more than a billion dollars in market cap noted above, 2008 EBITDA multiples average just 10x. Given the high growth rate of this industry, that is a surprisingly low multiple. As an online MMOG typically has a 4-6 year life, there isn’t much credit being given for companies being able to launch new hit games.

These relatively low multiple are being driven by three factors:

1) High cost to launch a new game
2) Low number of new games launched each year
3) Low probability of each game being a “hit”

In order to unlock the much higher multiples that a market growing as fast as online gaming should allow, companies will need to figure out a way to address one or more of these factors. I think a few of the free to play “social gaming” companies that are starting to figure out how to do this


1. If onling gaming is growing so fast, why are the companies not valued more highly? : PS 3 YOU! - May 6, 2009

[…] Here is the original post:  If onling gaming is growing so fast, why are the companies not valued more highly? […]

2. Matt Mihaly - May 6, 2009

What are you using to judge the average lifespan of an MMOG? I don’t think graphical MMOs have been around long enough to measure this properly yet.

Of the “big” graphical MMOs in the West, nearly all of the early ones are still operating. UO will be 12 in September. EQ is almost 11. Asheron’s Call is still around. Everquest is still around. Runescape is 8 this year. Habbo about the same.


3. vgworld.info » If onling gaming is growing so fast, why are the companies not … - May 6, 2009

[…] post: If onling gaming is growing so fast, why are the companies not … Leave a comment | Trackback No comments […]

4. Nabeel Hyatt - May 7, 2009

Hardcore MMOs, especially Asian one’s, seem to be going through the phase of the gaming business that the traditional console business went through in the late 80s/early 90s. Just Mario Bros and Pac Man had punctured the pop culture consciousness the video game business went increasingly hardcore in fighting for their highest engaged users, meaning every-increasing budgets and lowering profitability. Only recently, with the trends in social gaming, casual gaming, and the Wii/Rock Band have you seen massive growth opportunities in making games universal again.

I’d be interested to see the per-title profitability of Nexon’s more casual releases in Asia – like Audition, BnB, etc for instance (although i know they have struggled in the US).

Ultimately these look like the signs of a maturing hardcore Asian MMO market where the innovation has stagnated.

5. Lazaro Fuentes, CEO - May 7, 2009

We need a shift in thinking as regards virtual worlds [online games]. Content producers need to be careful to not be so “casual” about “casual gaming” as to forget “the story”.

In an era of multiplatform and multimedia distribution you need a narrative: a story. This allows you to monetize with music, books, an animated series, merchandise, yada, yada, yada, beyond the virtual world. They support each other.

Too much VC money has been focused on technology – which was great when the medium was in need of innovation – but its pretty damned innovative. Break out your writers and get back to basics: stories – content.

Just look at Club Penguin… it’s a great property, but it was just announced that they did not make their earn out numbers and will not get the $175MM for 2008 and most likely will not in 2009.

Is that because they are bad? No. It is because you can only take Penguins so far and then what?

Three phases of content development: Create, Launch, Sustain. Don’t forget the last one. Laz

Jeff - October 20, 2009

Hi Lazaro. I just tried googling the earn out info for CP but could not find it. Do you have the url announcing this?


Laz Fuentes - October 21, 2009
6. Keith Schacht - May 7, 2009

Jeremy, aren’t 1 and 2 opposite sides of the same coin? Am I misunderstanding or are there really just 2 factors?

7. Robert Brackenridge - May 7, 2009

Lazaro – I do believe that narrative is quite important to a world / game whether casual or not. But, I think you should take a closer look at Club Penguin, there is quite an extensive narrative there.

Perhaps it is not as striking as some of the fantastic story telling Disney is known for, but it is ever present none the less. Diving deeper also reveals the timeliness of their narrative.

Could it go deeper? Sure. Should it? I’m not positive that would help them build larger numbers…

Laz Fuentes - October 21, 2009


You cannot look at this as a virtual world. It’s a franchise, a brand. Where else can you take it? Movie? Done twice, not counting animated. TV? Done as well, with the Madagascar off-shoot? The DS did fairly poorly. The CP plush is languishing out there. The reason is not that Club Penguin is bad. It’s a fun gamming experience.

You need more than games in this business if you’re going to be around for a long time. The narrative is not the end, its the means to an end. Sustainability across various mediums and industries for the purpose of multiple revenue streams is the end.

Sorry that I had not responded, btw, I never received a notice and someone just connected with me here today. Thx. Laz

8. jeremyliew - May 7, 2009

@ Matt, some of the western MMOs you mentioned are still going but they are not at the level of usage that they were once at. I suspect 4-6 years (absent a very large update) is a reasonable estimate for the period before they drop below 50% of their peak usage

9. Amy Gu - May 9, 2009

also, i would say US investors are still worried on the online game business model in China. Also, there’s not a US comparable that they can follow. Would be curious to say how you think about this. Generally the reason why Baidu and Ctrip are so successful is because of the comparable model in U.S.

10. johnrocks - May 10, 2009

Revenue from China’s online gaming market reached US$298 million in 2004, up 48 percent from a year earlier, and could quadruple by 2009 as Internet access becomes more widespread in the region, according to market researcher IDC.
Young people between the ages of 19 and 30 accounted for more than three-quarters of the estimated 20.3 million people playing games online in China, according to IDC. Multiplayer games were most popular, it said.

11. Challenges in Online Gaming at Oregonstartups.com Blog - May 17, 2009

[…] Lightspeed Ventures blog post describes the profitability and valuation challenges in the gaming industry, and points to 3 […]

12. world cities - June 1, 2009

Jeremy.. thanks.

13. Langeweile - June 17, 2009

thats a good question, dude ,)
thanks for your nice post.. very helpfull!!

14. Watch Public Enemies - June 23, 2009

Nice Post! Thanks!

15. CPA Arbitrage Review - June 23, 2009

A very good post ! Thanks

16. Michal Todorovic - July 31, 2009

The problem with many online publishers is that they don’t know why their products were a success. They don’t properly metrics their losers (to fix them, or to learn why the product was a failure) and even less so their winners (to figure out what were the reasons the product was a success).

Many of these companies will be one or two hit wonders as they got lucky early, and will not be able to duplicate their earlier success.

Part of the problem is communication between management and developers. Some of it is just randomness.

Of course there will be the real winners who learn how to make great products more consistently. Those companies will earn higher multiples over time.

tournamentgames - August 31, 2009

I totally agree with you Michal Todorovic… Having the proper analytics and metrics set up is crucial to the success of any business including and especially the gaming business.

Good post!


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