Accessing his favourite online game, Sun Li realised something was different as he tapped in his username: Legend of Mir II was running free of charge.

"What's happened?" murmured Sun, accustomed to having to pay to play the Shanda Interactive Entertainment Ltd game.

Had anarchist hackers broken into the system and made it free for everyone?

Was there some kind of virus eating away at Mir II's coding, of which this was a symptom?

Had he accidentally stumbled across a previously unknown portal where he could access the game for free?

No.

What Sun was experiencing was the Shanghai-based company's latest stab at cornering the online games market.

Changes making Mir II, Shanda's most successful online game, free to play were rolled out late last month, in a move targeted at expanding the company's subscription base in the increasingly competitive online gaming sector.

The NASDAQ-listed firm, China's largest online game operator, launched Mir II more than four years ago, and had been running the game under the widely adopted pay-to-play revenue model.

Subscription fees, where users are charged 0.2 yuan to 0.4 yuan (2-5 US cents) per hour, have long been the lifeblood of game developers.

Under the new model, while it is free to simply play the game, charges are levied on desirable add-ons and extras.

"We believe that adopting the free-to-play revenue model for more games will benefit the company in the long run," said Chen Tianqiao, chief executive officer (CEO) of Shanda.

Another domestic game operator, Magical Land, has allowed its users to access its game's basic functions for free since November 24. Shanda applied the new model to another online game, World of Legend, on December 2.

Subscriber Exodus

The increasing popularity of the "free-for-play" scheme underlines the increasing competition in China's online gaming industry. Shanda has been a dominant player in the industry but subscription growth had slowed due to the increasing challenge from its domestic rivals NetEease and The9.

The peak and average user numbers on Netease's online game Fantasy Westward Journey reached approximately 827,000 and 345,000 respectively, in the third quarter of this year.

The figures for The9's online game World of Warcraft were approximately 467,000 and 240,000 respectively.

Shenzhen-based Tencent, an instant messaging service provider, also kicked off its own online game, QQ Fantasy, on December 8. By November 26, the firm said the trial version of the game had attracted a peak of 660,000 online users.

In contrast, Mir II, despite its runaway success over the past four years, has begun losing its lustre.

The average number of Mir II players online at any one time plummeted from 381,000 in the second quarter to 233,000 in the third quarter, driving the average number of online gamers playing Shanda games at any one time down to 630,000.

Analysts have also attributed the launch of Shanda's free-to-play model as a response to the Chinese Government's Game Fatigue System, which aims to control the amount of time young people spend escaping in online games.

Under the scheme, users who play less than three hours a day are deemed "healthy," while users who spend more than five hours online are labelled "unhealthy." "In the long run, the change of our charging model will not cut our income, and our market share will shoot up," says Li Lijun, a Shanda press officer.

According to Jim Sun, an analyst at Evolution Securities, Shanda's dropping of the pay-to-play model makes perfect sense. "Though Shanda's revenue from Mir II is expected to decrease by 50 to 60 per cent in the first quarter of 2006, the number of users will rise by 60 to 70 per cent," he explains.

The new model is also aimed at attracting more users to Shanda's other services, he says.

Shanda is due to launch a new game, Dungeons and Dragons, in 2006.

Online gaming has long been Shanda's largest source of revenue but, in the face of growing competition, the firm is diversifying.

Shanda has acquired stakes in NASDAQ-listed Sina Corp, China's largest Web portal, as part of its drive to build a media entertainment empire.

Analysts believe the expanded subscription base, brought by making games free to play, will help Shanda claim larger revenues from its other services.

The Shanda EZ Interactive Home Entertainment Solution rolled out in October is part of that ambition.

It connects televisions to the Internet. With a set-top box, users can surf webpages, download music, and play games on a television.

Chen Tiaoqiao expects EZ interactive home entertainment to become a new source of revenue in the fourth quarter of 2005.

But, "right after the free-of-charging model is launched, revenue may go down a bit," says Li.

The day after the new revenue model was made public, Shanda's share price tumbled 12.29 per cent.

Sun says Shanda's switch to a free-of-charge model will result in an immediate loss of 60 per cent of revenues generated by Mir II. And "that meanas a loss of 18 per cent of Shanda's total revenue."

Mir II accounted for 30 per cent of Shanda's total revenue in the third quarter of 2005.

Future of online gaming

Fu Xinghua, a senior analyst with Analysys International, a Beijing-based technology consultancy, believes the switch to a new revenue model heralds the future of the online gaming industry.

"Switching from the pay-to-play model to value-added services is a step forward," he says.

Li Lijun says because online games in China are all so similar in terms of content, Shanda was forced to make inroads into premium services to differentiate itself from rivals.

Making the add-ons players have to pay for more appealing is decisive to the success of the new model, says Fu.

But for all the claims that Shanda's approach marks the dawning of a new age, Pacific Epoch, a technology consultancy, says that for the next few years, traditional online gaming will continue to dominate the industry in terms of revenue, branding, and core strategy. The new revenue model will be limited to second-tier and aging games, it claims.

Shanda's major competitors are cautious in their approach to the free-of-charge model.

The9 said it has no plans to change its existing pay-to-play revenue model in the near future and Tencent has said it will not change subscription plans for QQ Fantasy.

Netease was not unavailable for comments on Shanda's new move.

But industry observers say that if the free-to-play model works in the coming months, Shanda's competitors will be forced to follow suit.

(China Daily 12/19/2005 page5)