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TLBB 2 signals a new "TLBB Series" strategy

On February 4, Chinese online game operator Changyou.com (NASDAQ:CYOU), a subsidiary of Sohu.com (NASDAQ:SOHU), announced its plan to launch TLBB 2 in 2010, a sequel to the company's flagship game TLBB.

I believe this development indicates that Changyou has adopted a new strategy on TLBB: The company is now looking to fully realize the potential of the TLBB brand through developing a series of "TLBB games".

The "Series Strategy" has been used by many Chinese online gaming companies, and it worked particularly well fpr Shanda Games (NASDAQ:GAME): Shanda has built a "Legend Series", including The Legend of Mir 2 (Mir 2), The World of Legend (Woool), Legend Wai Zhuan, Legend Gui Lai, Woool Heroes' Legend, The Legend of Mir 3.

These variations of Mir 2 have allowed Shanda to satisfy the demands of different types of "Legend fans." As flagship games Mir 2 and Woool matured, their slow growth has been offset by the fast growth of other games in the "Legend Series". In my view, the "TLBB Series'" development will likely follow the path of the "Legend Series".

"TLBB Series" strategy implies increased significance of DMD

Since TLBB will likely follow the stable growth pattern of "Legend Series", I believe that Duke of Mount Deer (DMD), Changyou's next in-house developed game, should become an increasingly important factor determining investors' interest level in CYOU.

Although the company's product pipeline includes several licensed games to be launched in 2010, I believe these external games will unlikely become key growth drivers. In my view, Changyou's key competence is the seamless integration of its core team with its whole game development and operation process. TLBB is successful largely because the core Changyou team dominated the whole process of developing and operating the game.

Therefore, the strengths of the Changyou team will not be fully utilized when they operate a game developed externally. In conclusion, near-term results of licensed games are unlikely to significantly change investors' sentiment on CYOU.

DMD is the key for Changyou to demonstrate to investors that it can replicate its past success in game development, and its stock deserves a higher valuation multiple.

Disclosure: No positions

Source: Changyou's New Games: Key for Investors