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Shanda Games (NASDAQ:GAME), a subsidiary of Shanda Interactive Entertainment (NASDAQ:SNDA), reported 1Q10 earnings on June 1. Despite overwhelmingly negative comments by Wall Street analysts, the stock has risen 13% since reporting. There were two bright spots in Shanda's 1Q10 results: all-time high Active Paying Accounts (NYSE:APA) for its Massively Multiplayer Online (MMO) games, and record Average Revenue Per Paying User (ARPU) for casual games.
Although ARPU for Shanda's MMO games declined 21% Q/Q, the APA grew 2% Q/Q to an all-time high of 9.62 million. According to my research, facing declining ARPU in its flagship game Mir 2, Shanda reduced the level of monetization across-the-board for its MMO games in Q1. This move decreased ARPU, improved player experience, helped retain Shanda's existing user base, and contributed to the all-time high APA. This strategy reminds me of the Chinese proverb "As long as the green hills last, there'll always be wood to burn." I believe Shanda has made the right decision: After all, users are the most fundamental and valuable asset of any online game. Shanda is not alone in this aspect - its competitor Perfect World (NASDAQ:PWRD) has cut monetization to retain users in 2Q10.
Monthly ARPU of Shanda's casual games surged 39% Q/Q to an all-time high of RMB 29. The strong growth in ARPU was the primary driver for the 47% Q/Q increase in casual games revenue. Some investors view this as a negative sign because high ARPU is difficult to sustain. In my view, the monthly ARPU of RMB 29 is quite affordable, and Shanda's casual games may have been under-monetized in the past. Although casual games' ARPU is expected to drop Q/Q in Q2 due to seasonality, I believe it still has plenty of upside in the future.


Disclosure: No positions
Source: Two Bright Spots in Shanda Games' 1Q10 Results