Seeking Alpha
Long/short equity, deep value
Profile| Send Message|
( followers)  

Qihoo's games are the same; the revenue is out of line with other game platforms.

First, let's clear one thing up. Qihoo's (NYSE:QIHU) games are not different from its competitors' games. Look at the identical games hosted by both Qihoo and Renren (NYSE:RENN):

(click to enlarge)Renren

[1) Like pop songs, the games will eventually be replaced with newer games. 2) To simplify communication in English and to help readers independently verify the facts, I have used Google translations of the Chinese games. 3) The slide above was taken from a presentation on the same topic here.

(click to enlarge)Renren

(click to enlarge)Renren

The preceding images show identical games found on both Qihoo and Renren. But this is just one of many available comparisons. There are many other platforms offering the same games as well. For example, there is a popular web game in China written as "神仙道" - which Google translates as "Immortal." Below you will find some of the many online operators of this very same game. For each bullet below, click on the link next to the operator (as translated by Google) and you will arrive on a competitor's game platform. On arriving at the login page, look at the logo and compare it to the Chinese Characters for "Immortal": 神仙道. This is the same game that Qihoo is offering.

Click here and you'll see that Qihoo's wan.360.cn is just one of many game operators. The CFO stated that the games were ranked on the page according to popularity. He also said that the top 10 games brought in 60 to 70% of web game revenue. (here) In the presentation I have prepared (click here), you can click through to multiple operators for each of the top 16 games (July 15, 2012) on wan.360.cn's home page.

The second thing we need to clear up is what Qihoo says about its game revenue. It is not in-line with competitors.

Let's step back a bit and review the key metric. How much does each user spend on web games? From a company's perspective, that's thought of as the Average Revenue Per Paying User (ARPPU technically, but with Qihoo and many others, correctly or incorrectly, it is referred to simply as ARPU).

64.5 RMB, that's the average monthly ARPU I found in a sample of seven Chinese companies with online game businesses. (Source material in presentation: here)

Qihoo says that their game business is "different" and that they don't "compare." Well, no kidding. Qihoo sticks out like a CEO in an orange jumpsuit.

Qihoo sticks out and is not in-line with other game operators

(Qihoo actually said last May that they had 440 ARPU. But "440" is so painfully off the chart that I'm going to help out. Let's say that the CFO meant Average Revenue per Paying User before splitting revenue with developers 70:30 ‒ so I trimmed 30% off the top. (He didn't say that, but I'm just trying to give him the best footing possible.)

Alex Xu, CFO of Qihoo, Q1 2012 conference Call [Time: 47:18 ] (The emphasis is mine, here and throughout this article.)

Jan basically, as I mentioned the game business at the end of the 3rd quarter … I'm sorry, March, we have 87 games up and running on the platform, 139,000 paid customers … uh, paid players and the ARPU for the month was about 440 RMB per month.

Shanda Games (NASDAQ:GAME), Renren Inc. , Giant Interactive (NYSE:GA), Changyou.com Ltd (NASDAQ:CYOU), KongZhong Corporation (KONG), Tencent Holdings (700:Hong Kong), Kingsoft Corp Ltd (3888: Hong Kong)

That's an equivalent of $70…in China. What was he thinking? Certainly he misspoke?

See, if he didn't mean ARPU before revenue share, then the number becomes even more difficult to believe, as pointed out by this interviewer.

(From the i Wall Street Snowball column; professionally translated)

Question: "If your game revenue is all shared income, then according to your published figures, on average every paying game player, every month, will spend around 550 RMB on games. Is this a normal (level) of expense?"

[Qihoo CFO "Alex"] Xu Zuoli: "Our ARPU is 400 RMB, which is identical to the average value of the overwhelming majority of domestic web-based game companies and platforms, and is nothing special." ~

Title: "Qihoo Zuo Li, Xu, CFO: navigation page income 70% of the total advertising" Feb. 25, 2012 Original article: "奇虎CFO徐祚立:导航页收入占整体广告70%"

For those hoping for some official clarity…hoping that Qihoo surely had set the record straight in official, SEC filed documents…Well, they did offer clarity...in an SEC filing and in response to accusations that their ARPU was out of line, so you'd have to think that they got it right this time…right?

The monthly ARPU has been fairly stable at around RMB380.

This claim was filed with the SEC in December 2011 here.

Then in May Qihoo says their ARPU for March was 440! Qihoo truly is a unique company. It is so unique it does not even compare to its own prior statements. Is its ARPU 260 in October through December '11? Is it a stable 380 in December '11? Did the CFO really mean 440 in March '12? But what else? When challenged with the extremity of the ARPU, he declared it to be 400 in the iWallstreet interview. If that was net of revenue share with developers, does that mean that we can have 550 gross ARPU? Who really knows? Tencent, a web game powerhouse, comes in at less than 50.

Qihoo says that its number is in-line with others. Analysts have also said that Qihoo's ARPU is in-line with other web game operators in China. How is this possible? (If this is not a bluff, analysts, show your cards. Some examples are in order here. Where are they? Who are the "others"? )

The out-of-line ARPU was first brought to public attention by Citron Research. Qihoo declared in return that their revenue was in-line with others -- but without providing examples. However, at the same time they also claimed that their games were "different" -- they didn't do Massive Multiplayer Online (MMO) games.

"Qihoo 360's gaming ARPU is not comparable to that of other publicly listed Chinese gaming companies because almost all of them are focusing mainly on MMORPG games." ~ filed with the SEC, Qihoo 360 Responds to the Citron Report

"Qihoo 360's web game ARPU is very much in line with other major Non-Social WEB game developers and platforms in China. Yet the short sellers tried to mislead the public by comparing our ARPU to that of MMORPG game developers or SOCIAL game platforms. Comparing our Non-Social WEB games with MMORPG games or SOCIAL games is like comparing apples to oranges." ~ Short-Sellers Are Wrong Because Qihoo 360 Is Different

How can this be a good thing? MMO games earn more than casual games.

Shek Hon Lo - Tencent SVP and Deputy CFO:

In terms of the ARPU range for MMOG is 90 to 130 per quarter and advanced casual game is between 50 to 95.

Tencent Holdings Ltd Q1 2012 Earnings Call Transcript

MMO games earn more than casual games 75(To be conservative, I didn't take an average, but put Qihoo in the best light possible in the comparison: I took the top numbers, then divided by 3 for monthly consistency -- monthly ARPUs of MMO games came in at 43 RMB and Casual Games at 32 RMB.)

Here's what iResarch has to say:

And all the survey results indicated that the users of large & medium sized casual games had the lowest average age and the lowest personal monthly income. ~ (here)

As we have seen, Qihoo's ARPU is definitely not in-line with other web game operators. A "stable" 380 ARPU is not in the same ballpark as an average of 65. Hosting non-MMO games only makes these numbers even more painful to look at. We are not just comparing apples to apples, we are comparing this very apple to itself: Qihoo's gamers are not playing the same "type" of games as competitors … but the very same games.

Now here's a rare chance to look under the hood. Two of the games hosted on Qihoo's wan.360.cn are known in English as "Shen Qu" and "DDTank."

They are included in Changyou.com Inc.'s SEC filing:

Average revenue recognized per active charging accounts for 7Road's games were RMB50, an increase of 32% quarter-over-quarter. The increase was mainly due to players' average spending level for Shen Qu, which is a role-playing game, being higher than it is for DDTank, which is an action game.

~ 6-K as Filed with SEC & as reported on Changyou.com.

Now there are two sides to every transaction. ARPU isn't "just revenue." You can't just pull revenue by the ears out of a black hat. It's got to come from someone else. So ARPU also tells us what gamers spend. Take Qihoo's 139,000 gamers and as an average they only have so much money. We are supposed to believe that gamers were spending about $70 USD in March on Qihoo's games. China People's Daily Online said in 2011 that the average monthly salary for "fresh college graduates" was 2,500 yuan, about $400 USD. (here)

Factsanddetails.com reports:

About 70 percent of the [online game] players have an average monthly salary of around $300 month but many are students with no income. (here)

There are only so many ways to slice up a budget, but the more slices you make the thinner each piece must be (unless you're just telling stories). How much would the average person spend on virtual goods through Qihoo that they wouldn't spend through Renren?

Same games, same platforms,…but different revenue? Same chunk of cheese to start with … yet when you look at the pizza, you know whose two-pound chunk of cheese actually passed through the cheese grater and whose didn't.

Whose cheese got grated and whose didn't?

(click to enlarge)

ARPU 380 chunk of cheese

Source: Qihoo's ARPU: Playing Games With Investors