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How To Analysis The ARPU Of Qihoo

|Includes: QIHOO 360 Technology Co. Ltd. (QIHU)

Mr. Berry posted an article "Qihoo's ARPU: Playing Games With Investors" on Seeking Alpha this Monday. Mr. Berry said that:" Qihoo's games are the same; the revenue is out of line with other game platforms". He has doubt on Qihoo's ARPU because it's higher than other game platforms who have a lot of identical games comparing with Qihoo. By compaing Qihoo with Renren and other online game platforms, the author asked:" same games, same platforms,… but different revenue?"

I don't know Qihoo's exact ARPU so I'm not going to talk about this. I just want to share some of my personal view on game platforms, which might help answer the question why same games could bring in different revenue on different platforms.

A game platform is a platform that offers all kinds of games for players to choose. It is not necessarily the creator of all the games it offers. It is like a supermarket with all kind of inventories for buyers to consume. With time goes by, a good game platform will attract more and more users. Then the game platform could convince game developers to put their game on the platform and share revenue with the developers.

Different game platforms have different focus and different marketing strategies. Some platforms focus on MMORPG, and some focus on browser game. Users of each platform are not the same. Renren's user are students or the white collar. A large percentage of Tencent's users are between 12-26 years old. We cannot say that since these platforms offer some same online game, these platforms are the same. What also matters is the user group of a platform. You can't say that Qihoo is the same platform as Renren, as you can't say Facebook is the same as LinkedIn since they are both social networking websites. And obviously different platforms have different major user groups.

Qihoo got to known by people via offering free antivirus software - 360 Antivirus. People who used antivirus back then were people who are in the IT industry, then the white collar and later the households. Now it has about 370 million users. Renren has 154 million users and 40% of them are students. Since different platforms have different user groups, their users' revenue could not be the same. Students who are still in school or just graduated wouldn't spend as much as those people who have worked for many years. Mr. Berry could not believe that fresh college graduates whose monthly salary is $400 would spend $70 on online game. But not all the people playing online games are fresh college graduates. People who spend the most on online games are middle-aged businessmen. And how much would people spend on online game does not totally depends on their revenue. It is possible that people who earns $400 spend $70 on games. Many people with no income like high school students are using iPhone in China. And many people with monthly salary around $800 purchased their own cars. According to Mr. Berry's logic, these should not happen.

Mr. Berry said that Qihoo and Renren should have same revenue because they offer the same games, thus they are same platforms. And he doubted that how could platforms offering the same game have different revenues? If the logic that "same game should bring in same revenue" is true, then every online game platform offering the same online game should have identical revenue, and it also means that one identical game should bring in same revenue for Qihoo as for Renren and other online platforms. How could this be possible? Taking iPhone as an example, you can't say that the Apple Store on Fifth Avenue should generates the same revenue as a small cellphone retail store in Brooklyn. Though they are selling identical products, they still generate different revenue since they serve different amount and different types of customers, right?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.