The Simplified Investor

It’s been years since AMD has been a leader in any market. First, it challenged Intel in the battle for semiconductor supremacy - and lost, badly, watching helplessly as Intel’s superior technology reached 75% dominance of the microprocessor market by 2007. As Intel surged, AMD swooned, and made a fateful decision to diversify its business. The purchase of ATI Technologies in 2006 burdened the books to the tune of $5.6B - and investors punished the stock, which has dropped nearly 90% in the two years since.

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For decades, video game companies have relied on a tried and true business model - spend on development of new titles, sell them to customers at high prices, and then roll out one sequel after another to capitalize on popular franchises. But the game is changing, literally, for the companies that make video games. The growth of the internet means that users want to download games right to their computers - and what’s more, they don’t want to pay for them anymore.

But companies like Shanda Interactive Entertainment (NDAQ:SNDA) and The9 (NCTY) have figured out a way to monetize the new, play-for-free market. These Chinese video game makers no longer charge for their premier titles - they allow users to download them free. Then, once users get hooked, they can pay for upgrades to the game - clothes and accessories for their avatar in a role-playing game, for instance, or increased abilities for their character that will help them make it through more challenging levels.

These Massively Multiplayer Online games (MMOs) have taken the Chinese market by storm. The9 licenses the World of Warcraft to the Chinese market with brilliant success - the game reached 1 million concurrent users in April 2008, meaning a million players were logged on and playing the game at the same time. Meanwhile, Shanda was the #1 market player in the Chinese online-gaming market by 2007 revenues, relying on its two popular MMO role playing games Mir 2 and Woool. Shanda moved to the play-for-free, transactions based model for its games in 2006.

Innovation has always been at the heart of the video game business - new consoles with better graphics, games with more realistic characters, and creative ways to control players are staples of the industry. But a fundamental change to the business model of gaming is more than innovation - it is evolution. If the current trends continue, the Chinese market could lead the world into a new era of game play.