We, a group of nine Chinese gaming companies, join forces to take up Citron on its recent challenge that Qihoo’s ARPU claim of 400 RMB is fraudulent, “demonstrated” by Citron’s comparisons with other gaming companies in its reports. We prove here that Citron’s analysis lacked basic understanding of the Chinese gaming market. Citron compared different types of companies against each other, and didn’t even understand how ARPU is measured (!). We pooled our gaming statistics together to form a trusted third-party validation of gaming ARPU for Qihoo and its true peers, and we found that: 1) Qihoo’s ARPU is just about average in a group of five comparable gaming platform companies, and 2) The average ARPU of a large number of popular games on the Qihoo platform is also in line with Qihoo’s reported number. Like the earlier reports published on www.citronfraud.com, this report once again shows that Citron knows very little about Chinese market and companies, and that its analysis is as amateurish as its claims outrageous.
Mr. Left: Game over. You lose!
Letter from Chinese Top Web Game Companies to Citron
Recently, the following challenge from Citron’s Mr. Andrew Left caught our attention:
[Qihoo claims the games offered by Qihoo] generate a massive monthly ARPU of 400 RMB, more than six times the most average of publicly traded gaming companies in China, and triple that of ARPU’s of publicly traded game companies in any country. Citron believes this claim is fraudulent. If you can factually explain and defend Qihoo’s gaming revenue claims, Citron Research will donate 100k RMB in your name to a charity of your choice.
This offer enticed us, a group of top web game developers and operators in China, to get details of Citron’s report discussing QIHU’s game business. After carefully reading it, we are quite shocked by Citron’s lack of understanding of the Chinese gaming market. We hereby take on Mr. Left’s challenge and will point out errors and omissions in Citron’s argument, and demand Citron to make the promised donation.
1. Citron compared apples to oranges…and to bananas!
Citron said in their paper:
Nobody in the games business, in China or the US or anywhere, generates $53.00 per month per paying customer – not NTES, not CYOU and not SNDA. Other Chinese games vendors report ARPU’s approximately $3 to $8 per month USD. ZNGA generates about $1.00 to $4.00 per month per paying customer, depending on which number you compute. Even the “gold standard” Blizzard International, whose World of Warcraft is in a league of its own for online gaming, charges US and European gamers, who typically pay far more than Chinese gamers, $15/month for subscription.
But NTES, CYOU, SNDA, ZNGA and ATVI are in totally different spaces of games!
Here is some basic knowledge that we think Mr. Left should have acquired before he pumped out his report.
Currently, in the Chinese online game market, there are five major types that are widely accepted in the industry:
Every good and professional market research firm knows that the revenue models, industry eco-system, target audiences, user bases, distribution channels, costs of user acquisition, game life spans, and ARPUs of each type of games are vastly different from one another. And this will make the comparison and conclusion totally different.
Mr. Left didn’t point out the difference between the games in his report and compared QIHU’s games with different type of games. He either does not understand such difference or, even worse, he just deliberately conceals those facts to make his fraudulent argument for economic gains.
Mr. Left’s main argument is that ARPU of QIHU is higher than that of other companies. But QIHU’s game business is a web game operator while the other companies he lists are either client-based MMORPG studios (NTES, SNDA, CYOU & ATVI) or social game producer (ZNGA). And ARPU differs greatly for these different categories.
Web game companies include operators and studios that develop or operate web games that can be played directly from the user’s Internet browser without downloading additional software. Such games typically attract “casual” game players who play the games in fragmented time slots. Client-based MMORPG companies develop games with much longer life cycle and target serious game players who devote significant playing time to one game for a prolong period.
Mr. Left’s comparison is like comparing the price of home mortgage vs. hotel room. He is advised to compare Westin with Marriott prices, not with HSBC payments!
2. Citron doesn’t know how to measure ARPU
Can the ARPU of a web game company be much higher than that of a client-based MMORPG company? Absolutely, and here are the reasons:
1) Web games attract users who have shorter attention span, and therefore monetization tends to be heavier in the beginning to maximize economic return for developers during web games short life cycle; Client-based MMORPG games, on the other hand, try to create a loyal user base and generate recurring income for a prolong period of time. Therefor MMORPG games tend to spread monetization over years, thus may appear less intense (in terms of monetization).
2) We have data from most major web game developers in China and their games’ ARPU on major operators’ platforms. The data shows that the average ARPU to be consistently around RMB 400 – 600, with QIHU within the range. For example, one major web game’s ARPUs across key operators are:
4) Another important difference is the way ARPU is calculated. While monthly ARPU is always total revenue divided by paying users in a month, the definition of “paying users” are different.3) We note that the only web game platform company with a meaningfully lower ARPU is Renren (NYSE: RENN). The reason for that is because while there is some overlap between Renren and QIHU’s games, Renren’s users are largely students with lower disposable income, and since Renren is a social network, many of its games are social games. Both of these factors drive the ARPU lower.
- For client-based MMORPGs, the “user-denominator” is the number of active paying accounts, which equals to “the number of game player accounts that spend virtual currency at least once during a given period,” as SNDA defined in its Annual Report 2010
- For web games, the denominator is the number of users who purchase virtual currencies during this month. Clearly, the web game user-denominator is much smaller than the MMORPG user-denominator, as the virtual currencies are purchased at a lower frequency and then spent over time. Therefore, web game ARPU is higher simply due to the different denominators.
Mr. Left’s comparisons is like a shopper complaining to Costco: “Your apples are so expensive!”, only to find out that Costco’s price is per crate, not per apple!
The abovementioned facts expose Mr. Left’s poor understanding of Chinese gaming market and adoption of wrong analytical methodology. Of course, to compel him to donate 100,000 RMB, we will also need to demonstrate that QIHU’s web game ARPU are real. Please read on.
3. Qihoo’s web game ARPU is comparable to its peers, and validated by third-party independent data
Let’s look at Qihoo’s true peers. Among the web game operator platforms that have a similar user base and game composition, the following companies’ platforms are similar to that of Qihoo’s.
Since Citron states Qihoo’s self-stated ARPU is fraudulent, we the undersigned shall use our own ARPUs to crosscheck Qihoo’s results. We, as a group of nine leading Chinese web game developer, collectively developed thirteen very popular games, which represent a significant majority of Chinese web game industry (excluding Tencent)，by disclosing average ARPU of our flagship games across all major web game platform, The nine undersigned developers who voluntarily contributed to this study are:
- Xindong Games (心动游戏)
- Guangzhou Feiyin (广州菲音)
- 7Road (第七大道)
- Game Reign (上海锐战)
- UUZU (上海游族)
- Gamewave (趣游)
- LineKong (蓝港在线)
- Zeus Interactive (天神互动)
And the 13 top web games that operated across platforms including Qihoo are：
We pooled our data, and obtained their ARPU on various platforms. These 13 games contribute over 60% of Qihoo’s total web game revenue by our estimate, as well as over 60% of the revenue of Chinese web game industry (excluding Tencent). Then we calculate average ARPU of the 13 games on each platform, as shown below in the table below (for confidentiality, the specific ARPUs are redacted, but the average is shown below):
From the above table, we see that all platforms have ARPU in range 310 – 447. We note that Qihoo’s ARPU is very much in line with its peers. And our independently computed 434 RMB ARPU for Qihoo is also very similar to the numbers Qihoo asserted.
We have demonstrated in this letter that ARPU cannot be compared among different types of gaming companies because 1) the nature of the businesses are different, 2) ARPU is computed differently among them. Citron seems unaware of these basic differences, despite their claim that they know China.
We have also demonstrated and crosschecked two ways that Qihoo’s numbers are reasonable. We showed that other platform companies like Qihoo have similar ARPU, and that our independently derived Qihoo ARPU is consistent with Qihoo’s self-stated ARPU. We are surprised that Citron chose call Qihoo “fraudulent” and to recommend shorting a stock, without pick up the phone to call a few companies.
Like the earlier reports published on www.citronfraud.com, this report once again shows that Citron knows very little about Chinese market and companies, and that its analysis is as amateurish as its claims outrageous.
Now that we have proven that Qihoo’s numbers are reasonable, and that Mr. Left’s accusations missed the mark again, we respectfully request that Mr. Left send the donation to One Fund and the wiring information is as below:
Account Name：Shenzhen One Foundation
Bank Name：China Merchants Bank
Bank address：China Merchants Bank Tower, No.7088, Shennan Boulevard, Shenzhen, China
Note: Please fill in the One Family Donation Form and fax it to +86-21-6335-0291 or email it to email@example.com
传真到 021-63350291 或邮件发送至 firstname.lastname@example.org
Signatories (In alphabetic order):
HUANG Yimeng, CEO, Xindong Games
HUANG Kai, CEO, Guangzhou Feiyin
LI Yifei, CEO, 37wan
Titan LIM, CEO, UUZU
Ben MENG, COO, 7Road
WANG Feng, CEO, LineKong
YU Guanglai, Founder, Game Reign
YU Hong, CEO, Gamewave
Andy ZHU, CEO, Zeus Interactive
[The Chinese version was originally posted on Zhihu.com]