Why We Expect Perfect World’s Paying User Base To Shrink

In this article, we take a look at the factors that impact the number of paying users for Perfect World‘s (NASDAQ:PWRD) Games In China division. This metric depends upon the number of users and their propensity to pay for the service. The number of users is dependent on industry-wide factors such as the number of people with mobile phones, as well as firm-level factors arising from strategic choices made by the company. Users’ willingness to pay for services depend on macroeconomic factors such as disposable income, as well as firm-level factors such as the game lineup.

We have a $15 price estimate for Perfect World, which is about 20% below its market price.

See our complete analysis of Perfect World here

Trends Impacting The User Base

The number of mobile phone subscribers in China in November 2014 was nearly 5% higher than in November 2013. ^[1] There was, however, some apprehension regarding the growth of the mobile phone market in China going forward. The market is nearly saturated, with very high mobile penetration, and growing penetration of smartphones. ^[2] The trend towards greater Internet usage through mobile devices has important ramifications for online games. It has coincided with the shift from MMORPGs (massively multiplayer online role-playing games) to casual games that can be played on the mobile phones. Perfect World’s flagship games are mostly MMORPG titles, so this shift has benefited competitors more than Perfect World. ^[3]

Getting Users To Pay

There are several factors that affect online game players’ willingness to pay for the premium aspects of the service. Inflation adjusted disposable income per capita, a measure of purchasing power, grew 8% in 2014 in China. Income inequality has gone down and employment has increased beyond expectations. ^[4] Greater disposable incomes could lead some users currently using the basic free services to upgrade.

Another factor that can help gaming companies monetize their games better is revenue management. Revenue management uses analytics to dynamically change prices to maximize revenues. For online games this can be done by looking at the past behavior of registered gamers to deduce their purchasing behavior. Based on such an understanding, tailor made combinations of products can be offered to gamers to induce them to spend more. For example, in action role playing games, character costumes, weapons and skill sets can be offered in a bundle that may make their purchase more enticing to specific gamers. The development of big data tools to facilitate such analytics will make such strategies more common going ahead. ^[5]

To Sum Up

In short, the most important factor affecting Perfect World’s number of paying users is its ability to compete successfully on the mobile platform. The fact that its game lineup is less conducive to mobile growth (relative to competitors) largely explains our pessimistic forecast. However, certain macroeconomic factors and business strategies can help the company offset that impact.

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1. China Mobile Users [↩]
2. World’s Largest Mobile Phone Market Becoming Saturated [↩]
3. China’s Shift From MMORPGs To Casual And Mobile Games [↩]
4. China’s Wealth Gap Narrows [↩]
5. Revenue Management Analyst Job Profile [↩]