Shanda Ties With Alibaba 盛大牵手淘宝 合作失败可能性大
China’s unruly and highly competitive Internet space has created all kinds of interesting partnerships, with word of a new tie-up between e-commerce giant Alibaba and former online game leader Shanda Games (Nasdaq: GAME) emerging as the latest. The driving force behind most of these tie-ups is a desire to drive more traffic to Internet sites as companies search for more customers. In this case, it appears the 2 companies are aiming to sell e-commerce goods to Shanda’s millions of online gamers from Alibaba’s hugely popular TMall online shopping mall. (Chinese article)
Investors were clearly underwhelmed by the announcement, with Shanda Games’ US-listed shares unchanged in Friday trade, not far from their all-time low since the company went public in 2009. Some of these new partnerships between web firms look smart, bringing together complementary companies that can truly help each other improve their business; but the big majority seem to have more hype than strategic thinking, and this new tie-up seems to fall into that category.
In announcing the new tie-up, Shanda even talked openly about the disappointing results from a previous similar tie-up with Yihaodian, the e-commerce company that was purchased last year by Walmart (NYSE: WMT). For any tie-up to work its obviously important for both companies to design a good product and give it the necessary resources to succeed. But such tie-ups also need to have a strong economic foundation, something this latest alliance seems to lack.
The reason is simple: the millions of web surfers who play Shanda’s games are mostly boys and young men in their teens to early 20s. While a growing number of those people may own their own computers, a big number still lack the cash to make such big purchases and instead go to Internet cafes where they can play their favorite games for hours for just a few yuan, or less than $1.
Such gamers lack the consuming power that would make them big customers for a major e-commerce site like TMall, and I suspect that’s part of the reason behind the previous failure of the Shanda-Yihaodian alliance. What’s more, online gamers aren’t nearly as interested in their personal appearance as young professionals, who are the best customers for e-commerce firms.
Thus even if they had more cash, these young gamers would be unlikely to spend the money on popular e-commerce items like clothing, makeup and other lifestyle goods, and would probably prefer to spend it on things like gaming accessories. For all those reasons, I’d say this new tie-up stands a strong chance of failure and will probably be quietly dissolved within a year or two after disappointing results.
Since we’re talking about Internet tie-ups, I should also use this opportunity to point out one or two more interesting pairings that really do seem to make much more strategic sense. One of those is a deal that made major headlines in late 2012 but has gone silent this year, which had leading online portal Sina (Nasdaq: SINA) in talks to sell a stake in its popular Twitter-like Weibo microblogging service to Alibaba. (previous post)
Those talks reportedly stalled after the 2 sides failed to agree on a price, though other reports indicated that talks had later resumed. Based on the latest prolonged silence, I’m guessing that a deal is perhaps dead, at least for now. But regardless of the situation, I really did think that such a tie-up looked smart, since many of Sina Weibo’s users are the kinds of young professionals who shop on TMall.
I have no doubt that the steady stream of Internet tie-ups will continue strong this year following this latest Alibaba-Shanda announcement, as companies look for any advantage they can find in the ultra-competitive environment. The fact that most of the deals will ultimately fail won’t discourage anyone, since such deals at the very least can generate hype and make headlines even if they don’t make much economic sense.
Bottom line: A new tie-up between Shanda Games and Alibaba looks likely to fail due to a mismatch between the two companies’ demographics.
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