Changyou IPO Soars On Virtual Goods


First IPO we’ve seen in an almost frozen market: Chinese gaming firm Changyou (CYOU) debuted yesterday on the NASDAQ, soaring as much as 50% before closing up about 25% on the day. (It crept down 3% today.)

Last year, the three-year-old Changyou made $108 million in income on $202 million in revenue, primarily from a single game, the martials arts fighter Tian Long Ba Bu. The company has at least three more games in the works.

Changyou’s business model basically follows the “freemium” gaming idea: Games are free to play, but extras, so-called virtual goods — anything from a new outfit for your character to a more powerful weapon — costs a little extra.

It’s something of an open question whether the virtual goods/freemium model will ever really catch on outside of Korea and China. Western gamers tend to consider the idea of buying power-ups for a game “unfair,” and big online games like World of Warcraft have strict rules against buying or selling in-game items for currency for real-world money. (There’s a flourishing black market, of course, although eBay has banned the trade at Blizzard’s request.)

But that’s still not stopping lots of American companies from trying to profit off the Changyou model. Some of the notables:

  • Second Life has a deep virual goods microeconomy. But Second Life is a somewhat unique case, there’s no “game” to win and the transactions are player-to-player.
  • OMGPOP — whose founder Charles Forman once lived in Korea — is working on a casual game network centered around a freemium model. 
  • Companies like Playspan are working with numerous freemium startups. Gamers put money into a Playspan account, and can buy virtual goods on any game in Playspan’s network.

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