Can a 2,000-yuan (US$240) box help China's third-richest man realize his dream of building a Chinese Disney?

For 32-year-old Chen Tianqiao, a set-top box may become one of the important vehicles in the sitting-room strategy, referring to the pair of the name which is the centre of home entertainment.

Chen, chairman and chief executive officer of the biggest Chinese online game operator, Shanda, said on July 1 that innovation is the key to the success to any Chinese company that wants to be globally competitive.

"We must turn our 'cost is king' strategy to 'application is king' and stand on the shoulders of international giants to develop our own business," said Chen at the China International Consumer Electronics Show (SinoCES) in Qingdao, a city in East China's Shandong Province.

In his eyes, Chinese electronics companies, famous for their manufacturing capability, missed a golden opportunity when US company Apple released its iPod music players. The reason is that they have all the elements in iPod such as hard disc, music software and patent protection technology, but they could not develop an iPod.

Home entertainment where Chinese companies have technologies, contents, market demand and capital will be an area that they cannot afford to miss and Shanda will want to be an innovative consolidator in the industrial chain.

Shanda is one of the fastest growing companies in China and is listed on the NASDAQ. Chen started the firm in 1999 in Shanghai with only 500,000 yuan (US$60,000), but the company booked 1.4 billion yuan (US$170 million) in 2004, which Chen estimates will grow to 3 billion yuan (US$360 million) this year, almost as much as the second-largest Chinese media group Shanghai Media Group.

The company, which started to operate an online game imported from South Korea in 2001, has become one of the most profitable Chinese Internet companies.

However, Shanda, already dominant in the online market in China, faces a bottleneck in its own development.

"What would be of interest for me even if we took 90 percent of the market share and acquired the remaining competition?" asked Chen in an interview early this year.

On the other hand, online games, to which many young Chinese are addicted, have been attracting a rising number of complaints from parents and, consequently, attention from the Chinese Government about the addiction and violence in some games.

China is working on a compulsory standard to restrict people from playing games for too long, which will reduce operators' average revenue per user.

Jim Sun, an Internet industry analyst with the UK-based Evolution Securities, points out that two game titles that Shanda has been relying very heavily on are almost at the maturity stage of their life cycle after years of operation. But Shanda's progress in in-house games has been not as satisfactory and the two game titles from South Korea continue to be backbone for the firm.

At the same time, the restriction on playing time might also be a strike for game operators, which usually provide a monthly package to players to give them unlimited access to games in one month one subscription model of Shanda.

The sitting-room strategy will be Shanda's core to its dream of becoming an entertainment empire like Disney in China. While China had only 94 million Internet users by the end of 2004, it has more than 300 million households with TV sets and over 1 billion TV viewers, so the strategy based on Internet protocol TV (IPTV), which allows a TV set to have Internet connection and other functions like digital video recording, with a set-top box, has become a natural extension of Shanda from online games to the TV entertainment platform.

Chen categorizes his company into three units content, service and platform to handle the transformation.

In the past two years, Shanda has spent all its US$450 million proceeds from its listing in April 2004 and a later issuance of convertible bonds on acquiring assets including the most popular Chinese Internet portal Sina Corp, mobile game developer DigitalRed, literature website Qidian, casual game website Bianfeng and South Korean game developer Actoz.

It also partnered with the US entertainment giant Universal Music and the Chinese search engine provider Baidu to license their music and search engine technology, trying to move them to the TV platform.

In the IPTV platform, the set-top box is a main vehicle and Shanda also teams up with top firms in their respective areas.

At the SinoCES, Shanda demonstrated the prototype of its set-top box for the first time, which is embedded with Intel's microprocessor, Microsoft's operating system on TV sets, ATI for its graphic display technology, the Taiwanese firm Gigabyte for its mother board technology, and manufactured by the Taiwanese electronic manufacturing big name Inventec.

With the set-top box, people can watch TV and record programmes, but they can also play games, watch real-time news and stock quotes, read books, sing karaoke, learn English or book tickets.

The company did not reveal when and at what price that device will be sold to consumers, but Chen says its price will not be like low-end ones, which sell at about 600 yuan (US$72).

However, that does not mean Shanda will become an electronic device manufacturer.

"Our core competences are content and service and we only focus on consolidating our resources."

(China Business Weekly July 12, 2005)