Meet China's Largest eBook Publisher, a Videogame Company

Quick, name the largest ebook publisher in China.

No? Ok, it's Shanda Literature, a nascent wing of one of the country's most successful videogame companies. And most of the books it publishes come from unknown authors uploading their works to the companies' network of websites.

The company announced this week that it's releasing an e-reader, the Bambook, that will have access to an online store with three million copyrighted titles, including 1.1 million works of user-generated material.

Shanda rose to prominence at the beginning of this decade largely due to a single massively multiplayer online game called the Legend of Mir II. Licensed from a Korean game developer, Legend turned Shanda into a national powerhouse with distribution for its game payment cards in hundreds of thousands of locations across China. The company debuted on NASDAQ in May 2004.

The Shanda group's founder and CEO Chen Tianqiao diversified his business into all kinds of entertainment, a process that included snatching up a series of online literature portals. Now, according to recent reports, Shanda controls something like 80 percent of the e-literature market in China and the company's management sees it as a growth area.

But if we're to believe the numbers put out by Shanda Literature's head, Hou Xiaoquiang, at the Frankfurt Book Fair last fall, things are even tougher for authors in China than they are in the west.

"Hou said Shanda shares 20 to 50 per cent of the income with authors and now has more than 100 authors who have earned more than 100,000 yuan (14,700 dollars) from their writing so far," Earth Times reported.

That's right, only about 100 of this new breed of Chinese authors have earned more than $14,700!

Another source of good information on the evolution of the Chinese eliterature market is Shanda's most recent annual report. The company has to declare foreseeable possible problems in its businesses. These risk disclosures always shade apocalyptic, but they nearly always provide an eye-opening overview of the way a business works. Here are the relevant literature snippets. 

Shanda Literature faces the risks of uncertainties regarding the growth of the online literature industry and market acceptance.
Shanda Literature operates an online-reading website where users can read literature published on the Internet. The online literature business is a relatively new and evolving industry and concept. Shanda Literature is dependent on authors using its various online platforms, as opposed to the traditional paperback format, to publish their literary works. As reading literary works online represents a new means of reading literary works, Shanda Literature cannot be certain that its users will prefer to read literary works online as opposed to the traditional paperback form. In addition, Shanda Literature cannot be certain that the authors will prefer to publish their literary works online on one of its literature platforms, as opposed to in paperback form. The failure of authors to publish, and its users to read, literary works online will likely adversely affect Shanda Literature's business and prospects.
Shanda Literature's business is dependent on its authors.
The literary works published on Shanda Literature's online literature platforms are written by independent authors, including a small percentage of whom are responsible for a substantial amount of its revenues. Most of these authors are not bound by exclusivity restrictions. Shanda Literature has also recently begun contracting with popular offline authors to produce online content. If Shanda Literature is unable to retain its most popular authors or if those authors or its offline authors do not produce content that is appealing to its users, the revenues and profitability of Shanda Literature could by materially and adversely affected.
Pirated versions of copyrighted content on Shanda Literature may be viewable through other websites.
Pirated copies of literature works that are licensed to Shanda Literature are often posted on third-party websites. Unauthorized and pirated copies of Shanda Literature's content may reduce the revenue it generates. Shanda Literature has taken, and will continue to take, a variety of actions to combat piracy. For example, in March 2010, Shanda Literature filed a copyright infringement case against Baidu, alleging that pirated copies of five of its novels could be viewed through links in Baidu search results and on a Baidu message board service. There can be no assurance that Shanda Literature's efforts to enforce its rights and protect its intellectual property will be successful in preventing content piracy. Furthermore, litigation in China is generally expensive and time consuming and the amount of damage rewards are low in comparison to those in the United States and other developed countries.
Changes in Shanda Literature's contracts with China's telecommunications operators or the policies of the telecommunications operators could harm its business.
Shanda Literature has begun to offer wireless value-added services ("WVAS") which allow its users to read literature it publishes over mobile networks. Shanda Literature's WVAS business is subject to the risk that (i) it may not be able to successfully negotiate favorable terms with the three principal telecommunications operators in China, China Mobile Communications Corporation, or China Mobile, China United Telecommunications Corporation, or China Unicom, and China Telecommunications Corporation, or China Telecom (together, the "telecommunications operators") and their provincial affiliates, (ii) the MIIT or the telecommunications operators may unilaterally change their policies and/or the enforcement of their current policies or (iii) the telecommunication operators may impose higher service or network fees on it, any of which could have a material and adverse effect on Shanda Literature's revenues and profitability.
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