One of China's most popular online games is now free to play. Shanda Entertainment announced yesterday that it would no longer charge players to enter its Legend of Mir II MMORPG (Massively Multiplayer Online Role Playing Game). Instead of collecting hourly or monthly fees from players on most of its servers, the company will now generate income by charging for other services, such as "certain in-game items and premium features". Shanda has been testing a free version of the game for several weeks, and some other online games are also switching to free play.

Observers have attributed the shift in Shanda's strategy to falling profits from the Legend of Mir II, the company's cash cow, which reported over half a million players simultaneously online during its heyday three years ago. Mir II was introduced in late 2001 and is a standard Tolkienesque isometric 3D role playing game.

Revenue from the game decreased 33.5 per cent quarter-over-quarter to US$19.1m, Shanda said in its third quarter financial results, and the average number of concurrent users slumped from 381,000 to 233,000. "Mir II has now entered the later stages of its life cycle," the company admitted. In a recent conference call, a company executive said that Mir's userbase had also been declining because Shanda had been unable to enhance the Korean-developed game with upgrades or expansion packs.

Shanda is set to begin beta testing Dungeons and Dragons Online in China early in 2006. The company did not include that title in a list of games that will be free to play.

With investors losing some of their earlier exuberance about China's online game sector, Shanda's shares have lost half their value in the past five months. Competitors have also seen share prices fall recently. Apart from the age of Mir II, the company cited a variety of reasons for the game's fall in revenue, including "increased competition in the online game market, the effect of hacking incidents, cheating programs and pirate servers".

Legend of Mir may also be losing players to the World of Warcraft, which has proved to be extremely popular in China, and to the country's first first major MMORPG to offer free basic play, Yulgang. Originally released in Korea, Yulgang was launched in China in July this year.

In a report issued in September, Goldman Sachs analyst James Mitchell estimated that Yulgang could be generating revenue of around $500,000 per month from about 1m active players, nine per cent of whom are actually putting money into the game. In its third quarter earnings report, released earlier this month, the game's operator Chinadotcom, said Yulgang had since surged to 10m registered users and had generated total revenue of over $2m to date.

In the report Mitchell suggests that "the emergence of free-to-play MMOs may reflect a shift from playing in PC cafes (where people anyway have to pay on an hourly basis for PC use) to playing at home (where they do not)."

Most successful online games require paid subscriptions. However, Project Entropia, operated by a Swedish company, Mindark, has survived for more than two years while offering basic play for free. Project Entropia's revenue model is based on item and property sales which generate income for Mindark, and a functioning economy that enables some players to earn money inside the game. The company says the game has over 330,000 registered players. In a recent investment prospectus, Mindark said Project Entropia had turnover of $1.85m and operating income of $390,000 in the first seven months of 2005.