Following a major shift in direction last November, Nasdaq-listed Chinese online games operator Shanda Entertainment has reported a net loss of $66.8m in the fourth quarter of 2005 and has laid off staff. 

Shanda's difficulties illustrate intensifying competition in China's online games market, particularly due to popular new entrants like World of Warcraft, analysts say. 

Shanda, Nasdaq's best performing stock in 2004, surprised the market in November when it decided to make its most profitable game, Legend of Mir II, free to play in China. 

At the same time, the software company threw its weight behind a series of new hardware products in cooperation with Intel. Shanda's new EZ series includes a mini gaming console, a PC home theatre adapter kit and a TV set-top box.

The EZ series is designed to provide a new revenue stream for the company by letting the user play Shanda's proprietary games and entertainment content.

By switching to a free play model, Shanda hoped to prolong the life of the popular, but aging, Legend of Mir II, and at the same time use it and other games it to promote sales of the EZ Series.

But industry observers have predicted a bumpy road ahead for Shanda as it tries to transform itself from a one trick pony to a company with a horse for every course.

"For Shanda, the move [to free play] is likely to have a short-term effect on staunching user defection, but the impact on margins will be heavy and further downside is likely," Deutsche Bank predicted in a report prior to Shanda's latest financial release. 

Jim Sun, a research analyst at Evolution Securities, added: "We believe that the lack of content will hamper the take-up of EZ series products. As a result, we do not expect that this product will emerge as a significant growth driver for Shanda until late 2007."