These aren't the best of times for Shanda Interactive (NASDAQ:SNDA). The Chinese online gaming giant generated a fourth-quarter loss on a 16.3% dip in revenues. Despite switching over to a free ad-based model on many of its games, the average number of users playing Shanda's various multiplayer games shrunk from 630,000 to 548,000 players.

If you were holding out for a silver lining, you better settle for bronze. Shanda's weakness comes a week after rival online gaming specialists The9 (NASDAQ:NCTY) and NetEase (NASDAQ:NTES) came through with better than expected results for the same quarter.

We can't necessarily pin the shortcoming on Shanda's decision to go with a sponsorship-supported model on three of its older games. The company's market share was shrinking anyway.

Shanda is trying. It's scooping up smaller companies as a way to beef up its pipeline. It is making a move into the lower-margin (yet potentially dynamic) hardware market with its EZ Pod remote control gadget that transforms a computer into an interactive entertainment system. It may pan out, but investors who bought into Shanda thinking they'd buy the booming region's largest online gaming company are out of luck.

Shanda -- like NetEase -- is a Rule Breakers recommendation. Yes, it's pretty bleak at the moment, but let's consider the value aspect. The company has $275 million in convertible debt, but that's more than offset by $391.6 million in cash and marketable securities. Back out the debt and you're left with about $1.64 per ADS in cash.

The company's marketable securities includes a 19.5% stake in SINA (NASDAQ:SINA) and a 38% interest in South Korean gaming company Actoz. The Actoz investment was marked down with an impairment charge over the past quarter.

Unless the EZ Pod is a smash hit -- and it's only been on the market since December, so give it a chance -- we may be looking at a few bumpy quarters until the ad-based model gains traction.

It could. As Baidu's (NASDAQ:BIDU) report from last week showed, advertisers in China are paying more to reach their target audiences, and that's something that the online gaming niche delivers. It's imperative for Shanda to make it work because it probably can't go back on that move at this point. It will have to lie in the bed that it made -- and it's going to feel like a bed of nails for now.

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Longtime Fool contributor Rick Munarriz believes in the sector and does own shares in Baidu.com. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.