The popular online role-playing game World of Warcraft (WoW) takes participants on fantasy journey through a battle-strewn land. But there is nothing make-believe about the crossfire in which NetEase (NTES.NASDAQ), the game’s operator in China, now finds itself.
The two warring parties are the Ministry of Culture (MoC), which approved WoW in July, and the General Administration of Press and Publications (GAPP), which banned a new upgrade of the game in October. Older versions still work.
Although GAPP may only approve a game when it is published in a physical form such as on CD or DVD, it argues that this provision applies to downloads as well. Furthermore, NetEase specifically hasn’t received GAPP approval to operate WoW, having only recently taken over the license from The9 (NCTY.NASDAQ).
It’s a messy situation, but analysts are confident it will play out in NetEase’s favor.
"[GAPP] said it’s all-powerful so why didn’t it pull the plug on the game?" said Jin Yoon, an analyst with Nomura Securities in Hong Kong, noting that NetEase has been running WoW for two months now. He doesn’t expect any disruptions to NetEase’s business and has a buy rating on the stock.
NetEase has a lot riding on the success of WoW. While the company has a number of strong titles, WoW – and game owner Activision-Blizzard (ATVI.NASDAQ) – represents its future. The WoW licensing agreement was part of a larger deal that will see NetEase get access to games such as Starcraft and also receive technical assistance from Activision-Blizzard. It is the package NetEase needs to compete against market leaders Tencent (0700.HK) and Shanda (GAME.NASDAQ).
Alicia Yap, China online games analyst for Citi in Hong Kong, said in a recent report that her positive investment outlook – she has a "buy" rating on NetEase – was largely due to the WoW license and the Activision-Blizzard partnership.
NetEase will also be able to leverage WoW’s China user network to cross-sell its own games, something that The9 failed to do, according to Credit Suisse analyst Wallace Cheung. The firm is now trading at about 30% below its cash value and has nothing in the pipeline to replace the revenue generated by WoW.
The partnership makes sense from Activision-Blizzard’s perspective, too, as NetEase’s distribution network is larger than The9’s. "NetEase can help the game to penetrate into the second and third tier cities," said Yap.
However, this all hinges on the GAPP-MoC dispute being resolved. In the interests of NetEase’s bottom line, a solution needs to be found before the launch WoW expansion pack Wrath of the Lich King (WLK).
"NetEase has to work on its government relationships," said Guo Chenggang, senior analyst with JLM Pacific Epoch. "In the overseas market, WLK brought about a 10% growth in WoW’s user population. In China, the growth could be much higher."