NetEase.com (NTES)

[eastunder]

New Game Proves Wildly Popular For NetEase

By KEVIN HARLIN, INVESTOR'S BUSINESS DAILY 07/21/2011 02:18 PM ET

http://www.investors.com/NewsAndAnalysis/Article.aspx?id=579024&ven=yahoo


The Chinese are finally grappling with "Cataclysm."

But it's not an economic or political one. This "Cataclysm" involves dragons, elves, goblins and humans, battling for survival in the mythical realm of Azeroth.

This month, Activision Blizzard (ATVI) and its partner in China, NetEase.com (NTES), released the third installment of the wildly popular online role-playing game "World of Warcraft."


Players line up for copies of "World of Warcraft: Cataclysm" signed by the developers at the launch in Fountain Valley, Calif., on Dec. 7, 2010. AP View Enlarged Image

"Cataclysm," as the new addition is known, sold more than 4.7 million copies around the globe in the first month after its December release elsewhere in the world. Chinese regulatory troubles had delayed the launch on the mainland.

But Beijing-based NetEase, which operates the game there, expects huge demand from that nation's legions of loyal gamers.

When NetEase released the previous "WoW" update — "Wrath of the Lich King" — in the fourth quarter, it said the game drove the 13% year-over-year increase in online game revenue. That gives analysts high hopes for "Cataclysm," which many didn't expect to hit China until this year's fourth quarter.

Popular Game

"'WoW' is one of the most popular online games in China, and the earlier-than-expected release of 'Cataclysm' suggests that revenue contribution from this game could be higher," Samsung Securities analyst Paul Wuh wrote in a research note.

As of Dec. 31, there were 12 million people around the globe signed up to play "World of Warcraft," one of the world's most popular MMORPG, or massively multi-player online role-playing game. That count was before the release of the Chinese version of "Cataclysm," which should appeal to existing gamers and lure in new ones. The update includes new maps, mythical creatures and adventures.

Overall, MMORPG revenue is expected to grow at a compounded rate of 9.8% a year in the U.S. and Western Europe through 2015, according to Lewis Ward, a games market analyst with IDC. He doesn't track the Asian market directly, but thinks MMORPGs could grow even faster there.

"World of Warcraft" remains the top game globally. And the 4.7 million first-month sales of "Cataclysm" should keep it there.

"It's a huge addition and has revitalized the franchise," he told IBD.

Samsung's Wuh estimates that "World of Warcraft" will account for 34% of NetEase' revenue in 2011.

NetEase — in English it's a literal translation of the Chinese name Wang Yi — formed in 2007 as a web search company.

It soon added email and other Internet services before refocusing as an online gaming company. Its founder and chief executive, William Lei Ding, still owns almost 45% of the company.

NetEase isn't alone in this online game space. Chinese firms Shanda (SNDA), Tencent and The9 (NCTY) have catered to the local market with various success. In fact, The9 had the exclusive "World of Warcraft" license in China from 2004 until 2009.

Officials at The9 expected its "WoW" license to be renewed. It wasn't, causing net losses there in 2009, 2010 and so far this year.

NetEase has operated "World of Warcraft" in China since September 2009, and "StarCraft II: Wings of Liberty" since April 2011, under license from those games' maker, Activision Blizzard. It has a three-year deal, with options for extensions.



But the company is also developing other games that resonate with Chinese players, something The9 failed to do.

NetEase launched its first in-house developed MMORPG, "Westward Journey Online," in December 2010. It followed that up with subsequent versions and new games.

There are two business models in effect. For some of the original games, including "World of Warcraft," players buy prepaid point cards, similar to a phone card, at Internet cafes, convenience stores and online. That works out to about 6 cents per hour of play.

Players can also pay extra for add-ons to improve their characters' performances or to enhance game-play.

Some of its newer games are completely free to play, relying instead on revenue from those upgrades and enhancements players often buy.

Almost 86% of NetEase's revenue last year came from those per-minute and add-on fees, down from almost 99% two years before. The company is bolstering that income via advertisements sold on its popular Web portals and game sites, as well as some mobile phone add-on services.

Its news, shopping and search site, www.163.com, is the sixth-most clicked-on page in that country, according to traffic tracker Alexa.com. That makes it the No. 27 most-viewed site on the planet.

Still, there are potential worries for investors. Blizzard could yank the "World of Warcraft" franchise from NetEase when the contract expires.

There's also the potentially disruptive role the government plays in Chinese game and Internet companies. New versions of games, including "Cataclysm," are often delayed for months after their global release, while censors ask for tweaks.

Government Control

In the past the Chinese government has also moved to restrict minors from playing graphically violent games and limit the amount of time adults can play. When the government declared three days of mourning in 2008 after the massive and deadly Sichuan Province earthquake, all online game sites were shuttered.

The government also heavily regulates Internet cafes and occasionally cracks down on and shutters illegal ones. The majority of Chinese playing MMORPGs do so at those cafes.

Still, the company has posted several quarters of double-digit earnings and sales growth.

In its most recent quarter, NetEase earned 86 cents per American depositary receipt, up 69% from a year ago. Revenue climbed 34%, to $229 million. The largest component of revenue, online games, brought in $211.6 million, up about 28% from a year ago.

Analysts forecast full-year earnings per ADR of $3.42, which would be a 32% bump from a year ago.