About this Blog

The purpose of this blog is for my personal use. It serves as my personal diary as I investigate Chinese internet/gaming companies for investment purpose. If you have any comments or disagreement, please give me feedbacks.

Thursday, April 16, 2009

The transfer of WOW to NTES

One can find my previous article on this subject here:

Only 8 hours after I wrote the above article, more news came out regards to this subject. See the following news:

This is the number 1 gaming related news in China right now. It is pretty certain that NTES is going to take over WOW by June 2009.

NCTY’s CEO allegedly send an internal memo to her employees and admit that NCTY is going to lose the license to operate WOW after June 2009. See the following for her letter:

I am not going to translate the whole article. The whole article is more like a pep-rally.

But I will specifically talk about some allegations she had over NTES. First, she said that Chinese government makes it illegal for foreign game company to set up wholly owned or co-owned company in China.

Because NTES set up a co-owned (50/50 ownership structure) company to operate WOW, it makes it illegal in China.

NTES also offered to pay $22M for game servers and 1M for the game operators. NCTY rejected because the original cost of the server equipment is $73M. She is undignified that NTES would make such offer.

At this point, there are no official announcements from any of the three parties. Therefore, it is officially still a rumor. But I think the ship had sailed already.

The following is my take on the whole thing.

Let me get the most important point out of the way first. Without player statistics, an expansion pact has zero value. If Blizzard only signed one contract through the life of WOW (including all expansion pacts), I am certain that NCTY would have the exclusive right of the player statistics. But that is not the case. NCTY has to re-negotiate for every expansion pacts. Unless Blizzard hired the stupidest lawyer in the world, it would definitely write it into the contract that Blizzard has the right to the player statistics.

Put it in another way, if NCTY has the exclusive right to the player statistics, she would have all the leverage when re-negotiate contract extension for the expansion pact. Blizzard would be completely in NCTY’s mercy. If that is the case, don’t you think Blizzard would insist on one long contract through the whole life of WOW?

If one read the letter carefully, she never specifically said that NCTY is not going to deliver the player statistics to NTES.

No matter how she would use different sentence structure to give other implications, I don’t believe she can say it out loud or she will be subject to law suit.

Regards to that offer of $22M made by NTES to purchase servers and $1M for operators, I think it is probably NTES’s way to appease NCTY to make the transition smoother.

After NCTY loses WOW, its servers will be sold to other companies and it operators will be lay-off. NTES is going to hire these operators one way or another. That $1M is probably NTES’s good will offer.

For a bunch of 1, 2, 3, or 4 years old game servers (that would cost $73M if brand new), considering how fast the depreciation is for IT equipment, $22M sounds like a good number.

Frankly, I doubt NTES cares very much for these game servers. Either it spent $22M to buy used game servers to operate WOW from NCTY or from third party, it is probably not very important.

In terms of the illegality of NTES’s co-ownership company with Blizzard, I think she is just grabbing for excuses. The 50/50 co-ownership company was established in August of 2008. It certainly was legal then, why wouldn’t it be legal now.

But just like my one concern, as I wrote in my last article, she can definitely purposely corrupt (say 1% of the users statistics) the player statistics before she delivered to NTES.

The possibility of her doing that is rather low. NCTY does need to license other games. If words go out that she does that on purpose, NCTY is not going to get many licensed games in the future.

But the possibility is still there. NTES does have to guard against it.

Most of the current NCTY’s WOW operators know that they are going to work for NTES. It will be important for NTES to communicate to them to guard against player statistics corruption. It would be very helpful if NTES can obtain those player statistics through other means. It won’t be hard. The people who has access to these statistics know who they are going to work for 3 months from now.

Finally, I can’t say enough about how dumb is NCTY’s management. Blizzard’s WOW provides more than 90% of NCTY’s revenue, and NCTY allows Blizzard’s mortal enemy (EA) to control 15% of NCTY’s shares.

What was NCTY’s management thinking?


Anonymous said...

Another great article, Henry.

Do you think the Blizzard partnership will help NTES with it's marketing issues that you previously noted.


asiequana said...

My understanding is that the JV is majority owned by Netease. It's a 51/49 split.

Anonymous said...

Henry - just stumbled over your blog. Good work, you've got a lot of interesting stuff here. I'll keep an eye on it in the future.


HenryC said...

Thanks for your insights


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