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.

Tuesday, February 19, 2013

Netease at a cross road, part 1

One can find my last NTES related post here:

Sorry for not keep this blog up to date. Frankly, NTES, SINA, SOHU, BIDU, etc. had become very stable companies. They had become big and any change will only have minimal impact to these companies. Besides, I had becoming very busy in my real job.

I am still busy in my real job, so I will not be able to make many blog post in the future.

But something incredibly significant happened to NTES, it would either accelerate NTES from a stable big company to a company that is growing like a new start-up. Or it could also cut NTES in half and will probably cut NTES's stock prices from $50s to the teens (or even less than $10/ADS).

At this point, I had no idea which way it will go.

But first, what happened?

On 2/10/2013: NTES announced 50% price increase for three games. It applies to its number 1 most popular game, XYQ (or Fantasy Westward Journey), its 2nd most popular game, XY2 (or Westward Journey 2), and a less popular game, XY3 (or Westward Journey 3). It applies to all its self-developed time card paying games.

The official announcement for XYQ:

The official announcement for XY2:

The official announcement for XY3:

XYQ and XY2 are NTES's foundation games. They probably contribute to 40% to 50% of all of NTES's gaming revenues. They are very old games (XY2 is about 10 years old and XYQ is about 8 years old). They don't grow much but they provided reliable revenue quarter over quarter.

Those games are turn based MMORPG games. The gaming pace is designed to be so slow that players are spending most of their time gossiping with their friends. They are probably closer to Facebook than other games.

The cost to play these games was 0.4 RMB/hour (RMB is Chinese currency name). That cost was established 10 years ago when XY2 started operation.

The new gaming fee is 0.6 RMB/hour. For the last 10 years, inflation in China is definitely more than 50%. Chinese can definitely support this new cost structure. Actually, NTES could probably increase gaming cost every few years. NTES will probably increase the gaming fee for World of Warcraft by 50% to 0.6 RMB/hour also. But all of that depends on if this gaming fee increase can be passed on to players without significant player revolt.

Also, we are only talking about gaming fee increase. The upside is up to 50% increase in revenue in the affected game. Since there is no affect on the spending, all these new revenue will add directly to the earning. We might be able to see 100% 200% (I am just guessing now) increase in earning.

But on the other hand, the down side could be there are player revolts and the revolts gain traction and completely destroyed these games. Since XYQ and XY2 are top two games for NTES (much more important than World of Warcraft is to NTES), destruction of XY2 and XYQ will be devastating to NTES.

In the second part of this series, I will provide detailed description of this new cost policy.

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