Breakdown of NTES's gaming revenue by games, part 6

One can find my last NTES related post here:
part 5 here

In part 4 and part 5 of this series of blog posts, I provided the short term effect due to the 50% increase of gaming fee Netease charges the players to play its games.

In this blog post, I am going to provide estimates of NTES's revenue breakdown by its games. Once I figure out each games' revenue breakdown, I can use that information to calculate how much more revenue can NTES get per quarter due to the 50% increased fee charge.

Unfortunately, NTES doesn't provide this information to its investors. One has to estimate it from different sources. But sometimes, NTES does provide hints in its quarterly earning conferences.

On 2Q2012 earning conference call, the company stated that the top 5 games (without ranking) are XYQ (Fantasy Westward Journey), XY2 (Westward Journey 2), TX3 (Tianxia 3), DT2 (Heroes of Tang Dynasty), and WOW (Blizzard/Activision's World of Warcraft).

On 4Q2011 earning conference call, the company stated that the top 5 games (with ranking) are XYQ, WOW, XY2, QN, and TX3. QN is Ghost Story.

On 3Q2011 earning conference call, the company stated that the top 5 games (with ranking) are XYQ, WOW, XY2, QN, TX3.

As implied from above, one can rank its top games as XYQ, WOW, XY2, TX3, QN, and DT2. Out of its two new games, WH (Kung Fu Master) had also became a major hit.

Thus, there are about 7 games of significance and it is ranked in terms of revenue by the following: XYQ, WOW, XY2, TX3, QN, DT2 and WH. The ranking stay largely the same, but there are some changes in ranking from quarter to quarter.

As I mentioned before, NTES's games can be broken down to three categories. The 1st category is its in-house developed time-based paying games. In this category, there are XYQ, XY2, and XY3. XYQ is NTES's most popular game, XY2 is NTES's 3rd most popular game. XY3 is not significant.

Category 2 is its licensed time-based paying games. Those games are licensed from Activision/Blizzard. They are WOW, SC2, and W4. WOW is NTES's second most popular game. SC2 (Starcraft 2) and W3 (Warcraft 3) do not generate much revenue of any significance. Note that SC2 and W3 are wildly popular in the west. But since they are not MMORPG games, thus they are easily pirated. These two games can't generate much revenues in China.

Category 3 is NTES's in-house developed item-based free-to-play games. Those games are relatively new and is still undergoing high player number growth. Most of these games are either a few months old to a couple of years old, thus, they are still in the early explosive growth stage. In this category, the significant games are TX3, QN, DT2 and WH. There are about 6 or 7 other games in this category, such as new FF, ZH, PK, MC, JL, and DT, but they don't provide significant revenue.

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Now, I will provide revenue estimates for games in category 1. NTES haven't provided individual game revenue by quarter for a long time. The last time it did is on the 1Q2008 earning conference. But it did provided PCU (Peak Concurrent User) numbers from time to time. I can use that to translate the revenue to the current quarter.

The last quarter when NTES provided individual gaming revenue is 1Q2008. I will use three quarters, 3Q07, 4Q07, and 1Q08, and to average them to get a more accurate estimate. The following is the PCU number and revenue number for the three quarter. The last column is the average of the three quarters.

	3Q07	4Q07	1Q08	Average
XYQ PCU	1440k	1520k	1670k	1543k
XYQ Quarterly Revenue	48.8M	50.7M	57.1M	52.2M
XY2 PCU	305k	387k	385k	359k
XY2 Quarterly Revenue	11.9M	13.2M	15.9M	13.7M

The last time NTES provided PCU is 3Q2012. On August, 2012, XYQ had a PCU = 2710k. Assuming there is a 10% decrease of PCU from 3Q12 to 4Q12, the PCU for 4Q12 is estimated to be = 2710k * 0.9 = 2440k.

By using the table above, we can generate the 4Q12 revenue estimate for XYQ = (2440k/1543k)*52.2 = 82.5M.

I will perform the same calculation for XY2. On August 2012, XY2 had a PCU = 1267k. Assuming 10% from 3Q12 to 4Q12, the 4Q12 PCU = 1267k * 0.9 = 1140k.

By using the table above, we can generate the 4Q12 revenue estimate for XY2 = (1140k/359k)*13.7 = 43.5M.

Finally, XY3 is the third game in this category, it is not a significant game. During the 4Q12, XY2 has about 170 servers in operation to support its gamers. During 4Q12, XY3 has about 35 servers. Therefore, I estimate that XY3 generated (35/170)*43.5M = 8M during 4Q12.

The following table provided the revenue generated by games in category 1 during 4Q2012.

	4Q12 Revenue (in Millions)
XYQ	82
XY2	43
XY3	8
subtotal	133

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Now, I will provide 4Q12 revenue estimate for games in category 2. In this category, only World of Warcraft (WOW) is of any significance. I will have to use different approach to generate an estimate for WOW.

NTES didn't get the license to operate WOW from Activision until 2Q2009. Prior to that, the game was operated by The9 Limited (ticker: NCTY). At the time, NCTY generated virtually all the revenue from WOW. In 1Q09, NCTY generated 59M for that quarter.

But the transition from NCTY to NTES was not a smooth transition. Chinese government blocked the transition. There were a few months where NTES was not allowed to operate WOW. Therefore, there were significant player lose at that time.

Only until 2Q2010 did NTES had a full quarter to operate WOW. The gaming revenue from 3Q09 is 113.6M. The gaming revenue from 2Q10 is 174.1M. The increase from 3Q09 to 2010 is 174.1-113.6 = 60.5M. But the increase is not just from WOW alone. Both XYQ and XY2 were still growing. In addition, TX2 started operation on 9/20/2009. Thus, the most likely case is WOW get about 40M during the 2Q10.

But by 3Q10, the 2nd expansion pact for WOW was released in China. By all indications, there were no major increase. Thus, NTES probably get 45M to 50M per quarter for the next few quarters. WOW's 3rd expansion pact was released in late 2Q11. NTES probably get 55M during the 2Q11.

But starting the 3rd expansion pact, the increase from an expansion pact only last for less than 1 quarter. Starting 3Q11, and virtually every earning conference after that, NTES announced that performance of WOW is decreasing. According to the earning conferences, WOW had been in a continual decline until 4Q12. By the 3rd Q 2012, WOW had probably decreased down to 40M per quarter. 4Q12 is when WOW's 4th expansion pact were released. Because the 4th expansion pact's main them is Panda (heavily Chinese theme). NTES got a big jump. I estimate NTES got 50M from WOW in 4Q12.

For other games (SC2 and W3) in this category, they are not significant. I estimate they combine for 5M in 4Q12.

The following table compiled the gaming revenues for games in category 2:

	4Q12 Revenue (in Millions)
WOW	50
SC2 & W3	5
subtotal	55

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Now, I will provide 4Q12 revenues for games in category 3. In this category, these are the in-house developed item-based free-to-play games. Those are fundamentally different games than those in category 1 and 2 time-based paying games. Thus, I can't use the statistics of category 1 or 2 games and to extrapolate gaming revenues in category 3 games.

For that, I have to use games in other company. Luckily, there is one game that is very similar to all the games in this category. Changyou.com Corp (ticker: CYOU) has a mega game call TLBB. TLBB turns out to be very similar to NTES's free-to-play games.

CYOU operate many games and it doesn't break out revenue by games. It currently have several games that have significant revenue. But before 3Q2011, TLBB was basically the only game of any significance for CYOU. Thus, I will use TLBB's revenue for 3Q11 as the basis.

For 3Q11, CYOU's gaming revenue is 115.8M. On average, for 3Q11, CYOU uses 350 game servers to support its gamers.

For 4Q12, NTES uses the following number of servers for the following games: it uses 102 servers for TX3, it uses 81 servers for QN, it uses 65 servers for DT2, it uses 52 servers for WH, it uses 31 servers for PK, it uses 21 servers for JL, it uses 20 servers for new FF, it uses 14 servers for ZH.

Finally, to extrapolate the 4Q12 revenue for each NTES's game, I use CYOU's TLBB statistics as the basis and uses the following calculation:

For TX3: its 4Q12 revenue = (102/350)*115.8 = 34M

For QN: its 4Q12 revenue = (81/350)*115.8 = 27M

For DT2: its 4Q12 revenue = (65/350)*115.8 = 22M

For WH: its 4Q12 revenue = (52/350)*115.8 = 17M

For PK: its 4Q12 revenue = (31/350)*115.8 = 10M

For JL: its 4Q12 revenue = (21/350)*115.8 = 6M

For new FF: its 4Q12 revenue = (20/350)*115.8 = 6M

For ZH: its 4Q12 revenue = (14/350)*115.8 = 4M

The following table compiled the gaming revenues for games in category 23:

	4Q12 Revenue (in Millions)
TX3	34
QN	27
DT2	22
WH	17
PK	10
JL	6
New FF	6
ZH	4
subtotal	126

Finally, note that for CYOU's TLBB, its ARPU = 218 for 3Q2011. It improves to ARPU = 353 by 4Q2012. Since ARPU is the Average Revenue Per active Users, TLBB's revenue improves by 353/218 = 162% in the next 5 quarters (from 4Q11 to 4Q12). Similarly, one would expect games in this category has the potential to grow by 162% over the next 5 quarters. That was assuming the number of players don't increase. But since the above games are very new, it is expected there will be significant players population increase. Thus, NTES's category 3 games shall increase by more than 162% in the next 5 quarters.

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Now, we combine all the games in all three categories in the following table:

	4Q12 Revenue (in Millions)
XYQ	82
WOW	50
XY2	43
TX3	34
QN	27
DT2	22
WH	17
PK	10
XY3	8
JL	6
New FF	6
SC2 & W3	5
ZH	4
Others	3
subtotal	317

Now, we have the approximate breakdown of all NTES's games.

I started out using three widely different approaches to estimate the games in three categories. I didn't uses the ranking and total gaming revenue to generate my estimate. But since the game ranking and the total gaming revenue for 4Q12 is known, I can use them as independent verification.

To make sure my estimation is of high quality, I uses the ranking of the games (NTES announce the ranking in some earning conference call) as well as total gaming revenue as ways to confirm my estimation.

From my estimation, it match the ranking of the game perfectly. In addition, the total gaming revenue I estimated is differed from the actual gaming revenue by only 3M. I assigned a new category as Others and allocate 3M for that to match that of the actual gaming revenue.

From the above two independent verifications (ranking and the total gaming revenue), my estimate had proved to be very accurate.

3 new NTES games within the next 10 days, YSG, DT2, and CSXY

One can find my last NTES related post here:

http://chinese-net-gaming-stock.blogspot.com/2010/03/players-revolt-in-wow.html

Right now, everybody is waiting to see when GAPP and Ministry of Culture will approve World of Warcraft』s next expansion pact. But everybody is missing two much more important recent developments.

Within the next 10 days, three new games will enter unlimited Closed Beta with permanent player statistics. Unlimited means anybody can play. This 「Closed Beta」 is not by invitation only. In addition, all player statistics will be permanent. That is, player statistics will not be erased at the end of this 「Closed Beta」. Thus, compare to the west, this is really commercial launch.

On the other hand, I think there will be minimal marketing for the 「Closed Beta」. NTES had been well known to be penny pinching on marketing.

YSG will enter unlimited Closed Beta with permanent player statistics on 4/9/2010. YSG is a 2.5D Turn based MMORPG game, based on Tale of three countries. It will be a free to play. But it is not a true item-based game. There are no items to purchase in this game. On the other hand, player can pay to buy 「essence level」 (精力值). Any time a player wants to get any goodies (such as experience, in-game currency, in-game items, etc.), he has to use up some of his 「essence level」. One can still play without paying any money. But he won』t get any 「essence level」. Thus one can』t get experience or item without 「essence level」. One can also get 「essence level」 through playing as team leader (or more like baby-sitter to other players). There is only one item in the online store, the 「essence level」, you can』t buy any other items in the online store. For PK (player kill), it incorporates 「Battle Chess」 style of play. It emphasizes the usage of battle formations. Therefore, there is a lot of strategy involved in player combat.

Therefore, this game is really NTES』s attempt to investigate another paying model (other than time-based, and item-based).

CSXY will enter its unlimited Closed Beta on 4/15/2010. This closed beta will have permanent player statistics. This game』s development starts in 2005. It is a turned based 3D game, based on BigWorld game engine. It will be a free to play, item-based game. It will be the third game behind the two blockbusters, XYQ and XY3.

DT2 will enter its unlimited closed beta on 4/16/2010. Again, this closed beta will have permanent player statistics. It is a 2.5D real time game. It will be a free-to-play, item-based game. This game emphasize player PK. This game encourages PvP but there are also some PvE elements. Basically this is a game for PK.

DT2 has promotional video for its closed beta. One can find it here:

http://news.17173.com/content/2010-04-06/20100406143519287.shtml

I had always defined a game to be a blockbuster if its PCU can break the important 500k barrier. For MMORPG (without counting the casual game), one can count all the blockbusters in China with two hands. NTES has three of them, WOW, XYQ, and XY2.

Of NTES』s other existing games, TX2 will probably reach blockbuster status by 2011 (it probably has PCU closed to 300k and is still growing strongly).

But out of about 10 new games in the pipeline, I can only see two games that have the chance to reach blockbuster status. These two games are DT2 and CSXY.

A new WOW expansion pact is important in that it will probably give a 10% to 20% kick to the amount of WOW players. It will also indicate the closure between the unpleasantness between GAPP and NTES. But the additional revenue will be shared between NTES and Blizzard.

A brand new blockbuster on the other hand will contribute much more to the bottom line. Somehow, the developments of these two games (DT2 and CSXY) are completely ignored by Wall Street.

At this point, there doesn』t seem to be a major marketing push for the 「Closed Beta」. NTES will probably using this period to continuously modify the game design. In a few months time, NTES will probably conduct a major marketing push for the 「Open Beta」.

But in two to three weeks, we would have some indication of the potential of these two games.

FF will start open beta on 5/15/2009 and quick status on NTES’s new games

One can find my previous article on FF here:
http://chinese-net-gaming-stock.blogspot.com/2008/09/ntes-ff2-status-part2-open-beta.html

It is about time. The new FF went into closed beta on 2/1/2008. Most closed beta doesn’t last more than 1 year. In the above article, I predicted that FF will go into open beta at the end of 2008.

NTES sure take its sweet time. Finally, FF is going to conduct open beta on 5/15/2009. For more detailed information, see the following article:
http://news.duowan.com/0904/103892813170.html

By the way, I had always addressed this game as FF2 to make distinction between this new game (that is developed from scratch by NTES) to the FF1 that was licensed from a Korean company. But NTES address this game as new FF and its web address is http://ff.163.com/. Therefore, from now on, I will address this game as FF.

Everybody knows the exciting news of WOW and how it will accelerate the growth of NTES. But I don’t think most people know the exciting development of new NTES games.

Between 2005 and now (2009), only two games went into commercial operation. DT went into commercial operation in 2006 and XY3 went into commercial operation in 2007.

DT was a failure and the development had been stopped. XY3 had become a medium game and is pulling about $5M per quarter.

In 2008, both TX2 and XYW went into closed beta and monetization had started. But it was very low level monetization and they are definitely not in commercialization mode.

In 2006, NTES got caught in the transition from paying game to free-to-play game in China’s gaming industry; she has to pull all her games in development back to the drawing board and re-started the development cycle.

For 4 long years, NTES had virtually no new game (except a mediocre XY3) for growth.

But the waiting is over. In the next year or so, an explosion of new games will be in commercial operation.

Starting with DT, NTES had restarted the development of DT from its death bed. On 4/15/2009, it released its 2nd expansion pact.
On 5/15/2009, FF will going into open beta. For item-based free-to-play games, open beta is the same as commercialization.

On June 2009, NTES will get the license for WOW. Commercialization shouldn’t be too far behind.

On June or July 2009, whenever the movie “Transformer 2” will be in theatre, NTES’s new game BB will go into open beta.

The two games that went into closed beta in 2008, TX2 and XYW (both had already have 120k to 150k players during the weekend), shall go into open beta some times this year.

2010 will be a busy year for NTES also. Star Craft 2 will probably go commercial that year. In addition, 3 new games will probably be out that year. QN, DT2, and CSXY are all major titles. Keep a special eye out for CSXY, it has blockbuster written all over it.

I didn’t count the two Warcraft 3 games, I don’t think they will be successful.

Out of those 10 new major games (DT is not new, but its re-birth is new), most likely WOW will be a blockbuster. Besides WOW, some of these games will fail, but 2 or 3 may become blockbuster (like that of XY2 and XYQ) and others will be medium games (like that of XY3).

Therefore, while everybody is excited about WOW, the 9 other new games will probably have much more impact than that of WOW.

Ntes is developing new games based on DaTang

My last article on DT2 can be found here:
http://chinese-net-gaming-stock.blogspot.com/2008/07/ntes-dt2-and-ff2-go-into-beta-testing.html

It never ceases to amaze me how different NTES is from other Chinese and American companies. The following is another demonstration of the idiosyncrasy of NTES.

DT had been a failure for NTES. But the game is still in operation. But there are hardly any updates for the game. NTES decided to develop its sequel and on 7/21/2008, DT2 entered into Final Internal Beta.

But it turns out it is not the end of the story. From NTES’s forum:
http://dt.netease.com/viewthread.php?tid=379113&extra=page%3D1
http://dt.netease.com/viewthread.php?tid=379310&extra=page%3D1

From the above two posts, NTES is going to start to develop DT again. It is also going to build another game from DT. DT2 development will still be following its original schedule.

I think NTES is mimicking what it had done for the XY2 series of games. I am going to try to draw the two series of games. First, I will draw the XY2 series of games:


One starts out with XY2. It is a serious 2D paying game. Then it branches out to XYQ. XYQ is a cartoonish 2D paying game. XY3 is supposed to be XY2’s sequel. It is also a serious 2d paying game. XYW branches out from XY3. It is a free-to-play 2D game. While the graphics of XYW will be not be cartoonish, its game-play will be closer to that of XYQ and is much more light-hearted.

The XY2 series of games had been extremely successful. XYQ is a 2 million player’s mega game and is the most popular game in China. XY2 is another mega-game that has close to 1 million players. XY3 is pretty solid game while the just released XYW (according to the server statistics) looks to be NTES’s next mega-game.

NTES is going to duplicate what they did for XY2 for DT. Now I will draw the DT series of games:



DT was a game that was left for dead. But NTES is going to re-start the development of DT. DT is a 2.5D marshal art paying game. DT2 is supposed to be its sequel. It is going to be a 2.5D free-to-play game. The new game will be another 2.5D free-to-play game. It is not clear how the two new games will differ. Most likely DT2 will be a more serious game while the new game will have more light-hearted game playing features.

From the two articles, the new game as well as the DT re-development had both been under development for 10 months already.

All these new developments are pretty exciting. TX2 and XYW are brand new games. All the growing will happen in 2009. In addition, FF2 and DT2 will certainly come out in 2009 also. It is hard to know when the new game (derived from DT) will come out. The most likely time frame is later in 2009. In addition, DT will be re-developed.

NTES will be busying adding new games to its staple in 2009.

Those are exciting news. If it is any other companies, it would have sent tons of press releases to Wall Street analysts. But it is not Netease’s way. It lets its games designer tells a few thousands gamers.

Netease makes great games. It continues to make great games. But NTES's investors have to tolerate its aversion to any marketing.

NTES – DT2 and FF2 go into Beta testing

My last post on DT2 can be found here:

http://chinese-net-gaming-stock.blogspot.com/2008/07/ntes-two-new-games-went-into-closed.html

My last post on FF2 can be found here:

http://chinese-net-gaming-stock.blogspot.com/2008/05/ff2-game-information.html

My last post on TX2 can be found here:

http://chinese-net-gaming-stock.blogspot.com/2008/07/ntes-ceo-predicted-pcu-of-more-than-1.html

My last post on XYW can be found here:

http://chinese-net-gaming-stock.blogspot.com/2008/07/ntes-two-new-games-went-into-closed.html

It is exciting time for NTES. All its major games are going to be out at about the same time.

TX2 went into Closed Beta on 6/6/2008. It is open to everyone and the game characters won't be deleted. Actually, it had already started commercialization already. The game is doing well and is growing steadily. It didn't grow like a block-buster. But that was planned. NTES was not looking for explosive start, but rather slow and steady growth until it reaches PCU of 1 million in 1 year (according to Netease's CEO).

It already started charging for in game items already. More excitingly, starting with a couple of weeks ago, players can now buy treasure boxes. This is similar to GA's ZhengTu game. The treasure boxes are really just online lottery system. It function like online gambling. It is like a slot machine. Every times it opens, items with different values rotates. The probability of getting really good item is very low, but also very tempting. Therefore, it is hard for players to only buy one. They buy one after another until they hit a good item. It may not have very good reputation. But players just can't stop spending money on those.

XYW started Closed Beta on 7/5/2008. In this game, NTES follows the traditional definition of Closed Beta by limiting the number of players. It will delete the game character after the Closed Beta. There is also no commercialization.

DT2 is a new free-to-play game. It went into Final Internal Beta on 7/21/2008. It is not clear whether NTES will kill off DT. It maybe possible that NTES will have both games operating at the same time, with DT2 the free-to-play game and DT the paying game.

Usually, the Internal Beta is limited to players working for NTES. But NTES uses outside players for this Beta. It is limited to about 1000 invited guests. The game characters will of course be deleted after the current beta testing.

Most likely, after the Internal Beta, DT2 will have Closed Beta and Open Beta.

FF2 is a pretty interesting game. It went into Closed Beta on 7/22/2008. It is open to everyone. But the game characters will be deleted. I don't believe it will be commercialized at this point.

I think FF2 will prove to be a very popular game. It will be cater to young players and female players. It might not be able to get a lot of money per players. But eventually, it could be a 5 to 10 million per quarter game.

Now, I am going to make a table on the characteristics of Beta testing on all four games:

Game	Date	Type of Beta	# of players	Delete game Character?	Commercialization
TX2	6/6/08	Closed Beta	Open	No	Yes
XYW	7/5/08	Closed Beta	Limited	Yes	No
DT2	7/21/08	Internal Beta	Limited	Yes	No
FF2	7/22/08	Closed Beta	Open	Yes	No

As can be seen from the above table, it is all over the map. There is no consistency in how NTES determines what is Closed Beta and what is Internal Beta. It is probably up to the chief game designers of each game to decide what he/she wants.

It may be confusing to the investors. But as long as NTES comes out with great games, that is all I care.

With all these major title coming out at about the same time, the next few months is going to determine the future of NTES.

Finally, one can download the official trailer of DT2 from the following address:

http://czdldt2.163.com/dt2/dt2_1024.wmv