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.

State of NTES's game stable, part 2

One can find my last NTES related post here:

My last NTES post

In part 1, I laid out the bi-polar scenario that NTES could either re-accelerate and start to grow like a new start-up ( with a growth > 50%) or could become devastated (cut the company in half). All of that depends on how the players react to this new policy.

Now, I will provide a detailed description of the new policy.  For the detailed analysis of this policy, I will leave for a future blog post.

Again, this policy is used for all of NTES's in-house developed time-based paying games. One can break up all NTES's games into three categories.

The first category is its in-house developed time-based paying games. There are three games in this category and they are XYQ, XY2, and XY3. XYQ is the number 1 game for NTES. XY2 is the number 3 game for NTES. XY3 is a relatively unimportant game for NTES.

The second category is licensed time-based paying games. This includes WOW (World of Warcraft) and SC2 (Starcraft 2). In terms of revenue, WOW is the number 2 game for NTES. But it had been losing players in the last couple of years. SC2 is not really time-based. But it is not very popular and is not very important for NTES.

The third category is its in-house developed item-based free-to-play games. There are about ten games in this category. But four games are important. TX3 is the most technical advanced in-house game for NTES and is most likely the number 4 game for NTES. QN is also a very popular game is most likely the number 5 game for NTES. DTWS2 and WH are new games developed in 2012 and are the games chiefly responsible for the increase in revenue in the last quarter. They are the number 6 and 7 game for NTES.

By the way, to get to the web site for these games. Just type the initial for these games. Then follows with .163.com. For example, to get to DTWS2, just use the web address: dtws2.163.com

The games in the first category probably represents 45% of NTES gaming revenue. The games in the second category probably represents 25% of NTES gaming revenue. The games in the third category probably represents 40% of NTES gaming revenue.

The games in the 1st category are very old games (8 to 10 years old) and is not growing very much. They are very stable because they became social games in that most players go there to hang with their friends. The gaming fee policy change applies to games in this category. Before the policy change, it was assumed that there will be minimal revenue increase from this category (if any). But the new policy changes everything. Now, we could potential get up to 50% increase in revenue from this category.

The games in the second category is basically Blizzard/Activision's WOW. It had been losing players badly in the last year. It is still a little too early to tell, but it seems to have stabilized. WOW is starting to becoming old. It is not going to increase player base. But it is not going to lose much player base either. It is starting to becoming games in the 1st category. The current gaming fee increase doesn't apply to WOW. But I have no doubt that if NTES is able to pass the fee increase to the players for the games in the 1st category, WOW will be next.

The games in the 3rd category are the jewels in NTES's eyes. These are new games (from a few months old to a couple of years old). They are still in the accelerated growth phase. In addition, NTES have four major new games in development. After 2 to 3 years of fruitless trial and error, NTES seems to had figured out how to generate major new games. But games in this category will not be affected by the new gaming fee increase. Because games in this category are item-based games, while the gaming fee applies to time-based games.

OK, I guess I got carry away with the general description of NTES games. I guess I will provide the detailed description of the gaming fee increase in the next blog post.

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.

QN - Another new major MMORPG game by Netease

The last new major MMORPG game developed by Netease is CSXY. My last article describing that game can be found here:

http://chinese-net-gaming-stock.blogspot.com/2009/03/csxy-another-major-game-developed-by.html

But there is an explosion on the development of new major titles by Netease. Obviously, there is another major new game under development.

On 4/1/2009, NTES announce another major game, QN. Any information on it is still very sketchy. The following is what little we know about it:

It is a MMORPG. It is going to be a fantasy game. It is a 3D game with fixed camera angle. I think that is what DT is but NTES called DT a 2.5D game. So I don't know the difference between 2.5D vs. 3D with fixed camera angle.

It can be roughly translated as 「Ghost Story」. It is based on an ancient Chinese novel. Then 20 years ago, it was made into a very famous movie. After that, it was made into a very successful TV series. The basic story is about the romantic story between a young Confucius scholar and a female ghost.

It is going to be a real time game. It is an in-house developed game. I think the closest NTES game is DT. But DT is a martial art game while QN is going to be a fantasy game where human, ghost, good gods and evil gods co-exist.

The game's web site is: http://qn.163.com

I attached some in-game graphics for the game below:

Those are some very beautiful graphics.