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.

Players revolt in WOW

My last WOW related post can be found here:
http://chinese-net-gaming-stock.blogspot.com/2010/02/coiled-spring-ntes.html

In the last three days, there is a mini-player revolt for Netease's WOW. Sina's game channel had a special section on this revolt. Sina's section can be found here:
http://games.sina.com.cn/zt/wow100325/index.shtml

I will provide a quick summary of what happened below:

On 3/23/2010, an individual WOW player hook up with a WOW clique to do a raid in WOW. After they kill the in-game monster, the clique took all the in-game reward (gold) from the monster. The individual felt he is victimized by the power clique (at least according to that individual).

Further negotiation results in the clique threaten to "kill" the individual.

That evening, when that WOW player logged on to the game, he is informed that his account is being frozen by NTES (the WOW operator).

That player complained on a popular instant messaging channel. Things like this happens a lot and a lot of individual players had been victimized by the power cliques (or clans).

Thing like this happens all the time and nothing usually happens. But somehow, this time, this player's circumstance somehow draw the attention of a lot of other WOW players.

These players then went to WOW and start to attack that clique. After the angry mob finished off the clique, they start to attack the game operator (NTES). For a while, all of in-game communication channels are dominated by angry players accusing NTES of negligence. That in turn attracted more players' attention.

By the morning of 3/25/2010, several tens of thousands of players were talking about this at various game forums. By the morning of 3/25/2010, NTES contacted that individual player and told the player that his account was frozen not because of any attack by a power clique, but because he had used illegal game point purchased from an illegal source. In addition, his account is only frozen for one day. Three will be no other punishment to that individual player.

Satisfied, that player get on the instant message channel and told the crowd that this issue had been resolved.

But the mob is not satisfied and the mass protest continues.

As of this evening (3/25/2010), accounts of several of leading protesting WOW players have been frozen.

Sina had hired a lawyer to provide legal advice to support the protesting WOW players. Oh, by the way, SINA and NTES are competitors.

While I don't think this thing has any long term affect, it is still interesting to follow this development.

Coiled Spring - NTES

My last WOW related post can be found here:

http://chinese-net-gaming-stock.blogspot.com/2009/07/wow-approved-by-ministry-of-culture.html

Now that WOW is finally being approved by GAPP. Better yet, NTES is probably not going to get panelized. Let me look forward to see how the fundamental is going to shape NTES.

Sometimes bad news worked out for the best.

The whole WOW-GAPP episode was definite a bad news for NTES last year.

But as we get to 2010 and as WOW is now officially approved, everything is most likely going to work out for the best.

NTES's TX2 is a competitor to WOW. If WOW got approved last year and the expansion pact (Wrath of the Lich King) got approved, it would had squeeze all the oxygen out of TX2.

As it turned out, NTES can't get WOW approved and it turns all its energy in TX2. As a result, TX2 has established a thriving and highly devoted fan base, it is on its way to become the next mega hit in China. TX2 has got to the point of being able to stand on its own feet now.

Now that NTES has got its license to WOW approved, it has three mega (WOW-related) events coming up. It has two new expansion pacts (Wrath of Lich King and Cataclysm) and Starcraft 2 coming up. In normal time, these events are staggered about 2 to 3 years apart. Each of these events would had been the dominate events in China’s gaming world.

Now, because of the unique circumstance (or incompetence) of GAPP, all three events are being squeezed into one year. In other words, 6 to 7 years of game changing events are being squeezed into one year time. For the next year to 18 months, NTES is able to release the Wrath of Lich King expansion, followed by Starcraft 2 and finished by coming out with the Cataclysm expansion pact.

NTES is going to have all of China’s gaming market all to itself in the next 12 to 18 months.

Better yet, NTES doesn’t have to sacrifice TX2 for it.

NTES has about 15 major games in later stage of development right now. But two of them has early signs of being the next mega hits. They are DT2 and CSXY. None of them are the direct competitor to WOW. Both of these two games are probably going to out within the next 12 to 18 months.

NTES is already dominant in the 2D cartoonish turn-based game, it is going to be dominant in 3D mythical games with WOW and TX2. With Starcraft 2 and the new battle.net, it is going to carve out a new area (that does not exist right now) in on-line battle matching. DT2 is targeting directly at the martial art games of PWRD, GA, and CYOU. CSXY is going to create another new area that does not exist in China’s gaming world.

18 months from now, there is a good chance NTES would achieve near monopolistic position on virtually all the different areas (except casual games) of China’s gaming market.

I don't think I could have been more optimistic about a company than I am about today's NTES.

WOW approved by ministry of Culture

My last WOW related post can be found here:
http://chinese-net-gaming-stock.blogspot.com/2009/07/approval-of-wow-could-take-another-60.html

Sorry, for not keeping up with the post, I do have a regular job and it gets pretty busy lately.

First, some old information:
http://it.sohu.com/20090717/n265296111.shtml

The General Administration of Press and Publication (GAPP) said July 17, 2009 that its content checks into NTES's MMORPG World of Warcarft (WoW) is almost complete. GAPP said that GAPP has found some violent content which needs to be revised but that this should prove no difficulty for game companies.

My guess is this will only be 2 to 3 weeks of more work before it is approved by GAPP.

But GAPP is not the only government agencies that NTES needs to get approval. Ministry of Culture's approval is also required. Today, 7/21/2009, NTES obtained this approval. See the following article:
http://it.sohu.com/20090721/n265371279.shtml

The following picture is the image from the web site of Ministry of Culture:


At this point, it is pretty clear that NTES will start operating WOW within 2 to 3 weeks. This delay had nothing to do with what NCTY's law suit. This is what I predicted from my last post.

Finally, my last post had a couple of comments that disagree with my prediction. First, thank to the commenter for your opinion, even if you are disagreeing with me. As long as you don't resort to personal insult, your comments are welcome. Viewers are especially encouraged to view the comments section to get other points of views.

Approval of WOW could take another 60 working days

One can find my previous article on WOW below:
http://chinese-net-gaming-stock.blogspot.com/2009/06/wow-had-already-passed-3-fourth-of-way.html

Previously, NTES and Blizzard had a joint statement saying that they will start to operate WOW at the end of June. Clearly, they are not able to do it.

NTES issued a public apology to Chinese users:
http://it.sohu.com/20090701/n264884981.shtml

In it, NTES didn’t specify the reason for the delay. It also didn’t say when WOW will be re-opened.

President of Blizzard said it (the interruption) is not a big deal:
http://it.sohu.com/20090630/n264863497.shtml

But the unknown is not good. Finally, the portals got hold of the relevant government department and interviewed the person who is in charge of the approval process:
http://it.sohu.com/20090701/n264903812.shtml

According to the person (a mid level bureaucrat) in charge of the approval process, government has up to 20 days to approve the application. But it also has up to 60 days to inspect the content of the game.

I believe there was a misunderstanding between NTES/Blizzard with the Chinese government. NTES probably thought since WOW had already been approved for NCTY, government no longer need time to inspect its content.

Therefore, NTES thought it only has to wait for up to 20 days before it got government approval. Thus, it and Blizzard made the announcement for restarting the game by the end of June.

But now, it is clear that the (up to) 60 working days of inspection is needed. Maybe the government thought there are a lot of new content being added for WOW between now and the time NCTY first submitted a few years ago, that a new review is warranted.

What does this mean? It has to be good news to SNDA’s AION. NTES’s TX2 will probably benefit from it also.

But overall, it is a temporary bad news for NTES. But does this have long term negative effect on the popularity of WOW in China? No, not at all. As long as WOW is the number 1 game in the west, its place in China is secured.
But it does means NTES will have to forgo a part of the summer season to make money from WOW.

Two other observations can be made here. First, this delay has nothing to do with the suits filed by NCTY against Blizzard. This explains the complete silence of NTES over the conflict between NCTY and Blizzard. That conflict doesn’t affect NTES at all.

The second observation is that it is clear now that if any foreign game companies want to change Chinese partner, even if it is perfectly legal under contract, he will have a high price to pay. Chinese government made certain of that.

Finally, will the full approval process last another 60 working days? I seriously doubt it. WOW had already been approved and people of playing it for long time already. If the government disapproves it, that means it disapproves something it already approved before. It is a slap on its own face. It also won’t take close to 60 days to approve it. It looks bad on them for being so inefficient. Finally, they really don’t need that long to inspect something they already inspected already.

WOW had already passed 3 fourth of the way in its approval process

One can find my previous article on WOW here:

http://chinese-net-gaming-stock.blogspot.com/2009/05/ntes-will-get-wow-players-statistics.html

On 6/7/2009, the operation of WOW in China was officially transferred from NCTY to NTES. NTES then start to submit to Chinese government for the approval to operate WOW.

It is required to get approval from four levels of government agencies, the Culture Department, the local level News Department, the provincial level News Department, and the National News Department.

NTES announced that it will start to operate WOW starting at the end of July, see the following:

http://chinese-net-gaming-stock.blogspot.com/2009/05/ntes-to-operate-wow-starting-end-of.html

Some Wall Street analysts doubted that it would happen that fast.

From the following article:

http://it.sohu.com/20090615/n264529993.shtml

NTES had already received the approval from the first three departments (Beijing city News department counts as two levels of departments). It only needs one more department to go. In a period of one week, it had already gone through ¾ of the way.

It is looking more and more likely that NTES is going to start operating WOW by the latter part of June. This is definitely a good news.

Finally, for one who wants to see the official government questions and answers regard to this subject, go to the following (the link might not be there for long though):

http://www.bjppb.gov.cn/xxhd/zxwd/ckjd_new.jsp?subjectID=2