Netease Captures World of Warcraft

 |  Includes: ATVI, NCTY, NTES, SNDA
by: China Market Research Group

By CMR Managing Director Jessica Lo, CFA

Activision Blizzard’s (NASDAQ:ATVI) massively popular MMORPG or ‘massively multiplayer online role playing game’ World of Warcraft is moving to a new home in China. WoW which for several years had been licensed by The9 (NASDAQ:NCTY) in China will now be licensed by NetEase (NASDAQ:NTES) for the next 3 years. Investors should take note of this new development as NetEase continues its roll.

NetEase saw total revenue for Q1 2009 grow 20% year on year to $114 million USD along with a 55% increase in profit year on year to $61 million USD. NetEase revenue from online gaming totaled $106 million USD primarily from the popular Fantasy Westward Journey, and Westward Journey Online II. The addition of WoW will only serve to solidify the company’s position in the market and add a 3rd major prong to its game offers.

The company’s gaming revenue jumped 30% year on year proving that NetEase has zeroed in on the kinds of titles that consumers are looking for. A testament to the popularity of their titles is their ability to convince gamers to pay to play even as the dominant trend is to offer free gaming only to charge for extras.

In a previous article CMR wrote that NetEase was the “#1 competitor/ player” in China’s online gaming market and what was true then is still true today. Founder Ding Lei and the rest of the NetEase management team have done a great job of solidifying the company’s position as the dominant player in China’s online gaming market.

Despite the financial crisis, young Chinese consumers who make up the core target market of WoW remain optimistic. They might switch away from spending money in bars and restaurants but are still looking for cheap forms of entertainment. We remain very bullish on the online game sector in China.

The addition of WoW may raise some eyebrows because the title itself is old. It is important Activision Blizzard and NetEase keep the title fresh through expansion in China (consumers have complained that few updates occurred in the last year) and in doing so has developed a dedicated following in China that NetEase will now be able to capture.

Meanwhile major competitor Shanda Interactive Entertainment Limited (NASDAQ:SNDA) may also warrant a look from investors as it carries a strong portfolio of titles including Dungeons and Dragons Online, and new release AION that appeal to hardcore gamers, as well as versions of chess and go which are popular with casual gamers.

China continues to be a hotbed for online gaming and with the growth in active gaming from the under 18 and over 40 crowd it is on track to overtake the United States as the largest online gaming market in the world by the end of 2009 after supplanting South Korea in the number two spot. China’s online gaming revenue in 2008 totaled $3.04 billion USD representing 27% of the global market compared to the US at 29% so the outlook for the best run of China’s gaming companies remains strong.

Disclosure: no position.