NetEase: Tian Xia II Poised to Grow Significantly in Q4

Aug.25.09 | About: NetEase, Inc (NTES)

On August 26, NetEase (NASDAQ:NTES) will release the open beta version of Tian Xia II (TX2), one of its in-house developed 3D games. The open beta will be officially launched on September 20, accompanied by a large-scale advertising campaign. This article discusses TX2's 4Q09 outlook and potential risks, and shows the game's recent trends of Peak and Average Concurrent Users (PCU and ACU).

TX2's PCU will be substantially boosted by aggressive advertising. TX2 is the focus of NetEase's advertising campaign in the second half of 2009, and more than RMB 100 million ($14.6 million) will be allocated to TX2's promotion, according to reports by Sina and Nanfang Daily. My tracking shows TX2 has already reached 160K PCU without much advertising (see chart below). I estimate the heavy advertising surrouding the open beta will propel TX2's PCU to at least 250K in 4Q09.

TX2 players' spending and stickiness will increase significantly. The huge size of TX2's open beta patch (1G - larger than many single games) indicates rich new contents will be added. Currently, TX2's revenues rely heavily on four systems/features: Treasure Box, Soul Pearl (Yuan Hun Zhu), Dresses, and Riding Animals. I believe the open beta version's abundant new contents will diversify TX2's revenue sources, and boost players' spending to a higher level in 4Q09. In addition, the large amount of new contents will increase players' stickiness in 4Q09 because they are likely to spend much time on exploring new maps, tasks, instances (Fu Ben), etc.

TX2 still faces potential risks. Although TX2's game design significantly imitates World of Warcraft (WoW), its skill system, task system, and profession balance still have a long way to go compared with WoW. I believe the open beta version will only partially solve this problem, and a lot of additional R&D efforts are required to improve TX2 after it enters open beta. Although aggressive advertising will boost TX2's PCU in the near term, such PCU levels will not be sustainable if NetEase's R&D efforts on TX2 fail to keep up with the growth in concurrent users.

Game monitoring and methodology. The chart below shows the trends of TX2's daily Peak and Average Concurrent Users (PCU and ACU). In the past seven weeks, TX2 reached its PCU of 166250 on August 8, 2009. My methodology is based on these articles: Article 1; Article 2; Article 3. If you have any suggestions on improving the monitoring, feel free to contact me.

Disclosure: No positions

Chart: TX2's Daily PCU and ACU Trends

xzhang 08252009Click to enlarge

Source: Monitoring by Xiaofan Zhang