Why Activision Must Renew The9's World of Warcraft Contract

With 92% of their 2007 revenues coming from operating World of Warcraft in China, The9 (NCTY) must renew their WoW license or lose much of their earnings power. Their license is set to expire in June, 2009.

If they can renew this license, and simply maintain their current earnings level - they have a very attractive valuation. With a Market cap of $518M, $300M in cash, no net debt, and earnings of $16.8M last quarter, they are great deal, even ignoring the fact that they have a fabulous growth record.

On August 13, shares of The9 fell 20% on news that Netease (NTES) had licensed various games from Activision Blizzard (ATVI) (Starcraft II, Warcraft III: Reign of Chaos, Warcraft III: The Frozen Throne™, and Battle.net® platform) for the China market. (See here.)

While the Starcraft and Warcraft series of games are entirely different types of games from World of Warcraft (they are play once type of games with groups of up to 12 people vs. WoW being massive multiplayer games - or MMORPGs), it is easy to understand the concern investors have that Activision is working with Netease now and may not renew the the WoW license for The9.

So now the big question is - will Activision renew the license for The9? I believe they must.

First of all - if they give the license to someone else (for example, Netease), all of the million+ regular players will lose their WoW accounts with The9. These users have invested years of time in developing their characters and status in the game, and will have to start over from scratch. With significant competition from game operators competing for players, many customers will decide to go to a different game, rather than start from scratch with World of Warcraft. Since Activision gets a 22% cut of player revenues, they would take a huge loss on the reduction of players.

Now, there is no chance another operator will be able to take over The9's player base and generate the same per player revenues. But, if they are able to offer a significant upfront fee to the extent that Activision won't care about per-player license revenues, then Activision might consider the switch. But that would then send a really bad message to future licensors. It won't make sense for companies to fully commit to licensing from Activision with the fear that even if extremely successful Activision might backstab them in the end.

So I see Activision trying to diversify their China offerings a bit with the Netease licensing, and delaying their renewal with The9 for as long as possible to try and get a higher percentage of license revenues, but in the end, it makes sense for them to give in and renew the license with The9.

Disclosure: Author is long NCTY

Comments

[Louis Liu:]

I agree. WOW is cash cow but also an old title anyway. Operator change will kill it, that Activision and the9 can not afford to either.

BTW, according to the9's 08Q2 report, she has $200M cash in hand, not $300M.

2008 Aug 19 05:34 AM

[Louis Liu:]

I agree. WOW is cash cow but also an old title anyway. Operator change will kill it, that Activision and the9 can not afford to either.

BTW, according to the9's 08Q2 report, she has $200M cash in hand, not $300M.

2008 Aug 19 05:34 AM

[Carousel:]

Fallacy in logic. The9 does not own user accounts, Blizzard does. Publishers are licensed to 'operate' the game, not own the user account information. When you sign up to open a WoW account, you agree to a Blizzard China EULA and TOS. So, if Blizzard was to decide to change publishers, they can simply move the accounts! So again, does Blizzard really have to stay with The9? The answer is a simple NO, based on the logic proposed by this article.

2008 Aug 19 06:03 AM

[borisb:]

Joker thanks for getting to the truth.

2008 Aug 19 08:23 AM

[Chuck Kasparov:]

Joker, thanks for your comments. That's a really good and key point I hadn't considered. I looked up Blizzard's TOS for China (see https://blizzard.com/account/c... under the china link).

Under Ownership it has the following:
All title, ownership rights and intellectual property rights in and to the Service, including without limitation the Blizzard Account that you register to use the Service ... are owned by Blizzard and/or its licensors.

So it's not yet clear to me in The9's case if Blizzard owns the accounts or the licensors own the accounts. Where did you find the Blizzard China EULA?

Thanks!

2008 Aug 19 09:10 AM

[bockwai:]

Chuck, the ToS that you get when you pull up that link on Blizzard's site is for the North American ToS, not China. Even if you use the China country setting it still displays the ToS for N.A. The only way you can get the WoW China ToS is at wowchina.com and you'll need to be able to read simplified Chinese in order to make use of that. Im going to have my analyst in Shanghai give it a look/see though I highly suspect that Blizzard owns the user accounts as Joker states. It would be very non-conforming within the video game industry for the game operator to own the accounts over the developer/publisher.

2008 Aug 22 12:58 AM

[vovka:]

User accounts will transfer to the new operator. There is no way that Blizzard signed an agreement that would lock them (and their customers) to a middleman. This is nonsense.

2008 Aug 25 02:37 PM

[eq2 plat:]

It's good to know despite the global economic crisis the virtual industry is still soaring high.

Feb 19 05:40 PM

[Eric Carter:]

The virtual economy in WoW is booming maybe we all should invest more in Blizzard stock.

Mar 21 05:38 AM

[Drexl:]

Sorry party people - but this is a DONE deal. Read the official press release from Blizzard and NetEase on Activisions website at:

investor.activision.co...

Disclaimer: I've had, and will continue to have, a whole BUNCH of Shorts PUT on this puppy for 2 days now...

Apr 16 02:46 PM