NetEase Plummets After Ending China Deal for Blizzard Games

NetEase Inc. and Blizzard Entertainment Inc. plan to end their 14-year partnership. NetEase shares plunged.

NetEase shares plunge as the partnership with Blizzard Entertainment is planned to end in January 2023. (Netease)

NetEase Inc. and Blizzard Entertainment Inc. plan to end their 14-year partnership after January, depriving the Chinese firm of a slice of revenue and suspending service for some of the country's most popular games. NetEase shares plunged.

The Hangzhou-based publishing giant and Activision Blizzard Inc. subsidiary failed to agree on an extension to their long-running collaboration, which had encompassed famed franchises like StarCraft, Diablo, Overwatch and World of Warcraft. Blizzard will suspend most online game services in mainland China from Jan. 23, the US company said on Wednesday. Game sales will also halt in the coming days.

Beyond financial terms, key sticking points to the NetEase extension were ownership of intellectual property and control of the data of millions of players across China, people familiar with the discussions said. The people spoke on condition of anonymity because the talks weren't public.

The affected games represented a low-single-digit percentage of NetEase's total revenue and profit, the Hangzhou firm said in a separate statement.

“We have put in a great deal of effort and tried with our utmost sincerity to negotiate with Activision Blizzard so that we could continue our collaboration and serve the many dedicated players in China,” NetEase founder and chief executive William Ding said in the release. “However, there were material differences on key terms and we could not reach an agreement.”

NetEase fell as much as 15% in Hong Kong after the announcement, its biggest intraday fall in more than a year, amid a wider selloff among Chinese tech firms.

Growing political tensions between the US and China have made user data a thorny issue. Short-video platform TikTok, run by China's ByteDance Ltd., has been criticized by American politicians as a national security threat and is having to show a firewall between its US users and any China-based operations.

Originally signed in 2008 and last renewed in 2019, the distribution accord has been fruitful for both companies, feeding NetEase with globally recognized hits and giving Activision a gateway into the world's biggest PC and mobile gaming arena. China contributed at least 3% of Activision's net revenue in 2021 and is a significant driver of future growth. It accounted for over $400 million in esports revenue last year and more than 400 million fans. Blizzard has several competitive gaming organizations, such as the Overwatch League, that include Chinese teams.

Before NetEase, Blizzard distributed World of Warcraft in China through Shanghai venture The9 from its release in 2004 through 2008. But that partnership ended in a rift, with Chinese players unable to access the game for more than a month.

China's No. 2 gaming giant swooped in as Blizzard sought to find a new local publisher, first signing a deal to run StarCraft II and Warcraft III, then taking over World of Warcraft, which at the time was the most popular online game in China.

Signs of a rift between the two sides emerged in the summer when they scrapped plans for a World of Warcraft smartphone game that had been in development for three years. NetEase disbanded a team of more than 100 developers tasked with creating content for the title. Activision warned in its earnings release this month that “a mutually-satisfactory deal may not be reached” for extending its licensing agreements in China.

Without finding an alternative partner, Activision is unlikely to be able to continue its China business. It's unclear if the company has engaged in negotiations with domestic leader Tencent Holdings Ltd. or another local distributor.

China's internet sector has been radically reconfigured in recent years by a broad government crackdown that put stricter limits on gaming time for youths and halted licensing of new games for months. Still, NetEase was this summer able to successfully release Diablo Immortal, a mobile role-playing game tapping one of Blizzard's prized assets. Players will still be able to play Immortal in China after January because that game is subject to a separate long-term deal.

Collaboration with China's big two of game publishing, NetEase and Tencent, has been the most reliable way for foreign companies to enter and stay in the Chinese market. Nintendo Co., for instance, uses Tencent as its local distributor for the Switch console and software. Even with Tencent's help, however, Epic Games Inc. last year gave up on its multiyear effort to bring its best-known game, online shooter Fortnite, to the market after failing to get regulator approval.