Blizzard Entertainment and NetEase confirmed on November 17 that the publishing license covering several Blizzard developed titles in mainland China will not be renewed when it expires on January 23, 2023. This will cause the shutdown of World of Warcraft, Overwatch, Hearthstone, Diablo III, Warcraft III, Heroes of the Storm and StarCraft titles in mainland China because foreign games require a domestic publisher. The expiration of this agreement will not impact the operation of Diablo Immortal, which was developed by NetEase, as it is governed under a separate contract. Nor will it impact Activision Blizzard’s agreements with other Chinese partners including Tencent that developed and operates Call of Duty: Mobile in mainland China.
The split is based on business decisions
Blizzard Entertainment and NetEase originally signed the publishing license agreement in August 2008 and formed a joint venture to manage the operations of Blizzard games in mainland China. The most recent multiyear contract renewal was in January 2019. Blizzard stated it ended the agreement because the renewal was not “consistent with Blizzard’s operating principles and commitments to players and employees”. NetEase said the agreement ended because “there were material differences on key terms, and we could not reach an agreement”. The news has had a profound impact on gamers and global markets reflected in Chinese social media with trending hashtags receiving hundreds of millions of views in the first 24 hours as Chinese gamers said their goodbyes to beloved titles.
No material impact in the short term, but reputations may be harmed
Activision Blizzard reported that it earned 3%, (approximately US$264 million) of net revenue from the mainland China publishing deal with NetEase in 2021. Niko Partners estimates that NetEase generated approximately 4% to 6% (US$550 million – US$825 million) of its net revenue from the publishing deal in 2021. While the revenue contribution for both companies is relatively small, the long-term impact and reputation of both companies may be negatively impacted. Blizzard maintains a good reputation in China, especially among older gamers who grew up with its titles. The potential loss of years of a gamer’s Blizzard game data, paired with potential impacts to the local esports scene and uncertainty around what may happen with upcoming titles like Diablo 4 may cause concern for some Chinese gamers
This is the second China publishing agreement Blizzard has ended
Chinese law requires a government issued ISBN for each game title to be published in the mainland, and the games must be published and operated by a Chinese majority owned company. Blizzard Entertainment first conformed with this law in 2004 by partnering with The9 for World of Warcraft. While the partnership had some initial success, with the game reaching over 1 million peak concurrent players in the country, Blizzard ended the agreement in 2009. Certain operational issues prompted Blizzard to end the licensing agreement with The9 and the company announced in April 2009 that it would shift its publishing agreement to NetEase. The law at the time stated that if the domestic publisher changes, the ISBN number stays with the original applicant and therefore NetEase had to apply for a new one. This caused a significant gap between the closure of The9’s World of Warcraft server and the launch of NetEase’s.
NetEase and Blizzard both benefited from the JV with titles setting multiple records
NetEase Games started operating World of Warcraft in 2009 and the franchise helped them solidify their position as a premium PC game publisher in mainland China. The title quickly became the #1 grossing licensed PC game for NetEase, and the release of expansions and nostalgic WoW Classic helped drive revenue growth over the long term, to the point that the game was the #1 driver of licensed game revenue growth in 2021 for the company. The renewal of the deal in 2012 led to the launch of additional PC games including Diablo III which became the fastest selling premium PC game in the country at the time. In fact, it was Blizzard’s Overwatch which broke that record in 2016, going on to sell over 10 million units in China. NetEase’s expertise in mobile game development also led to the development and publishing of Diablo Immortal, the first Diablo game for mobile, which has already grossed more than US$400 million worldwide despite launching just 5 months ago.
Blizzard may look for a new partner in China
Just as Blizzard parted ways with The9 and shifted to NetEase, it may choose to form an agreement with a new publisher to relaunch its PC games in the country. China remains an important market for the Activision Blizzard business as a whole and China is the #1 games market in the world by revenue. Niko forecasts China to generate US$45.44 billion this year. Our 2022 China PC Games Market Report found that World of Warcraft was the #7 highest grossing PC game in 2021 and that it was the 9th most played PC game in the country according to our survey respondents.
Blizzard has stated that it is “looking for alternatives to bring its games back to players in the future” but no further details have been announced at this point. Blizzard may turn to Tencent, who partnered with Activision Blizzard to develop and publish Call of Duty: Mobile in China. Tencent, with its strong distribution channels and experience of operating foreign game franchises, is likely the sole logical partner for Activision Blizzard to replace NetEase. Less likely options may include Perfect World, Shengqu Games or Kingsoft due to their experience publishing MMO games. Alternatively, the company may forgo a relaunch in China given the difficult regulatory environment for imported games and the inability of foreign game developers to obtain new game licenses this year.
If Blizzard does partner with another Chinese game company, its games would need to re-enter the approval process under the new operator. However, now at least, there is an expedited process that operators can utilize. For example, when the game Warframe switched operators from Changyou to iDreamsky, it was able to utilize this separate approval process which is also used when a games name needs to be changed or an additional platform needs to be added to the license. That being said, this process can still take months and imported titles overall have had a very rough time securing ISBNs in the past 16 months.
NetEase may develop its own AAA games for a global audience
While the partnership with Blizzard has supported NetEase’s growth over the past 14 years, the company has also grown on its own merits, and it has established itself as a premium game developer and publisher in the country. NetEase’s strengths lie in its self-development capabilities and the ability to create leading titles based on owned IP, such as Fantasy Westward Journey and Onmyoji as well as licensed IP in terms of Harry Potter: Magic Awakened and Diablo Immortal. The firm has recently embarked on a global expansion strategy which has involved upgrading its game development process, opening new studios overseas, hiring key global talent and initiating development of large-scale AAA titles that appeal to a global audience. With the success of titles such as Naraka: Bladepoint in the past year, it’s clear that NetEase can successfully incubate and launch new self-developed game projects that drive revenue growth regardless of the performance of Blizzard’s PC games.
From Wrath of the Lich King to Wrath of the Lich King (Classic)
The elephant in the room is how Microsoft’s acquisition of Activision Blizzard will factor into the future of Blizzard in China. Microsoft currently has an agreement with NetEase to operate Minecraft in the country, where it has over 600 million players across PC and mobile. However, this deal is also approaching its expiration date of August 2023. Microsoft has also partnered with Tencent and its TiMi Studios Group to develop and publish a mobile game based on its Age of Empires IP.
NetEase and Blizzard first partnered for World of Warcraft 14 years ago, with Wrath of the Lich King being the major expansion to release at the time. The re-release launch 2 months ago of Wrath of the Lich King Classic closes the circle for NetEase and Blizzard.
You can also read our thoughts here:
Wall Street Journal: Activision Blizzard to End Most Game Services in China, NetEase Partnership
Gamesindustry.biz: Blizzard and NetEase end 14-year partnership: Everything you need to know
Agence-France Press via Barron’s: Blizzard To Pull Popular Games From China After License Spat