NetEase Boosts Activision Ties

NetEase, Activision strengthen ties

It seems I was incorrect with my previous prediction that an alliance between online gaming giant NetEase (Nasdaq: NTES) and US game designer Activision Blizzard (Nasdaq: ATVI) could be headed for trouble, with news of a major new tie-up between the pair. The news that NetEase has won the China rights for Activision Blizzard’s new “Hearthstone: Heroes of Warcraft” game comes more than 2 years after NetEase first licensed another popular game from the US company, and appears to reflect a strengthening of their relationship. (company announcement; English article)

Investors seemed to be largely indifferent to the deal, with NetEase shares rising 2 percent in the 2 days after the announcement came out. But before we go any further with details of this latest tie-up, it’s helpful to retrace some of the history between these 2 companies, which also involves rival online gaming giant Tencent (HKEx: 700).

The story dates back to 2010, when NetEase won the China rights to Activision Blizzard’s highly popular “World of Warcraft” game from its former operator The9 (Nasdaq: NCTY). The move dealt a crippling blow to The9, which has struggled to recover since then. But it marked a major victory for NetEase, which used “World of Warcraft” to complement its existing portfolio of popular games.

Then last year Activision Blizzard was put up for sale by its majority stakeholder, France’s Vivendi (Paris: VIV). Right around that time, Tencent, China’s leading online game company, announced its own strategic tie-up with Activision Blizzard a year ago. (previous post) Media also reported at that time that Tencent, which has a huge cash pile, was one of several possible suitors for Activision Blizzard.

With a market capitalization of $8 billion, Activision Blizzard looked like a smart acquisition target for Tencent, and I predicted a sale could happen in the next year or so. Activision Blizzard’s most attractive asset was its popular games, which Tencent as an acquirer could have hosted on its popular gaming platforms. All of that led me to predict that if an acquisition occurred, then NetEase could easily lose its licensing rights for “World of Warcraft” when its current 3-year license for the game expired.

Of course, it’s been more than a year since Vivendi’s original announcement and there’s been no word of a sale of Activision Blizzard. That leads me to believe that Vivendi may have changed its mind and doesn’t want to sell anymore, or at least that no obvious buyer has come forward yet.

With all that background in mind, the latest tie-up between NetEase and Activision Blizzard certainly seems to indicate that the pair are working well together and want to strengthen their ties. The pair have actually collaborated since 2008, and NetEase now operates a number of other Activision Blizzard titles in China besides “World of Warcraft.”

In one interesting twist to the story, Chinese media are reporting that NetEase founder William Ding didn’t appear at the media event to announce the newest tie-up, which was attended by senior managers from Activision Blizzard. But I suspect Ding’s absence is probably more due to his low-key style, and is unrelated to any hidden conflict between the 2 sides.

So what’s ahead for this alliance? I seriously doubt that NetEase would ever consider buying Activision Blizzard, mostly because it has far less resources than Tencent and couldn’t afford such a purchase. But this latest tie-up does appear to show that NetEase is emerging as Activision Blizzard’s main partner in China, which should work to NetEase’s advantage as it seeks to consolidate its position in the nation’s competitive online gaming market.

Bottom line: NetEase’s new licensing deal reflects growing ties with Activision Blizzard, which should benefit NetEase over the long term.

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