Just a week after commending NetEase (Nasdaq: NTES) for being one of China’s few successful developers of popular online games, we’re seeing what investors really think of the company as they bid up its shares to new all-time highs after the company reaffirmed it will continue to offer its popular World of Warcraft title for at least the next 3 years. (company announcement; Chinese article) But avid gamers will quickly realize that far from being a self-developed title for NetEase, WoW is actually property of US game developer Activision Blizzard (Nasdaq: ATVI), which has just extended NetEase’s licensing deal for the wildly popular title by 3 years. The announcement sparked a rally for NetEase shares, which rose 3 percent to reach a new all-time high — a rarity for most US-listed Chinese firms whose shares all now trade well below such high points following a series of accounting scandals last year. While the renewal is certainly good news for NetEase, the Wall Street reaction highlights the fact that the company is perhaps still more dependent on games licensed from outside companies than I had suggested in my previous posting. Investors realize that such dependence is ok when you have a hot title and a fresh licensing agreement, but can be quite dangerous when that same title fades in popularity or a licensing agreement expires. The9 (Nasdaq: NCTY) knows that lesson all too well, as it was a previous hiigh-flyer whose success was largely based on its own previous licensing agreement for World of Warcraft. Industry watchers will recall that the company lost its rights to the game to NetEase when its license expired 3 years ago, setting the company’s shares on a downward slide that have seen them lose about half their value since that major development. This new licensing deal means that NetEase looks safe as an online gaming bet, at least for the next 3 years. In the meantime, I do have to commend the company for continuing to develop its own games, even though such an approach is much riskier since it takes lots of time and money, and there’s no guarantee of success. At the same time, the company is also looking to diversify a bit beyond its dependence on games by taking steps to reinvigorate its well-known but neglected Internet portal business. (previous post) Clearly investors like the broader NetEase story, which indeed does seem to paint a picture of a company taking a small number of focused steps to keep its business growing. Now the key will be execution by continuing to develop popular new games and getting some new value out of its portal business. If it fails to do either of those well, shareholders could equally punish the company stock the same way they are rewarding it now.
Bottom line: NetEase’s new licensing deal for a popular game title will give it a 3-year cushion as it works to develop its own new game titles and relaunch its Internet portal business.
Related postings 相关文章:
◙ NetEase Name Change: Spin-Off Coming 网易更名：预示业务分拆
◙ Online Games: Where’s the Excitement? 中国网游企业增长有限
◙ SouFun, NetEase: Slowing Growth Stories 搜房网、网易：增长放缓
After piling through the mountain of corporate earnings that have just come out in the last 24 hours, I’ve decided to focus on online game veteran NetEase (Nasdaq: NTES), which appears to be at a critical juncture that could simply mark a pause in its recent rise or be the beginning of a longer-term decline. NetEase has been one of the most resilient companies throughout the current confidence crisis for US-listed China stocks, perhaps due to its status as one of China’s oldest publicly listed Internet firms and also due to solid performance from its core online game business.
