UPDATE 2-China clamps down on Activision's top online game

By Alexei Oreskovic SAN FRANCISCO, Nov 2 (Reuters) - A Chinese regulator has suspended approval for NetEase.com Inc to operate Activision Blizzard's World of Warcraft online game, putting the future of the recently-launched and high-profile title in question in China. Citing "gross violations" of regulations, the General Administration of Press and Publication said it had halted and returned NetEase's application to operate "Burning Crusades" -- the latest version of the game licensed from Activision. The regulatory body posted a statement on its Web site that demanded the NetEase affiliate company that operates World of Warcraft to suspend charging users to play the game, and disallow new account registrations. Shares of NetEase, the No. 2 online game company in China, closed down 2.4 percent at $37.69 on Nasdaq. Stock in Activision Blizzard ended down 4.3 percent at $10.37, while rival Shanda Interactive finished up 3.5 percent. Sohu , a major game portal, lost 2.8 percent. The news comes as Beijing tries to tighten its control over online gaming, worried about undesirable content. In October, the regulator banned many forms of foreign investment into the country's online games industry -- expected to grow 30-50 percent this year to up to $4 billion. But analysts said the impact on other Chinese online gaming operators such as Shanda would be marginal, because most were in compliance with regulations set by both the administration as well as the Ministry of Culture, also viewed as a regulatory body for the industry. NetEase launched the World of Warcraft game commercially in China on Sept. 19. Roth Capital Partners analyst Adam Krejcik said the move by the GAPP was not surprising, given previous reports that the agency was displeased that the popular multiplayer online game was launched without its approval. TURF WARS Krejcik said the situation reflected a regulatory turf battle in China between the GAPP and the ministry, which had approved the content of the game prior to its launch. "These guys are essentially stuck in the middle of this power struggle," Krejcik said of NetEase. But he expected the impact on other firms in the Chinese online gaming market would be limited. NetEase and affiliate Shanghai EaseNet, which operates the World of Warcraft game in China, said they believed they were in full compliance with applicable laws and that they were seeking clarification regarding the statement by the General Administration of Press and Publication. NetEase said that it has not yet been officially notified of GAPP's determination. Kristen McNally, a NetEase spokeswoman, said she could not say if NetEase has complied with GAPP's requirements of suspending new account registrations. GAPP also said in its statement it was evaluating whether to impose penalties on Shanghai EaseNet. In a note to investors, Morgan Stanley analyst Richard Ji said World of Warcraft had experienced strong momentum since its launch, with nearly 1 million peak current users. Even in a worst-case scenario, in which NetEase ceases to operate World of Warcraft, the company would still operate several blockbuster games and its shares would still have 30 percent upside, Ji said. Janco Partners analyst Mike Hickey estimates the Chinese market for World of Warcraft accounts for 5 to 6 cents a year of Activision's earnings, which analysts expect to be 65 cents, excluding items, in 2009, according to Thomson Reuters I/B/E/S. While it was difficult to predict the actions of the government, if World of Warcraft goes offline it could hurt Activision's earnings by a penny or two in the current quarter, he added. (Reporting by Alexei Oreskovic; Editing by Edwin Chan and Tim Dobbyn) (([e-mail]; [phone]; [e-mail])) Keywords: NETEASE/ * China regulator says game's new version lacks approval * Observers say move the result of apparent govt turf war * NetEase shares lose 2.4 pct, Activision sheds 4.3 pct * Move underscores risks to China Internet firms (Adds comments, background) By Alexei Oreskovic and Melanie Lee SAN FRANCISCO/BEIJING, Nov 2 (Reuters) - A Chinese regulator has ordered top online game firm NetEase.com to stop operating a popular title, the result of an apparent governmental turf war highlighting the risks the sector faces. NetEase said the General Administration of Press and Publication (GAPP) halted and returned its application to operate the latest version of Activision Blizzard's popular World of Warcraft game due to "gross violations" of regulations. The agency posted a statement on its Web site demanding that NetEase suspend charging users to play the game, and disallow new account registrations, NetEase said on Monday. The move put the recently-relaunched popular title's future into question in China, and sent NetEase and Activision Blizzard shares down 2.4 percent and 4.3 percent, respectively. Observers said GAPP's move was the result of a recent turf war between the agency and the Ministry of Culture, which also oversees the online gaming sector. "This is different from operating a businesses in the U.S. or Europe," Yu Yongfu, CEO of Chinese mobile Internet firm UCWeb told Reuters on the sidelines of one of China's top Internet shows taking place this week in Beijing. "For Chinese businesses expanding in China, we need to learn how to operate suitably in the environment in order to thrive and survive," he said. NETEASE WOES BOOST OTHERS While NetEase shares fell on the news, some of its major rivals rose as investors bet they would capitalise on the setback. Shanda Games jumped 3.1 percent, while The9 . "But if you take a long term view of the industry, many of these Warcraft gamers may migrate to other games, so for the other Chinese online game companies, it is a good thing." The news comes as Beijing tries to tighten its control over online gaming, worried about undesirable content. In October, the regulator banned many forms of foreign investment into the country's online games industry -- expected to grow 30-50 percent this year to up to $4 billion. But analysts said the impact on other Chinese online gaming operators such as Shanda would be marginal, because most were in compliance with regulations set by both the administration as well as the Ministry of Culture. NetEase launched the World of Warcraft game commercially in China on Sept. 19. Roth Capital Partners analyst Adam Krejcik said the move by the GAPP was not surprising, given previous reports that the agency was displeased that the popular multiplayer online game was launched without its approval. "These guys are essentially stuck in the middle of this power struggle," Krejcik said of NetEase. GAPP also said in its statement it was evaluating whether to impose penalties on NetEase affiliate, Shanghai EaseNet. In a note to investors, Morgan Stanley analyst Richard Ji said World of Warcraft had experienced strong momentum since its launch, with nearly 1 million peak concurrent users. Even in a worst-case scenario, in which NetEase ceases to operate World of Warcraft, the company would still operate several blockbuster games and its shares would still have 30 percent upside, Ji said. (Additional reporting by Garbiel Madway in San Franciso; Editing by Doug Young, Edwin Chan and Tim Dobbyn) (([e-mail]; [phone]; Reuters Messaging: [e-mail])) Keywords: NETEASE/ (If you have a query or comment on this story, send an email to [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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