NetEase, Activision caught up in China turf war

SAN FRANCISCO/BEIJING - 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 capitalize 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 September 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.

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