Tech Check

WoW Fights New Front in China

Big problems for World of Warcraft fans in China, and there are lots of them, as first reported by GameSpot yesterday. But this could be as big, if not a bigger problem for Activision investors and that's why it's certainly worth mentioning here.

Government officials in China have shut down the globally popular WoW by revoking NetEase's permit to operate the game in the country. The Chinese version of the game has been offline for much of the year, and there was widespread hope that at some point, and soon, Chinese regulators would throw the door open and let players resume their obsession.

Not gonna happen.

This news took a toll on NetEase already, shaving almost 4 percent of the company's value in trading yesterday. And worse, for Activision Blizzard, the Chinese decision alone could chop 5 cents a share in earnings, which had been expected to be around 65 cents for fiscal 2009. Incidentally, Activision Blizzard reports earnings Thursday, and this is the last thing the company needed, especially in a climate right now where video games sales are under such enormous pressure. (Electronic Arts will release its earnings on Nov. 9, by the way.)

All of this stems from an apparent power struggle between China's Ministry of Culture and the General Administration of Press and Publication. It's been an ongoing issue for other game publishers of so-called "massively multiplayer role-playing games" for much of this year. But the developments shine a bright and disturbing light on all companies trying desperately to crack the Chinese market, from Activision Blizzard to Yahoo to Apple to Google . There but for the grace of Chinese regulator go you! Some estimates suggest the Chinese online gaming industry should grow 30 to 40 percent to $4 billion, says the Web site, even though foreign companies "cannot control or participate in domestic game-operating businesses indirectly through another investment company, signed agreements or by supplying technical support." In other words, American game publishers ought to be forewarned that China may not be the revenue panacea they were hoping for.

So far this year, video games sales are down 13 percent, says NPD, just last week Nintendo said Wii sales have fallen off a cliff, and deep price cuts by both Sony and Microsoft on Playstation and Xbox respectively promise to hit bottomlines and margins. And The Beatles: Rock Band sales were disappointing to some. Microsoft did share some surprisingly good news with its recent earnings, with its Entertainment and Device Division reported far better-than-expected results. But it will all come down to holiday shopping for the game publishers and console makers and the outlook is mixed at best.

Some analysts do anticipate a decline in game purchases this holiday shopping season, and the latest version of Activision Blizzard's "Call of Duty" franchise, "Modern Warfare 2" is expected to be an enormous seller, and may even offset any lost business from WoW in China. And there are other big name titles on the way, including a new version of "Halo," "Assassin's Creed," and "Super Mario Brothers," so there's hope that the industry could stage a turnaround of sorts, small that it might be.

The Chinese developments swirling around WoW are disconcerting on so many levels, not the least of which is freedom, freedom of commerce and freedom of speech. For game-players though, it might just be a frustrating inconvenience. For investors, it becomes far more troubling.

Questions?  Comments?