NetEase License for Blizzard Games end in a no-win situation

NetEase Activision Blizzard Playstation plus

Activision Blizzard does not publish its games in China itself, but with the help of its partner NetEase. But this license ends in 2023 and the culprit is clear,  a boss at Activision Blizzard – and it’s not difficult to guess the name. NetEase is a giant in the Chinese gaming and technology market. NetEase has been operating several Blizzard games as a license partner in China since 2008. It has the likes of Overwatch, Hearthstone, Diablo 3, Heroes of the Storm and the StarCraft series. However, these games will no longer be usable in China from January 23, 2023. This is because the current license from NetEase will expire. 

14-year partnership ends

The 14-year partnership between Blizzard and NetEase has come to an end. Blizzard Entertainment issued a statement stating that the existing licensing agreement with NetEase will expire on January 23, 2023. After that date, most Blizzard game services in mainland China will be suspended. These include Warcraft series, “StarCraft”, “Diablo 3”, “Hearthstone” and many other Blizzard game products. However, some games like “Diablo: Immortal” has a separate agreement. It will not part of this scope. “Diablo: Immortal” was jointly developed and published by the two companies.

Blizzard Games

In a statement, Blizzard stated that the two parties have not reached a renewal agreement. “The company is looking at alternatives to bring Blizzard games back to players in the future,” said Blizzard Entertainment president Mike Ybarra.

In this regard, Netease responded that it has been doing its best to negotiate with Activision Blizzard. Netease claims that it is hoping to advance the contract renewal. After a long period of negotiations, Netease still failed to reach an agreement. “We are very sorry that Activision Blizzard announced the termination of cooperation today. We will have to accept this decision. Netease will continue to fulfil a duty, to serve our players until the last moment.”

What’s the reason for the negotiation breakdown?

According to The Paper, an insider reveals the main reason for the termination of the cooperation. The source claims that the price is the major issue in the contract. Blizzard has a new high price which NetEase could not accept.

Blizzard Games

At present, a number of game companies have been rumoured as potential interested parties. These companies are willing to negotiate with Blizzard. The likes of Tencent, Perfect World, and Bilibili, are part of the list. However, Tencent claims that it is not looking in that direction at the moment.

History of NetEase and Activision Blizzard negotiations

Negotiations between NetEase and Activision Blizzard have been on for a while. However, there were already pointers that both parties will not reach an agreement. Activision Blizzard has been facing some financial crises evident in its Q3 2022 financial report. The new agreement would have covered a number of games released in Blizzard China. These games account for approximately 3% of Activision Blizzard’s net income in 2021.

Tencent & NetEase

Back in August, both companies could not reach a deal for “World of Warcraft”. They had to terminate the cooperation after three years of development. Blizzard and NetEase disagreed on the terms of cooperation. This is the major reason for the cancellation of the agreement.

Just like for “Diablo: Immortal”, NetEase partly develops other Blizzard’s IP mobile games for global distribution. However, it only enjoys the revenue share of the Chinese market. In fact, Blizzard requires NetEase to pay a huge deposit or prepaid fee as a guarantee.

According to reports, the new deal will see NetEase further reduce its income. This is because it will be acting as an agent of Blizzard games. For jointly developed games, NetEase will also bear more financial risks and market pressure.

The new contract is not a cost-effective cooperation for NetEase. In fact, it will not be a cost-effective deal for any Chinese game manufacturer with the capacity to represent Blizzard games. This means that Blizzard may find it difficult to get new partners in the Chinese market.

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Why are Blizzard’s requirements so high?

Activision Blizzard may be eager to find new performance growth. This is likely responsible for its new requirements. Blizzard games have gotten high traffic in the past. However, with the consistent lack of investment, Blizzard is not able to produce a game comparable to “World of Warcraft”. Neither “Hearthstone” nor “Overwatch” can be regarded as “successors”. Although they were once popular in the online game market, both player reputation and game ratings have a clear downward trend.

Activision Blizzard

What makes players even more disappointed is that after “Overwatch”, Blizzard has not launched a new online game for six years. The only big move is to keep updating the expansion pack of “World of Warcraft”. Six years is too long for the fast-changing game industry.

NetEase and Activision Blizzard honeymoon is over

The 14-year cooperation between NetEase and Blizzard is easily the most successful in the Chinese game industry. In 2008, Blizzard agreed to exclusively license “StarCraft 2”, “Warcraft 3: The Frozen Throne” and “Warcraft 3: Reign of Chaos” to NetEase. In April of the following year, Blizzard further licensed “World of Warcraft” to Netease.

For the above two cooperations, NetEase paid no less than $301.5 million in authorization, royalties, consulting and other fees. But also thanks to the agency rights of many Blizzard games, NetEase’s game business has risen rapidly. In Q4 of 2009 and Q1 of 2010, mainly due to the operation of “World of Warcraft”, NetEase’s game business revenue increased by about 60% and 50% year-on-year respectively.

As a result, Blizzard has really opened up the Chinese market. With the influx of Chinese players into the game, a survey by Edward Hunter showed that in August 2009, the number of online players of “World of Warcraft” reached 13.1 million, setting a record high.

This win-win cooperation continued for many years to come. Since then, NetEase has successively won new products such as “Diablo 3”, “Hearthstone”, “Heroes of the Storm” and “Watching Pioneer”. “Diablo 3” sold 2 million copies soon after its Chinese server was launched.

Diablo IV

There are no winners

Netease, which shines in the era of mobile games, has firmly established itself as the second-largest game manufacturer in China. Judging from the recent performance, the income generated by the agency of Blizzard series games has also become less important in the proportion of Netease’s overall performance.

The net profits that Blizzard games contribute to NetEase are recently in low single digits. The expiration of the contract will not have any impact on NetEase’s financial performance. According to NetEase financial report, Blizzard and Microsoft will contribute only 9.1% of Netease’s income.

In terms of game development, NetEase is good at gamifying IPs that are familiar to the public. For example, its old games “Westward Journey in Dreams” and “Westward Journey” have maintained a strong ability to attract money for more than ten years. In terms of international IP, NetEase won IPs such as Onmyoji and Harry Potter. However, it should be noted that in recent years, Netease’s “popular” games are all authorized IPs. This includes the likes of Harry Potter and Diablo. However, its own original IP games do not have many IPs.

In terms of established games, many of NetEase’s games have also declined severely. According to Sensor Tower data, the turnover of “Onmyoji” in the first half of 2022 fell by 50% year-on-year. The turnover of “Harry Potter: Magic Awakening” declined month by month. It often falls out of the top 50 or even 100 of the best-selling list.

This year, the appearance of “Diablo: Immortal” is a relatively successful IP game following NetEase’s new game. However, the end of the cooperation with Blizzard also means that NetEase has lost many big IPs such as Warcraft and Interstellar.

Diablo 4

Blizzard will be further distant from the Chinese market

As of today, Blizzard’s influence in the Chinese market is not as good as before. Blizzard has been absent from popular games for many years. After this “breakup”, the distance between Chinese gamers and Blizzard will further increase. If Blizzard can not quickly get a new partner, it will be a huge loss for the company.

At the moment, it will not be easy for Blizzard to find a partner at the same level as NetEase in China. Rumours claim that Tencent, Perfect World and Bilibili are in contact with Blizzard. However, there is no official confirmation from any of these companies.

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