Activision Blizzard games to go offline in China after NetEase deal falls through

Popular American video games including World of Warcraft and Overwatch are set to go offline in China in the coming months, hitting revenues for their creator Activision Blizzard as it seeks to complete a $75bn sale to Microsoft.

China is the world’s largest gaming market, but foreign developers need a local partner to distribute their games in the country. Beijing also heavily censors gaming content and controls the number of new releases through a licensing system.

Activision Blizzard said on Thursday it was unable to reach a deal to renew a licensing agreement with NetEase, one of China’s largest game developers and publishers, which has distributed the games in the country for years.

The California-based company said last week that the NetEase agreement in dispute accounted for about 3 per cent of its net revenues last year, translating to roughly $264mn in sales.

Activision Blizzard president Mike Ybarra said the company was “immensely grateful for the passion” Chinese gamers had for their titles and that the company was looking for alternative distribution partners.

NetEase chief executive William Ding said they “put in a great deal of effort and tried with our utmost sincerity” to negotiate with Activision Blizzard but could not bridge “material differences on key terms”. The company said the affected games represented a low single-digit percentage of its revenues and profits.

NetEase shares fell 9 per cent in Hong Kong on Thursday, dipping further than the broader Hang Seng tech index that fell 2.2 per cent. Shares of food delivery group Meituan fell almost 6 per cent after technology group Tencent announced it would distribute most of its holding to shareholders.

Activision Blizzard will need new game licences from the government if it finds a new partner, which may take months or even years, said Cui Chenyu, a gaming analyst at research company Omdia.

“The companies could still come to terms, but there are challenges because they are both shifting their business strategies at the moment. Blizzard is preparing for its Microsoft takeover and NetEase is focused on expanding globally,” she said.

The contract dispute between NetEase and Activision Blizzard is the latest hurdle for a US game developer in the highly lucrative but heavily regulated Chinese market.

Online gaming company Roblox was forced to pull the local version of its hit game in China because of unspecified data processing issues in December. Almost a year later, it remains offline, despite a partnership with gaming giant Tencent.

One person familiar with the discussions between NetEase and Activision Blizzard said that the dispute centred on a disagreement over commercial terms, rather than being the result of geopolitical tensions between the US and China. Negotiations to renew the deal began before Microsoft’s bid to acquire Activision Blizzard, this person said.

Affected games include World of Warcraft, the StarCraft series, Hearthstone, Heroes of the Storm and Overwatch. New sales of the titles will be halted in the coming days, with the servers that support online play likely to be turned off in January when the current deal expires.

Activision Blizzard and NetEase started working together to distribute the games in China in 2008 and the deal has been renewed several times.

The two companies have a separate agreement covering Diablo Immortal, a mobile game that has proven particularly popular in China since its launch this summer. It will not be affected by the dispute.

Additional reporting by Eleanor Olcott in Hong Kong