World of Warcraft’s return to China will bring peace to NetEase investors

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A dramatic break-up between Microsoft and China’s gaming giant NetEase last year ended a nearly 15-year long partnership. It affected not just investors but millions of China’s gamers. A reconciliation will be good news for all concerned.

NetEase and US games rival Microsoft, which bought Activision Blizzard last year, said on Wednesday they will bring Blizzard’s popular titles such as the online role-playing game World of Warcraft back to China from this summer. A disagreement last year over intellectual property control resulted in them suing each other, Microsoft ending their partnership and the game being taken offline.

NetEase has much to gain from the reconciliation. Blizzard titles are wildly popular in mainland China. Other blockbuster hits include Hearthstone and Diablo III. World of Warcraft alone has over 3mn players in China. Analysts estimate that NetEase, as the publisher of Blizzard games in China, made as much as 5 per cent of its total sales from Blizzard games before the partnership was terminated.

Line chart of Share prices (rebased) showing Online gaming groups

They are a perfect match. NetEase is looking for growth overseas. Getting its titles to Microsoft’s Xbox and other gaming platforms is key. Microsoft needs NetEase too. Foreign game companies are required to have a local publisher to offer video games in China, which has a gaming market worth $43bn. Getting new licences for its games with a new publisher from local regulators would also have meant delays given a lengthy approvals process.

Shares of NetEase, which lost more than 14 per cent when reports of the break-up first went public in 2022, are up 9 per cent in the past year, although at 14 times forward earnings they still trade at a steep discount to regional peers.

Having Blizzard game licences in its portfolio is not just about the boost to its net income. Crucially it gives NetEase an edge over Tencent, its biggest local rival. It also comes at a good time just as Tencent looks for its next big hit, after reporting weaker than expected revenue growth in the fourth quarter, when its gaming sales disappointed. Tencent has also has the multiplayer online game Tarisland, which is being seen as a direct competitor to World of Warcraft.

The return of Blizzard games to China will help alleviate investor concerns that the world’s largest online gaming market may be starting to close itself off to foreign titles. With Chinese regulators increasing the number of commercial licence approvals for new video game titles this year, there is reason to be optimistic about local gaming companies.

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