Blizzard Entertainment announced on Nov. 17 that it will suspend most of its Blizzard game services on Chinese mainland because its current licensing agreement with NetEase, Inc expires on January 23, 2023.

These include World of Warcraft, hearthstone Legend, Warcraft 3: rebirth, Watch Pioneer, StarCraft series, Diablo 3 and Storm Hero. The joint development and release of Diablo: immortality and separate agreements involving the two companies.

With regard to the termination of the agreement with Activision Blizzard, NetEase, Inc responded:

Has been doing its best to negotiate with Activision Blizzard, hoping to push forward with the contract renewal. After a long period of negotiations, we are still unable to agree on some key terms of cooperation with Activision Blizzard. We very much regret that Activision Blizzard announced the cessation of cooperation today, and we will have to accept this decision. NetEase, Inc will continue to perform his duties and serve our players until the last minute.

Blizzard Entertainment has signed a licensing agreement with NetEase, Inc since 2008, covering the release of these Blizzard games in China.

On November 8, Activision Blizzard said in its 2022 Q3 earnings report that the company's agency agreement in China would expire in January 2023. They said they were discussing renewing the agreement, but may not be able to reach a mutually satisfactory result.

According to the financial report, the current agreement to renew the contract covers a number of games released in Blizzard China (World of Warcraft, StarCraft II, hearthstone Legend, Watchman, etc.), which account for about 3% of Activision's combined net income in 2021.

When these two messages appeared in Activision Blizzard's earnings report at the same time, it also puzzled many media and investors:

Does Blizzard really account for only 3% of the revenue in the Chinese market in 2021? With the contract renewal approaching, what happened between Blizzard and Chinese agent NetEase, Inc? Will the incident of "World of Warcraft out of Service" 13 years ago happen again?

01 the former honeymoon period

The cooperation between Blizzard and NetEase, Inc can be traced back to 14 years ago.

In August 2008, Blizzard reached an agency agreement with NetEase, Inc to grant exclusive rights to the latter "StarCraft 2", "Warcraft 3: Frozen Throne", "Warcraft 3: rule of chaos" and expansion packages, as well as Blizzard game platform Battle.net for a period of 3 years.

In April 2009, Blizzard again authorized NetEase, Inc to operate its popular product World of Warcraft for a period of three years. In a statement filed with the SEC, NetEase, Inc promised to pay no less than $301.5 million (about 2.2 billion yuan) for the two agreements, including licensing, royalties, consulting and other fees.

However, since World of Warcraft was not authorized by Blizzard for the first time at that time, when changing agents, both parties had to spend extra costs to dock data, re-examine content, and so on. Although Blizzard and NetEase, Inc said at that time that they would try their best to make a smooth transition to ensure the player experience, World of Warcraft suspended its operation for about two months for the above reasons.

2009 is the first year of cooperation between the two sides. On the one hand, with the update of many expansion films of World of Warcraft, more and more Chinese players are pouring into the game. World of Warcraft reached an all-time high of 13.1 million online players in August 2009, according to a survey by Edward Hunter.

On the other hand, NetEase, Inc also said in the financial report that, mainly thanks to the operation of World of Warcraft, the company's game business increased by about 60% in 2009 and 50% in 2010.

The good development trend of World of Warcraft seems to let Blizzard see the potential of the Chinese market. Blizzard Entertainment CEO Mike Morhaime said in an interview with 21st Century Business Herald in August 2009 that it is working with NetEase, Inc to break through China's second-and third-tier game market, and the number of Blizzard players in the Chinese market is expected to double in the next four years.

In 2012, Blizzard renewed its agency agreement with NetEase, Inc and handed over the domestic operation rights of the first product Diablo 3 to NetEase, Inc. NetEase, Inc, on the other hand, overcame many difficulties and successfully introduced the "Diablo 3" national service two years after the foreign service was put on sale, and soon achieved 2 million sales after the product was launched.

Since then, Blizzard has joined NetEase, Inc to launch new products such as "hearth Stone Legend", "Storm Hero" and "Watchman Vanguard" in the domestic market. Among them, "hearthstone Legend" should be the first time for both sides to achieve domestic and global simultaneous public testing products, its products in the domestic iOS side of the first day, made the first free list and the third best-selling list results.

At the same time, NetEase, Inc CEO Ding Lei also said at the earnings meeting in May 2014 that China ranked first in the global market of hearthstone Legend, far surpassing other markets in terms of users and revenue.

"Watch Vanguard" was released in May 2016 and soon became one of the most popular phenomenal games for many years. The cumulative sales of the products exceeded 20 million that year, of which NetEase, Inc announced that the sales of national service exceeded 5 million, accounting for about 1/4 of the total sales.

Judging from the revenue results of the above products, the Chinese market accounts for a large share of Blizzard's global revenue, and the global synchronous operation model reached by Blizzard and NetEase, Inc also makes Blizzard games reach the domestic market for the first time and get more sound.

At the same time, with the development of self-developed games, and drawing on the popularity and reputation of Blizzard series of works, and summing up relevant R & D and operation experience, NetEase, Inc gradually surpassed Shanda and became the second largest game manufacturer in China.

02 blizzard in the past two years

Up to now, Blizzard has cooperated with NetEase, Inc for more than 14 years, and the cooperation agreement between the two sides has been renewed in stages until January 2023. In the last three years of the agreement, Blizzard's situation is not optimistic.

On the one hand, with the growth of the game life cycle and the impact of the market environment, Blizzard has lost a lot of PC players. Some players have made a chart of the number of monthly active users of Blizzard players based on the monthly active users disclosed in Blizzard's financial report, from which we can see that the number of monthly active users of Blizzard has gone from 46 million in 2017 to 26 million in Q2 in 2021.

On the other hand, players' reputation for Blizzard games is also declining. For example, after Blizzard launched "Warcraft 3 remake" in early 2020, more than 20, 000 players gave a score of 0.5 on Metacritic (out of 10).

At the same time, the research and development of new Blizzard products is relatively slow. Not only has there been no new IP product available for five consecutive years since 2017, but the much-anticipated "Watch Vanguard 2" and "Diablo 4" have also jumped many times. Even under the influence of factors such as the epidemic, preparations for the carnival, which Blizzard players look forward to most every year, have been suspended since 2021.

Blizzard also experienced a series of personnel changes over the past year. Not only many senior executives, such as Jeff Kaplan, game director of Watchman Vanguard, and Chacko Sonny, executive producer and vice president of Blizzard 2, have left, but the company has also sacked a number of employees because of the "employee sexual harassment incident."

Fortunately, in 2022, Blizzard launched two products that had skipped tickets many times-"Diablo: immortal" and "Watchman: return", which brought heat and revenue to the company while recovering some of its decline.

Among them, Diablo: immortal (hereinafter referred to as Diablo) was jointly developed by NetEase, Inc and Blizzard. Thanks to the popularity and theme play of the Diablo series IP, as well as NetEase, Inc's experience in mobile games and localization, the number of downloads of Diablo mobile games overseas exceeded 10 million in the first month, contributing nearly $49 million (about 320 million yuan, excluding platform sharing) to Blizzard (data source: mobilegamer).

Subsequently, the national service of Diablo Mobile Games released at the end of July also achieved good results, ranking firmly on the iOS best-seller list TOP 5 in the first month of launch.

In early November, Appmagic reported that the cumulative revenue of Dark Mobile Games in five months had exceeded $300m (about 2.174 billion yuan, excluding the platform share), of which the domestic market contributed $144.7 million, or nearly half, in the past two months.

而Blizzard Entertainment also posted a 10% year-on-year increase in net revenue in the 2022 Q3 earnings report, which said the growth was mainly due to the launch of Dark Mobile Games in the Chinese market in July. These figures may prove that the Chinese market still generates considerable revenue.

What information did Blizzard report reveal?

Going back to the Blizzard Q3 financial report, Blizzard mentioned that "the net income of the agency games signed with NetEase, Inc accounted for only 3% of Activision Blizzard in 2021", which may have some ambiguity.

First of all, Activision Blizzard's net income in 2021 is 8.803 billion US dollars, which mainly comes from Activision, Blizzard Entertainment and King, of which Activision and King business is not directly related to NetEase, Inc, so the revenue share should be calculated as the proportion of NetEase, Inc's acting products in Blizzard Entertainment.

The net income of Blizzard Entertainment is $1.827 billion, so it is calculated that Activision Blizzard should account for 14.45% of Blizzard Entertainment revenue. Considering that NetEase, Inc bears almost all the operating costs of agency games, Blizzard's profit share should be very high.

From this point of view, Blizzard's income from NetEase, Inc's products last year should be about 15%, and the absolute value is not low. Why did they publish this "3%" data and contract renewal negotiations on the Q3 node?

I think this is Blizzard's negotiation skill in the face of the upcoming contract extension next year. But obviously, it didn't work out.

Q3 financial report pointed out that the cooperation of Diablo: immortal comes from a separate agreement, and according to the revenue of the above-mentioned Diablo mobile game national service of US $144 million in three months, blizzard's revenue in the domestic market this year will be significantly higher than that in 2021-which means that Blizzard and NetEase, Inc still have a win-win situation of cooperation, and the domestic market in 2022 will still be an important source of income for Blizzard.

In addition, when many people see the contents of the financial report, they may guess that Blizzard released the "3%" data, thinking that the domestic product income of NetEase, Inc's agent is not up to expectations and is ready to break up with NetEase, Inc at the end of the agency period. However, judging from the above, the cost of this "breakup" is indeed a bit high-- it will not only affect the current win-win situation of cooperation between the two sides, but also lose long-term benefits as a result of canceling or changing domestic agents.

You know, when World of Warcraft changed agents in 2008, with the full promotion of Blizzard and NetEase, Inc, the game was suspended for two months. And now the requirements of the domestic market are more stringent, if NetEase, Inc agents of a number of games are faced with this situation, then the replacement of agents will bring more twists and turns will not be less.