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Life After ‘World of Warcraft’ Starts With NetEase Searching for Its Own Hits

(Bloomberg) -- In January, NetEase Inc. smashed into pieces its giant statue of World of Warcraft’s legendary Gorehowl axe, a fitting symbol for the termination of its 14-year partnership with US studio Blizzard Entertainment.

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Last week, leaders from the company were at the Game Developers Conference in San Francisco, exchanging business cards with other overseas firms and living life like Blizzard was never in it. China’s biggest gaming firm after Tencent Holdings Ltd. is now focused on serving up original hits to fans both at home and abroad.

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Leading the company’s biggest overseas expedition since China pared down Covid restrictions is Hu Zhipeng, a senior vice president whose NetEase career is only slightly longer than its Blizzard collaboration. He heads up the firm’s ThunderFire studio, with 2,000 employees in Hangzhou and Montreal. He was joined by two dozen colleagues at GDC, where his aim was to seed the next phase of growth.

“We have gone through the first stage of rapidly acquiring global studios and talent,“ Hu said in an interview at the conference. “Now it’s more about giving them our full support to deliver the products. The payoffs will come in waves in the next two or three years.”

NetEase wants to be involved in a quarter of the most premium — so-called AAA — titles on the global market and generate half its gaming sales from outside China within five years, executives told Bloomberg previously. Its renewed pursuit of audiences in the West comes after China’s games industry shrank 10% in 2022, the first drop in eight years.

Losing the pact to distribute Blizzard games in China, once one of the most lucrative in gaming, is a further incentive to pursue new growth. The partnership ended in a sudden and ugly breakup earlier this year, after the two sides couldn’t agree to terms, and popular franchises from Warcraft to Overwatch and Diablo have gone dark in the world’s biggest internet market. Blizzard did not respond to a request for comment.

NetEase is finding homegrown alternatives. Its marquee PC title, Justice Online, recently launched a new version with tweaks tailor-made for Chinese Warcraft players. Naraka: Bladepoint is a battle-royale mainstay that’s sold 10 million copies globally — rare for a Chinese non-smartphone game — and provided the new statue taking pride of place on NetEase’s Hangzhou campus: an oversized cavalry-fighting sword.

Game developers big and small have had to endure a months-long wait for new game approvals from Beijing regulators, choking off the pipeline of new content to stir sales and growth. Beijing has in recent times reaffirmed support for the games industry, but during the final quarter of last year, NetEase’s revenue grew a mere 4% — its slowest pace in three years — while Tencent barely reversed a contraction.

Read more: China’s Other Gaming Giant Is Quietly Snapping Up Global Talent

In its messaging to investors and developers, NetEase has tried to portray itself as the anti-Tencent: a constellation of studios laser-focused on games creation and unafraid to take risks, while its bigger rival juggles investments in a vast entertainment empire. The smaller firm is willing to support veteran game developers, weary of pumping out endless sequels to established hits, with the resources and autonomy to develop new intellectual property, Hu said.

It’s a risky strategy in a crowded market with thousands of releases each year, and one that could erode margins before it pays off. NetEase currently generates just 10% of gaming revenue overseas, the bulk of which come from Japan, where it has two hit mobile games. But going west, where console gaming is the dominant format, is a much harder proposition.

“Developing new games and IP is an extremely arduous and costly undertaking,” said Serkan Toto of Kantan Games. “It will be tough for the company to get a quick win.”

For now, NetEase is pinning hopes on the star producers it recruited. Jonathan Morin, creator of Ubisoft Entertainment SA’s hit franchise Watch Dogs, now heads a 70-person outfit in Montreal that has a four-year runway to roll out a new console title. Toshihiro Nagoshi, the industry icon behind the Yakuza series, left Sega Sammy Holdings Inc. for NetEase last January to set up his own studio. In 2022, NetEase also acquired French game developer Quantic Dream, best known for Detroit: Become Human.

What Bloomberg Intelligence Says

NetEase’s piecemeal strategy should help ensure its overseas ventures are built on strong foundations, if executed properly. However, we believe pursuing an organic strategy will be slower to implement, with more upfront cost, as NetEase invests to grow. We don’t expect NetEase to generate meaningful revenue overseas over the next two years.

- Robert Lea and Tiffany Tam, analysts

Click here for the full research

At its peak in 2009, World of Warcraft helped NetEase boost sales by 62% in a quarter, but before the two firms severed ties this year, Blizzard games represented low single digits as a percentage of the Chinese firm’s total revenue and net income.

Still, Blizzard’s enduring franchises, along with the June release of Diablo IV, are valuable assets now up for grabs in the world’s largest gaming arena. And while NetEase still gets its share of a Diablo mobile game it co-developed with Blizzard, the bitter breakup has marred prospects for future collaborations.

Read more: Tencent Will Make Sure China Doesn’t Miss ‘Warcraft’

One of NetEase’s biggest remaining cash cows, Justice Online, now operates servers dedicated to “Warcraft veterans,” offering more cross-faction combat and less pay-to-win elements. These features attracted Chinese Warcraft fans hungry for a new virtual universe, and NetEase deploys as many employees on Justice’s Warcraft-esque version as it does to its original.

A player himself, Hu said he was “pretty sad” when the genre-defining Warcraft stopped operating in China; other executives and employees were not as measured in their reactions.

“I feel so heartbroken,” Simon Zhu, NetEase’s games investment chief said in a post on LinkedIn. “One day, when what has happened behind the scenes could be told, developers and gamers will have a whole new level of understanding,” he added.

In its staff canteens, NetEase named a new beverage “Blizzard Green Tea” in a possible use of a local pejorative for an unfaithful woman to describe the US studio.

At a time when the seminal ChatGPT is spurring an artificial intelligence arms race among global technology firms, NetEase has said it plans to embed its own AI chatbot into games, starting with the June mobile release of Justice. Hu, a former Microsoft Corp. researcher in Beijing, said AI could make non-player characters in games more true-to-life and lower production costs in the long run.

“We want to make gaming experiences closer to Ready Player One,” Hu said, referring to Steven Spielberg’s science fiction film and Ernest Cline’s novel, depicting virtual reality entertainment in a dystopian world.

--With assistance from Felix Gillette.

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