There has been a ton of new development in the ongoing saga of the General Administration of Press and Publication (GAPP), the Ministry of Culture (MoC), NetEase.com, Inc. ((ADR) NASDAQ: NTES) and its troubled World of Warcraft (WoW) operations in mainland China.

On November 2nd, GAPP put out a notice on its website (link in Chinese) that it has formally rejected Netease’s license application for WoW. (Below quotes my translation)

Today GAPP announced that it has terminated the approval process for World of Warcraft (The Burning Legion), and has rejected the application for World of Warcraft.

During the approval process, GAPP took into consideration the amount of data being transferred during the changing of the operators, and to protect consumers’ interests, allowed EaseNet [the Netease affiliate operating the game] to operate the game in private beta since July 30th while working on removing the inappropriate content within the game, with the focus on restoring consumers’ data. It was clearly stated that EaseNet could not charge users or open the game for new user registration during this period, which EaseNet acknowledged and fully accepted.

However, EaseNet has opened user registration and charging for use since Sep 19th, without approval from GAPP, which is in effect publicly operating the game, and which has seriously violated state regulations that online games and foreign games must receive approval from GAPP prior to launch. Therefore, GAPP has terminated the approval process and has rejected the application.

…EaseNet must cease its illegal operations immediately, and stop user registration and fee collection. Based on the conduct of EaseNet, GAPP will determine the appropriate disciplinary action, including terminating EaseNet’s ISP rights.

The night of the 2nd, Netease announced a “scheduled update downtime” and WoW China servers went offline for 12 hours. They were back in operation as of the afternoon of Nov 3rd.

Also on Nov. 3rd, during its regular press update on illegal online games, Li Xiong, the chief of the Department of Cultural Markets at MoC, went on record stating (link in Chinese):

“…Both GAPP and MoC should closely follow State Council’s prior regulations…GAPP’s action to reject the WoW application is a clear violation of its jurisdiction… the MoC approved WoW on July 21st, therefore the game is operating legally… We will report our work upwards to the State Council, per usual communication channels…”
– Li Xiong, Chief of the Department of Cultural Markets, Ministry of Culture

The last sentence hints that a final resolution will probably only come via a verdict by the State Council. This ongoing drama of course not only affects Netease; indeed all online gaming operators in China are closely watching to see how the mess untangles, and therefore who they need to lobby to in future.

We reported last month on the return to China of Activision Blizzard Inc.’s (NASDAQ: ATVI) World of Warcraft, and how administrative rights over who regulates what regarding online games have beensorted out. Well, it appears that the General Administration of Press and Publication (GAPP) is having its own interpretation of the government guidelines, as they have undertaken a crackdown covering more than 200 games that has led to the shutdown of 45 online games so far. They also came out with a circularwhich bans foreign investors from operating online games “in any form” in the country.

Interestingly, a Ministry of Culture (MoC) official“expressed his shock” (link in Chinese) at GAPP’s latest announcements, saying it clearly violates the State Council’s earlier guidelines. It’s quite rare to see different branches of the government argue in public, but the MoC will probably take some further actions to protect their turf.

While this power grab is interesting to watch, it certainly isn’t fun for the businesses affected.CCW.com.cn reports (link in Chinese) that Mainfirst Securities (based in Hong Kong) has come out with a new report claiming that WoW is in danger of shutting down. Mainfirst’s point of view is that the MoC has lost the power grab to GAPP, and therefore WoW cannot avoid a shut-down since it has not received approval from GAPP. Mainfirst also believes that the best that NetEase.com, Inc.((ADR) NASDAQ: NTES) can do at this point is to apologize, pay a fine, and try to minimize the down-time while getting through the approval.

Mainfirst maintains its “sell” rating on Netease with a target price of $35. The stock’s ADR price fell 2.8% on Friday to close at $40.51.