Last Friday, a day before Chinese New Year’s Eve, China’s General Administration of Press and Publication (GAPP) finally approved (via QQ Tech – link in Chinese) Activision Blizzard Inc.’s (NASDAQ: ATVI) massively multiplayer online role playing game (MMORPG), World of Warcraft: The  Burning Crusade. This is good news for the 4 million Mainland Chinese subscribers who since mid-last year have been torn with uncertainty over the future of their beloved game.

GAPP issued a very simple statement, stating that since Netease.com, Inc. ((ADR) NASDAQ: NTES) “has taken necessary corrective measures” to address issues highlighted before by GAPP, it now has been given the license to operate the game in Mainland China.

Incidentally, one of the biggest Internet memes in China over the last month has been a fan-made film about the World of Warcraft approval fiasco, with a shocking parody of all the major players involved – Netease, The9 Limited ((ADR) NASDAQ: NCTY), GAPP and the Ministry of Culture. Veteran expat twitterer / blogger @niubi has a nice summary post of the video. (Part 1 of the video on Youtube, with English subtitles, is here.)

Tencent Holdings Limited (HKG: 0700 | (ADR) PINK: TCEHY) announced impressive Q3 results on Nov. 11th (WSJ article, Tencent PR). Quarterly revenues were USD 493.3 MM, 17% QoQ growth and 66% YoY growth; profit growth was even more impressive at USD 209.9 MM (42% net margin), 19% QoQ growth and 92% growth YoY. And as a Bloomberg articlenotes, Tencent has been the best performing stock in the Hang Seng Index this year.

Not all segments were growing though. While Internet VAS (QQ Zone, QQ Games) grew 22% QoQ and represents 78% of total revenue, Mobile VAS dropped 5% QoQ and accounted for 13% of revenue, and the outlook continues to be uncertain despite 3G networks being rolled out. Online advertising grew 20% QoQ and accounted for 9% of revenue, however, outlook for the next quarter seemed poor:

“Sustainability of the recovery in the advertising market is still uncertain… We also expect our search-based advertising revenues to reduce substantially due to amendments to service contract with our partner and the gradual transition into our self-developed search engine.”
– Mr. Ma Huateng, Chairman and CEO of Tencent Holdings Limited.

The ad recession issue aside, Tencent’s fundamentals look great. Active users of QQ increased to 485MM (in comparison, Facebook has >300 MM); peak concurrent users were 75MM (in comparison, Skype has around 20MM peak concurrent users). In terms of monetizing its massive user-base, Internet VAS paying subscribers reached 48MM, a 20% QoQ growth – this is one of the drivers of that impressive top-line growth.

The other driver is of course online games, which generated 58% of Internet VAS revenue (45% of total revenue) and grew 23% QoQ, though Tencent management noted that it was driven by strong summer holiday seasonality. Management also notes that they were facing strong competition from SNS casual games. As an interesting side-story to this, last month rumors surfaced (and then denied) that Tencent had acquired the developers of Happy Farm, the ridiculously addictive casual game that inspired Zynga’s FarmVille. Some people estimate that Tencent was grossing USD 8MM a month on Happy Farm, which would be strong reason to acquire the company while it was still small. (Tencent’s M&A head was actually at Berkeley Haas last week for recruiting, though he was very secretive about their deals, only commenting that they have been very active.)

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.

Phoenix TV and various other Chinese media, as well as lots of Internet forums, are picking up on rumors that the long-awaited World of Warcraft (W0W) expansion Wrath of the Lich King (WLK) is close to release.

The rumor is interesting considering the issues that NetEase.com, Inc.((ADR) NASDAQ: NTES) has had surrounding the operations of the massively multiplayer online game in China. The fact that it’s caught between an apparent power struggle between General Administration of Press and Publication (GAPP) and Ministry of Culture (MoC) has made the future of the game extremely unclear. Indeed, an article on People.com.cn (the state owned paper) claims that many retailers of point cards are not selling WoW cards and waiting for the situation to clear, which means that even if fans wanted to play (and pay), they are currently having a hard time getting access. In addition, Netease has put a hold (from official Chinese WoW website, link in Chinese) on registering new characters in certain servers. This could be purely due to technical reasons, but one could also speculate that it’s due to uncertainty regarding the game.

While it’s probably not good practice to over-analyze Internet forum rumors, Phoenix TV is generally a well-respected source. According to their article, “informed sources” claim that Netease CEO William Ding has resolved the company entity issue regarding the JV between Netease and Activision Blizzard Inc. (NASDAQ: ATVI) which operates WoW in China. According to Chinese regulations, foreign companies are not allowed to operate online games in China; sources claim that William Ding and the Netease team has purchased shares of the JV to overcome the regulatory hurdle.

At the same time, Netease and Blizzard has finished most changes to the WLK game content as required by Chinese regulators (including major changes to the “Death Knight” character). Phoenix TV’s sources claim that WLK could be online for testing in as soon as 2 weeks, while other publications have pointed out that the game still needs to go through the approval process by the MoC, which could last as long as 60 days.

Regardless, it seems that William Ding has the support of the MoC. Now the question is how GAPP will respond to these new rumors, especially if any of them materializes.

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.