UPDATE 2-China clamps down on Activision's top online game

Mon Nov 2, 2009 4:12pm EST

* China regulator says game's new version lacks approval

* Orders NetEase to stop collecting fees, new accounts

* NetEase shares lose 2.4 pct, Activision sheds 4.3 pct (Recasts first paragraph to add Activision, context; adds analyst comments, closing stock prices)

By Alexei Oreskovic

SAN FRANCISCO, Nov 2 (Reuters) - A Chinese regulator has suspended approval for NetEase.com Inc (NTES.O) to operate Activision Blizzard's (ATVI.O) World of Warcraft online game, putting the future of the recently-launched and high-profile title in question in China.

Citing "gross violations" of regulations, the General Administration of Press and Publication said it had halted and returned NetEase's application to operate "Burning Crusades" -- the latest version of the game licensed from Activision.

The regulatory body posted a statement on its Web site that demanded the NetEase affiliate company that operates World of Warcraft to suspend charging users to play the game, and disallow new account registrations.

Shares of NetEase, the No. 2 online game company in China, closed down 2.4 percent at $37.69 on Nasdaq. Stock in Activision Blizzard ended down 4.3 percent at $10.37, while rival Shanda Interactive SNDA.O finished up 3.5 percent. Sohu (SOHU.O), a major game portal, lost 2.8 percent.

The news comes as Beijing tries to tighten its control over online gaming, worried about undesirable content. In October, the regulator banned many forms of foreign investment into the country's online games industry -- expected to grow 30-50 percent this year to up to $4 billion. [ID:nSHA252963]

But analysts said the impact on other Chinese online gaming operators such as Shanda would be marginal, because most were in compliance with regulations set by both the administration as well as the Ministry of Culture, also viewed as a regulatory body for the industry.

NetEase launched the World of Warcraft game commercially in China on Sept. 19. Roth Capital Partners analyst Adam Krejcik said the move by the GAPP was not surprising, given previous reports that the agency was displeased that the popular multiplayer online game was launched without its approval.

TURF WARS

Krejcik said the situation reflected a regulatory turf battle in China between the GAPP and the ministry, which had approved the content of the game prior to its launch.

"These guys are essentially stuck in the middle of this power struggle," Krejcik said of NetEase.

But he expected the impact on other firms in the Chinese online gaming market would be limited.

NetEase and affiliate Shanghai EaseNet, which operates the World of Warcraft game in China, said they believed they were in full compliance with applicable laws and that they were seeking clarification regarding the statement by the General Administration of Press and Publication.

NetEase said that it has not yet been officially notified of GAPP's determination.

Kristen McNally, a NetEase spokeswoman, said she could not say if NetEase has complied with GAPP's requirements of suspending new account registrations.

GAPP also said in its statement it was evaluating whether to impose penalties on Shanghai EaseNet.

In a note to investors, Morgan Stanley analyst Richard Ji said World of Warcraft had experienced strong momentum since its launch, with nearly 1 million peak current users.

Even in a worst-case scenario, in which NetEase ceases to operate World of Warcraft, the company would still operate several blockbuster games and its shares would still have 30 percent upside, Ji said.

Janco Partners analyst Mike Hickey estimates the Chinese market for World of Warcraft accounts for 5 to 6 cents a year of Activision's earnings, which analysts expect to be 65 cents, excluding items, in 2009, according to Thomson Reuters I/B/E/S.

While it was difficult to predict the actions of the government, if World of Warcraft goes offline it could hurt Activision's earnings by a penny or two in the current quarter, he added. (Reporting by Alexei Oreskovic; Editing by Edwin Chan and Tim Dobbyn)

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