April 15, 2009 / 6:52 PM / 9 years ago

UPDATE 1-The9 tanks on reports it may lose World of Warcraft

(Adds analyst’s comments, details, updates share to close)

By Mansi Dutta and Saumyadeb Chakrabarty

BANGALORE, April 15 (Reuters) - Shares of China-based online game operator The9 Ltd (NCTY.O) plunged almost 25 percent after reports in the Chinese media indicated the company had lost the license to host Activision Blizzard’s (ATVI.O) popular game World of Warcraft. According to the Chinese business publication JLM Pacific Epoch, popular Chinese portal Sina (SINA.O) reported that The9’s president sent an internal letter to employees on April 15 suggesting that the license would not be extended.

JLM Pacific also said another Chinese website Sohu (SOHU.O) reported that The9’s rival NetEase (NTES.O) will announce a license for World of Warcraft later in the day.

The report noted that NetEase has spent 200 million yuan ($29 million) on servers for World of Warcraft operation, citing Sohu.

The9’s World of Warcraft license expires on June 8. The company had refused to comment on a possible extension at its fourth-quarter earnings conference call.

“The9 gets 90 percent of its revenue from World of Warcraft. Loss of the game would mean cash burn for the company in the next few quarters,” Think Equities analyst Atul Bagga told Reuters by phone.

Bagga added that the next few quarters are going to be a rough phase for The9 without World of Warcraft.

World of Warcraft is a multiplayer role-playing game published by Activision Blizzard, a company owned by Europe’s largest entertainment group Vivendi (VIV.PA).

“The reports said The9 will transfer computer hardware and employees (related to World of Warcraft) to an unnamed operator. The firm will receive $22 million for hardware and computers it purchased for $73 million,” said Frederic Ruffy, option strategist at Web information site WhatsTrading.com.

Phone calls to the offices of The9 in China went unanswered. A NetEase spokeswoman based in New York refused to comment on the reports.

ThinEquities’ Bagga said if The9 loses World of Warcraft, it might get War Hammer Online from Electronic Arts ERTS.O but added that this was not going to happen soon.

    “The game is still a few quarters away,” he said.

    The9 competes with a slew of rivals such as NetEase, Shanda Interactive SNDA.O and Perfect World PWRD.O for a bigger share in the increasingly competitive online gaming market in China.

    NetEase has a joint venture with Activision Blizzard for the publisher’s other games such as Starcraft II, Warcraft III: Reign of Chaos and Warcraft III: The Frozen Throne.

    The9 has been aggressively hiring people and building up their own game development teams to reduce its overwhelming dependence on just one game.

    “Certainly they are adding more expenses. Those expenses are not going to result in immediate revenue opportunity for them. This shows you will see the company getting into negative cash flow, that probably is going to hurt the company,” Bagga said. American Depositary Shares of The9 closed down $3.26 at $9.96 Wednesday on Nasdaq. NetEase closed up 2 percent at $29.79, while Activision closed down 4 cents at $10.03.

    In the options, The9’s volume was 23 times the usual combined turnover with about 11,000 puts and 1,138 calls traded in the afternoon session, according to option analytics firm Trade Alert. ($1=6.833 Yuan) (Additional reporting by Doris Frankel in Chicago; Editing by Himani Sarkar)

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