Guest Column

Guest Column
China and the World of Tradecraft

Greg Pilarowski | 13 Aug 2009 20:30
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These foreign companies don't operate games in China directly, but rather control variable interest entities through contractual arrangements and those controlled entities operate the games. So why can't companies like Activision Blizzard do the same thing? You won't find the rule written down anywhere, but industry insiders can tell you the answer: because they're not Chinese.

All of this smells like protectionism, which is not very nice given America's $268 billion annual trade deficit with China. But Beijing did join the World Trade Organization eight years ago, and the country did make market access and national treatment commitments. Doesn't the WTO offer some protection to foreign game companies in China?

The answer may very well be yes.

On August 12, 2009, a WTO panel made public its decision in a dispute between the U.S. and China regarding market access for audiovisual entertainment products, including movies and music. According to the ruling, the regulations that prohibit any foreign-invested entity from distributing digital music violates China's WTO obligations. Because the very same regulations also restrict foreign game companies in China, this panel decision may open China's online game operation market to foreign competition.

What does all of this mean for Activision Blizzard? Delays, which means massive loss of revenue.

World of Warcraft ceased operations in China on June 6, 2009. Based on data from The9's 2008 annual report, World of Warcraft China revenue last year was $660,000 per day, approximately $145,000 of which went to Activision Blizzard. The deal with NetEase.com is presumably more favorable to the game makers, and thus with 68 zero revenue days and counting, Activision Blizzard is out at least $9.9 million. Although this isn't a disaster for a company with over $3 billion in revenue last year, it certainly isn't a victory either.

More worrying is whether those revenue numbers will ever return. Guo Chenggang, a games analyst at JLM Pacific Epoch said, "Our surveys show that just under 70% of World of Warcraft users will continue to play when the game returns." But an online poll taken by NetEase.com competitor Tencent suggested that only 35% of players would return.

The good news is that in late July, both the Ministry of Culture and GAPP completed their content review and permitted NetEase.com to begin closed beta tests for World of Warcraft at the end of the month. Perhaps in light of the recent WTO decision, the Activision Blizzard- NetEase.com joint venture will also be permitted.

The author founded The Law Offices of Greg Pilarowski, PLLC, which focuses on the digital media industry in China. Firm website: www.pilarlegal.com.

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