While China continues to be a growing market for most US-based industries - including games - the very nature of the Chinese regulatory process and perhaps the nature of the government itself, make the Asian nation an increasingly challenging place to do business, as the world's largest publisher of videogames, Activision-Blizzard, has discovered.
Activision Blizzard (Nasdaq: ATVI) recently tested China's murky world of game regulation when it announced a switch in operators for its World of Warcraft franchise from The9 (Nasdaq: NCTY) to NetEase.com (Nasdaq: NTES). Although the original license expired on June 6, 2009, due to the nascent stage of China's game regulatory environment and perennial uncertainties regarding the use of governmental discretion, no one could say for sure whether the authorities would allow Activision Blizzard to change from one operator to another.
What is clear is that Activision Blizzard cannot operate World of Warcraft in China by itself. Regulations issued by China's Ministry of Culture and the Catalogue for the Guidance of Foreign Investment Industries both prohibit foreign companies from operating online games within the country. Foreign games are also subject to content review by the Ministry of Culture and publishing approval by the General Administration of Press and Publication (GAPP). But is yet another government approval required to switch local partners?
On April 24, 2009, just eight days after Activision Blizzard and NetEase.com jointly announced the new World of Warcraft license, the Ministry of Culture declared that their approval is indeed required. One month later, GAPP declared that they too must sign off on the change.
Never mind that World of Warcraft content was approved by the Ministry of Culture four years ago and GAPP approved publication of the game in 2005, these brand new rules say that switching game operators requires yet another content review and a new publishing permit, which means another round of review and another delay in re-launching the game.
But wait, it gets worse.
Kou Xiaowei, director of the technology and digital publishing bureau at GAPP explained on January 16, 2008, that if any disputes arise between a Chinese and foreign game company, GAPP will suspend the approval process for all games from the foreign company until the disputes are settled to the satisfaction of the Chinese company. Naturally, The9 sued Activision Blizzard four times. As of July 15, 2009, three of the four cases had been dismissed by the courts of Shanghai on jurisdictional grounds and the fourth suit, for breach of contract, is likely to face similar challenges since the original license requires disputes to be resolved through arbitration in Singapore.
To further complicate matters, Activision Blizzard and NetEase.com entered into a joint venture to support the operation of World of Warcraft along with three other games and the Battle.net platform. In July, an official from GAPP stated that they are investigating this joint venture, presumably to determine if the new entity is violating China's ban on foreign-invested game operators.
Adding a further wrinkle, The9 is listed on Nasdaq, seemingly indicating it's foreign-invested and thus prohibited from operating games in China, according to regulations. Which is indeed the case.
The9, NetEase.com and seven other companies with game operations in China are actually foreign entities incorporated in places like the Cayman Islands and listed on U.S. stock exchanges. And yes, under current regulations they are not permitted to operate online games in China. So, what gives?