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Did The9′s relationship with EA cost it 90% of its revenue?

By on April 22, 2009

Last week, Activision announced that it would be shifting the Chinese licence for World of Warcraft from The9 to Netease.

This is pretty bad news for The9. To quote their 2007 20-F annual report filed with the SEC:

“99% and 92% of our total revenues in 2006 and 2007, respectively, were attributable to the operation of WoW in China, including game play time, merchandise sales and other related revenues. We expect to continue to depend on WoW for most of our revenue in the near future”

To put it another way, in 2007, World of Warcraft generated $170 million in revenues for The9. That’s also, by the way, WoW‘s China revenues. According to The9′s Q4 2008 earnings call, the company’s 2008 revenue was $250 million of which $20.5 million came from Soul Of The Ultimate Nation and Granado Espada, leaving approximately $230 million coming from WoW. (As an interesting aside, The9 said World of Warcraft had 9.1 million active users in China, defined as “users who have spent money during the past three months”). With the ending of the WoW agreement, The9 is about to lose over 95% of its revenue.

There are some future game prospects. The9 is collaborating with EA on FIFA Online 2, which it calls “one of the top 10 anticipated online games in 2009.” Other games include Korean MMO Atlantica and dance game Audition 2. On the cost side, analysts told Reuters that Netease will be buying The9′s servers for $22 million (they originally cost $73 million).

But however you look at it, The9 is about to lose the game that has generated over 90% of its revenue for the past three years. I’m surprised that the share price has not collapsed completely (see chart below).

From Activision’s side, the company has warned analysts that there will be some impact on calendar Q2 revenues following the disruption of trying to migrate the 9 million Chinese World of Warcraft players across to Netease. Given this impact, why did Activision kill the deal with The9?

Some analysts have pointed to an allegedly disappointing performance by The9. I think the real reason is both simpler and more personal.

Activision will not work with an ally of Electronic Arts.

Not only is The9 working with EA on FIFA Onine 2 but it’s 15.8% owned by Electronic Arts.

That means that whatever is good for The9 is good for EA, Activision’s direct rival for the crown of world’s largest third-party games publisher. Even more importantly than that, it means that EA may (I only say may) have insight into Activision-Blizzard’s strategies for WoW in China – new revenue models, roll-outs products and so on.

And there is just no way that Bobby Kotick was going to allow that to continue.

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: thecurveonline.com