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Activision Blizzard, Inc. (ATVI) Pushes Deeper Into China

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Blizzard Entertainment, of Activision Blizzard, Inc. (NASDAQ:ATVI), announced on July 8 that it will be extending its partnership with the Chinese internet company NetEase, Inc (ADR) (NASDAQ:NTES) to bring Activision Blizzard, Inc. (NASDAQ:ATVI)’s new trading card game, Hearthstone, to China. Activision Blizzard, Inc. (NASDAQ:ATVI) currently relies on NetEase, Inc (ADR) (NASDAQ:NTES) to deliver World of Warcraft and StarCraft to Chinese gamers.

Activision Blizzard, Inc. (NASDAQ:ATVI)

NetEase, Inc (ADR) (NASDAQ:NTES) has a sizable portfolio of over a dozen self-developed online games with over 600 million registered accounts and earns over 80% of the company’s total revenues ($1.16 billion) from online gaming, including StarCraft and World of Warcraft. The company doesn’t provide a breakdown of sales per game, but NetEase reports the outstanding balance of licensing fees to Activision Blizzard, Inc. (NASDAQ:ATVI) through 2015 to be $183 million. The company has not announced what licensing fees will be paid for Hearthstone. Adding another Activision Blizzard, Inc. (NASDAQ:ATVI) title to its offerings is a nice feather in NetEase’s cap, but the true winner of this arrangement is Activision Blizzard, Inc. (NASDAQ:ATVI).

It’s clear Blizzard has been trying to push its way into the Chinese gaming market. Last year, the company chose Shanghai to host their World Championship Series finals, which featured both World of Warcraft and StarCraft. China has been specifically cited as the major driver of World of Warcraft subscription losses over the last year. The Chinese massive multiplayer online, or MMO, game market is very competitive and largely based on a free to play model, and World of Warcraft seems to lack the staying power it enjoys in the West.

Blizzard has also announced it is going to begin beta testing a micro-transaction system in Asia that would allow gamers to purchase the ability to level their character more quickly. This is a common feature of free to play business models and is another indicator the company is doubling down on its efforts to breach the Chinese gaming market.

There are three reasons why the addition of Hearthstone to Blizzard’s Chinese game offerings is a potential windfall. First of all, the game will be free to play. Players will have the option to purchase card packs rumored to be around $1 for a pack of 5 cards. The free to play business model is increasingly popular among gamers, especially to casual gamers and mobile gamers.

According to Newzoo, a gaming market research and consultancy, free to play games were by far the most profitable games downloaded in 2012. In the United States, they accounted for 72% of all iOS revenues in 2012, compared with 54% in 2011.

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