The rift between gaming giants shows the toll of economic repression in China

Last October, the executives of Chinese games company NetEase and US video game developer Activision Blizzard joined a Zoom video conference to discuss the future of their 14-year partnership to deliver Activision’s games like World of Warcraft in China.

NetEase executives were concerned about new laws imposed by the Chinese government and wanted to make changes to their longstanding contract with Activision to ensure they were compliant.

But the companies left the call with starkly different interpretations of what was said, according to four people familiar with the talks and a document viewed by The New York Times. According to NetEase executives, a conciliatory gesture was seen as a threat by Activision executives. A month later, the companies broke off talks.

In January, more than three million Chinese gamers lost access to iconic Activision games when the partnership ended, and angry NetEase employees livestreamed the dismantling of a 32-foot ax sculpture of World of Warcraft standing outside NetEase’s headquarters in Hangzhou, China.

The tense breakup, after months of talks, ended a relationship that seemed to prove that global trade could thrive despite deepening geopolitical divisions. A partnership worth around $750 million in annual revenue, according to filings by the company and video game research firm Niko Partners, had become another case study in the growing difficulty of doing business in China.

The details of failed negotiations between Activision and NetEase provide an unusual behind-the-scenes look at how Chinese and American companies are struggling to balance the interests of the Chinese government with what they believe is best for their businesses.

The Chinese government, under its leader, Xi Jinping, has clamped down on China’s biggest internet companies and urged companies to adhere to Communist Party priorities. It banned children from playing video games on school days and tightened its already strict approval processes for companies to distribute new games. Last year, China’s $39 billion gaming market contracted for the first time in years.

“The private sector in China is currently in a very weak position,” said Duncan Clark, chairman of Beijing-based investment advisory firm BDA China. “The cost of entering the Chinese market has increased for Western companies, and for domestic companies there is a greater fear of arbitrary regulations.”

In a statement, Michael Lee, vice president of Activision, said the company’s experience in China has been “very positive” for nearly 20 years, including its decade-long partnership with Tencent to deliver Call of Duty. . “While the partnership you describe took a surprising and troubling turn, it’s important to recognize that it was an anomaly,” Lee said.

Alexandru Voica, a NetEase spokesperson, said NetEase has moved on and “we suggest Activision Blizzard do the same”.

Since 2020, Chinese antitrust regulators have been reviewing past mergers and joint ventures that attracted large amounts of foreign capital. New antitrust amendments last summer dramatically increased the fine for failing to meet these exams.

Last year, NetEase executives asked Activision to file relevant information, such as annual revenues and details of parts of its business, with Chinese regulators, but Activision disputed that it was not complying. not the law or that she was required to provide more information. , according to four people with knowledge of the situation and documents seen by The Times.

During contract renegotiations with Activision, conducted every few years since the partnership began, NetEase said it wanted to end the companies’ joint venture agreement – ​​a business entity that helped NetEase distribute games from Blizzard Entertainment, a subsidiary of Activision, in China. NetEase said it wanted Activision to license its games directly to NetEase, which would give NetEase more control over operations and allow it to better comply with new regulations without Activision’s help.

Andrew Tang, a veteran gaming executive in China with close ties to Activision, said he believed NetEase was simply using antitrust regulations as an excuse to get a better deal.

NetEase is “under a lot of pressure over the past two years due to all these crackdowns and the limitation of children’s play,” Tang said. “At the end of the day, I think it’s all to do with the bottom line.”

But tensions had been building ahead of last year’s contract renewal talks, according to people familiar with the talks.

NetEase executives believed Activision chief executive Bobby Kotick had made unreasonable demands over the years, two of the people said. In 2018, NetEase announced a $100 million investment in Bungie, a game developer that worked with Activision to produce popular game Destiny. Mr. Kotick was unhappy with the investment because Bungie was lagging behind in developing Destiny content, and he feared the investment would further divert the company from its Destiny obligations, two other people said.

That year, NetEase invested in a game development company founded by someone who was until recently a senior Activision employee, which also angered Activision, the sources said. Mr. Kotick considered ending the partnership. A 2019 deal between Activision and NetEase included restrictions that prevented NetEase from hiring former Activision employees or investing in game studios run by them.

These tensions came to a head during the call last October. Mr. Kotick and William Ding, chief executive of NetEase, discussed the many antitrust regulators around the world reviewing Microsoft’s $70 billion deal to buy Activision, two people with knowledge of the call said. Mr Kotick told Mr Ding he would review the license proposal, although he fears a change could rattle Chinese regulators ahead of a major political meeting this month and cede more control over ownership intellectual property from Activision to NetEase.

At one point in the conversation, sometimes led by translators, Activision executives felt that Mr. Ding was threatening Mr. Kotick. The Chinese government was reviewing Microsoft’s acquisition, and executives recalled that Ding said NetEase could influence the government to block or support the deal depending on the outcome of the licensing discussion, according to two people familiar with the matter. call and a document. reviewed by The Times.

But NetEase executives had no intention of making a threat and were trying to be accommodating to Activision, two other people familiar with the conversation said. The point they intended to make was that if Activision did not go through with a licensing deal, Microsoft would face the same regulatory hurdles when acquiring the company.

Mr. Voica, the NetEase spokesperson, denied that Mr. Ding had threatened Activision. He said Activision continues to “harass and taunt companies and regulators around the world.”

Microsoft declined to comment.

After the Zoom call, Activision made a counteroffer: It would move to a licensing deal if NetEase paid it about $500 million upfront, rather than payments throughout the deal, according to three people familiar with negotiations. This was intended to insulate Activision from the risk of its games being blocked in government approval processes or being reproduced without its consent.

NetEase later said in a statement that Activision’s terms were “commercially illogical” and that the stage was set for the contract to expire in January.

When the breakup became public in November, it sent shockwaves through the Chinese gaming community. NetEase shares plunged in Hong Kong.

As time passed, Activision made a final offer to extend the partnership for another six months so gamers could keep playing while it sought a new long-term partner, as reported by business news site Yicai. Overall. NetEase declined the new offer and, in a statement, compared it to “staying together while divorced.”

In mid-January, NetEase contractors destroyed the World of Warcraft ax sculpt. As contractors threw hammers, the employees broadcast the demolition live to 30,000 people. NetEase said local law required it to dispose of another company’s intellectual property after the partnership ended.

In late January, most of Activision’s games – including World of Warcraft, Diablo III and Overwatch – went dark in China. Chinese companies, including NetEase, released games that some analysts said bore close similarities to shuttered Activision titles.

NetEase also launched a recruiting pitch to former World of Warcraft players, hoping to get them to join Justice Online, a NetEase game in the same genre as World of Warcraft. Online, people have posted pictures of items from the Justice and Warcraft games that look alike.

NetEase said its games do not share similarities with Activision’s.

Activision said it plans to return to China and is in talks with other Chinese companies to distribute its games. In the past, Tencent and ByteDance, which owns TikTok, have expressed interest in working with Activision. Activision has also considered partnering with telecommunications companies like China Mobile, two people said.

For Chinese players, the breakup has been devastating. Zhang Yu, a 35-year-old World of Warcraft player in Beijing, said he still mourns the loss of a game that had been a constant companion and connected him to thousands since 2005.

“What worries me the most now,” Mr. Yu said, “is that those friendships are disappearing.”