Last October, executives from Chinese game company NetEase and American video game developer Activision Blizzard joined a Zoom video conference to discuss the future of their 14-year partnership to bring Activision games like World of Warcraft to China.
NetEase executives were concerned about new laws imposed by the Chinese government and wanted to make changes to their long-standing contract with Activision to ensure they were compliant.
But the companies left the call with drastically different interpretations of what had been said, according to four people familiar with the conversations and a document seen by The New York Times. What the NetEase executives held up was a conciliatory gesture that Activision executives saw as a threat. 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 sculpture of a World of Warcraft ax that was outside the NetEase headquarters in Hangzhou, China.
The testy break, after months of talks, ended a relationship that seemed to show that global trade could thrive despite deep geopolitical divisions. A partnership that had been worth about $750 million in annual revenue, according to company documents and video game research firm Niko Partners, had become another case study in the growing difficulty of doing business in China.
Details of the breakdown of negotiations between Activision and NetEase provide a rare behind-the-scenes look at how Chinese and US companies struggle to balance the interests of the Chinese government with what they believe is best for their business.
China’s government, under its leader, Xi Jinping, clamped down on China’s largest internet companies and urged the companies to adhere to Communist Party priorities. It has 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 now in a very weak position,” said Duncan Clark, president of Beijing-based investment advisory firm BDA China. “The cost of accessing the Chinese market has increased for Western companies, and for domestic companies there is greater fear of arbitrary regulations.”
In a statement, Michael Lee, Activision’s vice president, said the company’s experience in China had been “very positive” for nearly 20 years, including its decade-long partnership with Tencent to deliver Call of Duty. “While it is true that the association he is describing took a surprising and worrying turn, it is important to recognize that this was an anomaly,” Mr. Lee said.
Alexandru Voica, a NetEase spokesman, said that NetEase had moved on and “we suggest that Activision Blizzard do the same.”
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Since 2020, China’s antitrust regulators have been reviewing past mergers and joint ventures that attracted large amounts of foreign capital. New antitrust amendments last summer it significantly raised the fine for failing to comply with those reviews.
Last year, NetEase executives asked Activision to submit relevant disclosures, such as annual revenue and details about parts of its business, to Chinese regulators, but Activision disputed whether it did not comply with the law or was required to provide more information. . , according to four people with knowledge of the situation and documents seen by The Times.
In contract renegotiations with Activision, held every few years since the partnership began, NetEase said it wanted to end the joint venture agreement of the companies, 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 games executive in China with close ties to Activision, said he thought NetEase was simply using antitrust regulations as an excuse to get a better deal.
NetEase is “under a lot of pressure in recent years because of all these crackdowns and limiting children’s play,” Tang said. “Ultimately, I think it all has to do with the bottom line.”
But tensions had been building before last year’s contract renewal discussions, according to people familiar with the talks.
NetEase executives believed Bobby Kotick, Activision’s chief executive, 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 Destiny, a popular game. Kotick was unhappy with the investment because Bungie was behind in developing Destiny content and was concerned that the investment would further distract the company from its Destiny obligations, two other people said.
That year, NetEase invested in a game development company founded by a person who had until recently been a senior Activision employee, also angering Activision, the people said. Mr. Kotick considered ending the partnership. A 2019 agreement between Activision and NetEase included restrictions preventing NetEase from hiring former Activision employees or investing in game studios run by them.
Those tensions came to a head in the call last October. Mr. Kotick and William Ding, chief executive of NetEase, spoke about the many antitrust regulators around the world examining Microsoft’s $70 billion deal to buy Activision, two people with knowledge of the call said. Kotick told Ding that he would consider the licensing proposal, though he worried that a change could unsettle Chinese regulators ahead of a major political meeting later that month and cede more control over Activision’s intellectual property to NetEase.
At some point in the conversation, which was sometimes conducted through translators, Activision executives felt that Mr. Ding threatened Mr. Kotick. The Chinese government was reviewing the Microsoft acquisition and executives recalled Mr. Ding saying NetEase could influence the government to block or support that deal depending on the outcome of the licensing dispute, according to two people familiar with the call. and a document. reviewed by The Times.
But NetEase executives did not intend to make a threat and were trying to be conciliatory with Activision, two other people familiar with the conversation said. The point they wanted to make was that if Activision didn’t switch to a licensing agreement, Microsoft would face the same regulatory hurdles it did when it acquired the company.
Mr. Voica, the NetEase spokesman, denied that Mr. Ding threatened Activision. He said Activision continued to “harass and mock companies and regulators around the world.”
Microsoft declined to comment.
After Zoom’s call, Activision made a counter offer: It would switch to a licensing deal if NetEase paid it roughly $500 million up front, rather than payments over the course of the deal, according to three people familiar with the negotiations. That was meant to insulate Activision from the risk that its games could get tied up in government approval processes or be replicated without its consent.
NetEase later saying in a statement that Activision’s terms were “commercially illogical”, and the stage was set for the contract to expire in January.
When the breach became public in November, it sent shockwaves through the Chinese gaming community. NetEase shares plunged in Hong Kong.
As time was running out, Activision made a last-minute proposal to extend the partnership for six months so players could keep playing while it searched for a new long-term partner, like the business news site. Yicai Global informed. NetEase rejected the new offer and in a statement compared it to “stay together while divorced.”
In mid-January, NetEase contractors destroyed the World of Warcraft ax sculpture. While the contractors pounded with their hammers, employees livestreamed the demolition to 30,000 people. NetEase said it was required by local law to remove another company’s intellectual property after the partnership was terminated.
At the end of January, most Activision games, including World of Warcraft, Diablo III, and Overwatch, were shut down in China. Chinese companies, including NetEase, released games that some analysts said had many similarities to Activision’s closed titles.
NetEase also did a recruiting pitch to former World of Warcraft players, hoping they would join Justice Online, a NetEase game in the same genre as World of Warcraft. Online, people posted photos of items from the Justice and Warcraft games that resembled each other.
NetEase said that its games did not share similarities with Activision’s.
Activision has said it plans to return to China and is in talks with other Chinese companies to distribute its games. In the past, both Tencent and ByteDance, which owns TikTok, have expressed interest in working with Activision. Activision has also considered partnering with telecommunications companies such as China Mobile, two people said.
For the players in China, the break was devastating. Zhang Yu, a 35-year-old World of Warcraft player in Beijing, said he was still mourning the loss of a game that had been a constant companion and connected him to thousands of people since 2005.
“What worries me most now,” Yu said, “is that these friendships will disappear.”
