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Some brief background: Last November, Activision Blizzard abruptly ended its relationship with Chinese gaming firm Netease during talks to renegotiate its 14-year partnership. Netease distributed and managed regional versions of Diablo 3, Overwatch, and World of Warcraft. So players were upset when support for the titles was pulled in January when the contract ended.
It was mysterious how such a long relationship could sour so quickly. However, a recent document obtained by The New York Times, and corroborated by anonymous insiders to the negotiations, sheds some light on the situation. It appears the whole thing was a misunderstanding caused by words getting lost in translation.
According to the document, the contract renewal talks took place over Zoom with translators present to help with the discussion. New terms were required due to several changes in Chinese gaming regulations, including laws passed limiting how often and when minors could play, among other things.
During the talks, Netease CEO William Ding told Activision head Bobby Kotick that he wanted a "licensing" agreement rather than their customary distribution partnership. Netease had already lost about $60 billion in stock valuation thanks to China changing the laws governing minors, so Ding felt pressured to score a more profitable agreement.
Kotick was somewhat receptive to the idea but had reservations fearing that a licensing contract would harm Microsoft's negotiations with regulators over its acquisition. He voiced these concerns to Ding, who said via translator that Netease could sway Chinese officials to prevent or allow the Microsoft merger. Activision took the suggestion as a threat that if it didn't enter into a licensing arrangement, it would face negative dealings with China regulators.
Despite the perceived threat, Activision said it would agree to a licensing deal, but only if Netease provided an upfront payment of around $500 million instead of payment installments throughout the contract term. It intended the payment to be a safeguard itself against the potential danger of its games being subject to government approval processes or reproduced without its permission. Netease called the $500 million stipulation "commercially illogical," and the deal fell apart.
However, the NYT sources say that NetEase executives were not threatening Activision but instead attempted to be conciliatory. Ding meant his words as a warning that Microsoft would encounter similar regulatory obstacles after it acquired Activision if it did not transition to a licensing agreement. By offloading titles under license to Netease, Activision could skip all the bureaucratic red tape involved with distributing games in China.
It is unclear if the executives discussed this misunderstanding, but it appears not. The NYT notes that Activision is interested in re-entering the Chinese market but is seeking a partnership with other companies. Both Tencent and ByteDance, the parent company of TikTok, have previously expressed interest in collaborating. Activision is also contemplating partnerships with telecommunications companies, such as China Mobile.