Warcraft Row: An Industry Game Changer

Competing Regulators

While the game industry boomed, an undercurrent of regulatory friction was coming to the fore. It became obvious after GAPP issued its Provisional Regulations on Internet Publishing Management in 2002 and the culture ministry issued Provisional Regulations on Administration of Internet Culture just one year later.

The rules seemed nearly identical. On paper, GAPP's was aimed at "publication management," while the culture ministry targeted "cultural management." But the objects and contents of the efforts were exactly the same: online gaming companies and their products.

Suddenly, online gaming companies faced a new reality: Dual – and sometimes dueling – government oversight. At the bottom of every online game home page are a culture ministry license and document number, as well as a GAPP electronic publishing number. Online games imported from other countries also need copyright registration credentials.

In June 2004, the State Council modified its decision to give GAPP control full responsibility of gaming oversight. A council order put the culture ministry in charge of reviewing Internet culture companies and their imports of culture products, while GAPP was put in charge of electronic publications with overseas copyrights, including online games. More tasks, including animation oversight and online games, were transferred to the ministry in 2008.

Against this backdrop, NetEase was ready to grow after its Shanghai subsidiary won the rights from U.S.-based Blizzard Entertainment to operate World of Warcraft, which had been dealing with The9 in China. Blizzard developed the game but had decided to terminate its four-year cooperation with The9.

Since coming to China in 2005, the game's operators have signed up 5 million active players nationwide, more than half of which are between ages 18 and 24. Players from students to company executives are captivated by the game's mystical world.

Changing game operators is usually an everyday commercial affair. But World of Warcraft bumped against regulatory boundaries, as competition over the game license between The9 and NetEase brought to the surface contradictions in the industry regulatory environment.

After years of experience, NetEase knew it would be foolhardy to challenge the regulators. So, the company applied to operate World of Warcraft in June 2009 by concurrently filing with GAPP and the culture ministry.
However, the9 filed a complaint with GAPP last July claiming NetEase had violated regulations. Moreover, in May 2009, The9 sued Blizzard in Chinese courts for property damage and business defamation. As of late February, neither case had been resolved.
 
Sources close to the matter told Caixin that GAPP officials tried unsuccessfully to mediate the conflict between The9 and NetEase.

Meanwhile, an angry The9 shut down World of Warcraft, taking the game off the Internet in China. The blackout cost NetEase millions of yuan every day lost revenues and testing the patience of World of Warcraft players.

In July, the culture ministry approved the NetEase application, but GAPP delayed a decision.

Forward Motion

Nearly a month later, in August, NetEase Chairman Ding Lei had run out of patience and took a drastic step by restarting World of Warcraft without GAPP approval. A NetEase employee with World of Warcraft operations says company officials felt GAPP's stamp was no longer needed because the government, through the culture ministry, had technically given the game a thumbs up.

"During the approval process, the State Council's government agency reform plan said the culture ministry was the lead regulator for online games," the employee said. "The ministry had already asked NetEase to start operations. But GAPP still hadn't given approval.

"With the lead regulator telling you to start the service, could you say no?"

But events turned for the worse, as GAPP halted its review and returned NetEase's application. The agency then required that the company immediately stop charging for the game and activating new accounts, and said it should prepare for administrative penalties.

At the same time, the culture ministry responded to the termination notice by claiming GAPP "was clearly overstepping its authority." Indeed, the ministry had already flexed its muscles as the lead regulator in January by publishing a white paper on the gaming industry.

As fierce confrontation raged between the two regulatory agencies, GAPP suddenly approved World of Warcraft in February, just before the Chinese New Year holiday period. Many industry analysts said the move was out of consideration for the game's 5 million users.

Gaming industry tracker Analysys International said World of Warcraft had lost about 15 percent of its users after The9 shut down the game. That forced NetEase to launch a marketing effort that brought back about 5 percent of those users.

Meanwhile, Blizzard plans to release a new version of the game called World of Warcraft Cataclysm worldwide later this year, which means NetEase may have to apply for regulatory approval again. If that's the case, the unresolved friction between GAPP and the culture ministry may intensify.

Liu Yusu of Peking University's Cultural Industry Research Institute Animated Games Research Center told Caixin that the review and approval process for online games is the same at GAPP and the culture ministry. For that reason, and for the sake of the gaming industry's health, he thinks the licensing procedure should be streamlined as quickly as possible.

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