The China Angle: 9you, T3 Make Up, Kick Out Homewrecker 2

Nineyou (9you) is back! Three months after the Chinese online game operator suspended its initial public offering in Japan due to a licensing dispute over its bread and butter game Audition, 9you announced that it has finalized an agreement with Korean game companies T3 Entertainment and Yedang on September 13 to extend 9You's license for Audition from its previous expiration date of July 2008 to August 2010. 9you agreed to pay T3 an additional US$ 45 million for the two year extension, including US$10 million in licensing fees and guaranteed US$35 million minimum in royalties, set at 30 percent of revenues. 9you and T3's love-hate relationship dates back to 2005. 9you was a fledgling online game company, with two new hit online dancing games in O2Jam and Audition, licensed from Korea's O2Media and T3/Yedang, respectively. By the end of 2005, 9you made its first attempt to phase out royalties to the Korean developers by launching its own in-house developed music game Super Dancer Online. To add insult to injury, 9you even license its own music games overseas, competing directly with the Korean game developers. T3 struck back in 2007. In May, T3 licensed Audition's sequel Audition 2 to China's World of Warcraft (WoW) operator The9. In July, less than a week before 9you's IPO, T3 publicly announced that it plans 9you is in violation of its contract and may face early termination of its Audition license. Later in July, T3 signed a licensing agreement with The9 for Audition starting in August 2008, with an option for earlier operation of the game is 9you's license is prematurely terminated. The9 agreed to pay a US$ 8 million license fee for Audition, and also agreed to pay T3 a 30 percent royalty, with a US$35 million guarantee. According to rumors and accusations, The9 encouraged the squabble between 9you and T3 by offering to pay legal fees incurred by T3. 9you's dispute with T3 is the third major licensing problem in China. Chinese game operator Shanda, which introduced MMORPGs to China's masses with Legend of Mir 2, had a similar disagreement with Legend of Mir 2 owners Actoz and Wemade. Shanda eventually resolved its problem by acquiring Actoz and then settling with Wemade. Earlier this year, Wemade decided to give Shanda another chance and licensed its new Three Kingdoms themed game Changchun Online to Shanda. The9 also had a glitch with its World of Warcraft license. Only one year into the four year contract, Blizzard publicly announced in 2006 that it is actively exploring partners in mainland China and has invited The9 to negotiate for WoW's expansion The Burning Crusade. The announcement caught everyone off-guard as the contract already gave The9 the rights to operate any WoW expansion in China. Although the issues over the expansion were resolved without any additional fees, the announcement continues to cast a dark shadow over The9 stocks as investors worry about license renegotiations in 2009. Now that 9you and T3 have resolved their license dispute, investors finally have a baseline to measure the potential effects of WoW's contract renewal in 2009. The9 and 9you's offers for Audition set a new standard for licensing fees in China. New games are typically licensed for 22 percent royalty, but both The9 and 9you were willing to pay 30 percent plus a large licensing fee. The9's bargaining position with Blizzard is even worse than 9you's position against T3. At least for 9you, gamers are familiar with Audition and the game operator rather than its developer. If anything, Blizzard has better name recognition than The9 among Chinese gamers. [Shang Koo is an editor at Shanghai-based Pacific Epoch, and oversees research and daily news content on China's new media industries, with a concentration in online games. Pacific Epoch itself provides investment and trade news and publishes a number of subscription products regarding the Chinese technology market. Readers wanting to contact him can e-mail [email protected].]