Videogame developer NetEase (NTES) (HK:9999) is Monday's worst-performing stock in Hong Kong by a country mile, as it was forced to postpone the Chinese release of its latest blockbuster game, Diablo Immortal, three days before its debut.
NetEase hasn't set a date for any revised release. The move comes after the game's site on Weibo, China's equivalent of Twitter (TWTR) , was banned from new posts "for violating relevant laws and regulations."
The game's microtransaction system has led to it already being pulled from a planned release in Belgium and the Netherlands. Both countries ban "loot boxes" as a form of gambling, where players pay real money for the chance to get rare in-game items.
Hangzhou-based NetEase shed as much as 10.0% at the open on Monday, before recovering a little of the lost ground. It closed on a 6.7% loss. Its troubles in Asia hint at a possible follow-through effect for its partner Activision Blizzard (ATVI) in U.S. trading.
Diablo Immortal, which was released outside China on June 2 on mobile phones, with a PC beta-test version, has posted the worst-ever user score on the site Metacritic. At one point, the game fell as low as 0.2 out of 10, as fans "review bomb" it for its extensive use of microtransactions. The game is "free to play," but offers frequent opportunities to upgrade your character using real-world money, causing critics to dub it a "pay-to-win" game.
Chinese game developers such as NetEase and Tencent Holdings (TCTZF) (HK:0700) pioneered the "free to play" model for games, particularly those played on mobile phones. The developers give the game away and recoup their costs by selling in-game goods to players that either give them a gameplay boost or provide specialized looks to items or characters.
For now, this is a game-specific story. Tencent shares rose 0.4% on Monday, on par with the 0.4% rise in Hong Kong and its Hang Seng Index benchmark.
Shares of Activision Blizzard are down only 4.1% this month, though they have a backstop that Microsoft (MSFT) is in the process of acquiring the company, which makes the best-selling Call of Duty franchise, for a whopping US$68.7 billion. Still, ATVI sits at US$74.71, way down from the US$95 per share MSFT is willing to pay.
Blizzard developed the game, with NetEase its partner in China. The game faced an uphill battle on its announcement in 2018, since previous games in the Diablo series were first-and-foremost designed to be played on a computer, whereas Diablo Immortal is at heart a mobile-phone game. Fans of the previous games had been expecting a new installment on computer.
It can cost as much as US$51,195 to play Diablo Immortal, according to Rebecca Jones on the gaming site Rock Paper Shotgun, if you want to guarantee you will acquire the best in-game item.
Players purchase Eternal Orbs in packages of 60 for US$0.99 up to 7,200 for US$99.99. The "gambling" catch is that you use the orbs to buy items such as Legendary Crests, which you can apply before you start one of the game's dungeons, the Immortal Rifts.
By applying up to 10 Legendary Crests to a dungeon, you increase the odds of collecting prized Legendary Gems from 1-star up to 5-star for completing an Immortal Rift. By applying a Legendary Crest, there's a 75% chance of a 1-star Legendary Gem with a 1-star cap, but a 0.05% chance for a 5-star Legendary Gem with a 5-star cap. You'd have to spend all that money to be sure of landing the perfect 5-star, 5-cap Legendary Gem.
You can play Diablo Immortal very happily for free if you are mainly interested in the storyline and the game's dungeons. But you can only get 1 Legendary Crest per month without spending real-world money, forcing you to use worse Rare Crests, which have a 10% chance of yielding a 1-star Legendary Gem with 1-star cap, and essentially zero chance of getting anything better than a 2-star equivalent. There's an 87.5% chance you'd get no Legendary Gem at all.
The biggest downside comes in the game's player vs. player mode. People who have spent real-world money have a massive advantage.
Loot boxes are particularly pernicious. I love playing videogames, but I'm old-fashioned, and prefer spending my money upfront on a game that won't pester me to keep topping up my account. It also means that, for a new title like Horizon Forbidden West on PlayStation 5, I'm paying US$69.99 for a new game's basic edition.
My 13-year-old son and many others who have grown up with mobile phones in their hands are far more used to apps that are free. The games they play are often free, too. But then I have him bugging me now and then that "Dad, I really really really wanna get this package of gems/tokens/credits, it's the only way you can get this skin/weapon/car, and it's on sale only for A LIMITED TIME!"
It's tough to sit down a frenzied 13-year-old who has just been in the middle of some fierce videogame battle to explain to him that, son, these games are designed to exploit exactly the feeling you are feeling now. And that's why my credit card is staying in my wallet. From time to time, I break down and let him spend his birthday money on a loot box, while getting him to promise this is the only one he'll be getting for, say, three months.
NetEase was due to release Diablo Immortal in China on Thursday. The Chinese Communist Party has already restricted the amount of time children can play videogames, and often says it won't approve games that are overly violent. Increasingly, it is also concerned with the moral content of games.
Loot boxes would be the next frontier -- an irony, since China invented the model. NetEase says it is conducting "multiple optimization adjustments," suggesting the authorities are having a word after the fan outcry in other markets.
Diablo Immortal won approval in February 2021 for release in China, before Chinese regulators went into a freeze on issuing new game licenses. That was only thawed after a nine-month gap in April, but the roster of licenses issued in April and June include no new games for NetEase or Tencent.
With 56% of people playing digital games in some form, China is the world's largest videogame market, worth an estimated US$55.6 billion in 2022, according to Statista, compared with US$33.6 billion for the second-place U.S. market. Mobile games are by far the largest share of the Chinese market, making up 84.8% of sales.