Netease levels up with online games (NTES, ATVI)

Online gaming and social media companies are getting lots of attention in the United States as Zynga moves toward an IPO, but some of the biggest gaming dollars are in China, where Netease (NTES, quote) has reported robust third-quarter numbers. The Chinese internet company reported total Q3 revenue of $307 million, up 46.7% year-over-year. 88% of Netease’s revenue comes from its stable of online games, both in-house titles and licenses of popular Western games. 

The $270.9 million Netease earned from online games compares well with leading American game companies like Activision/Blizzard (ATVIquote) — $336 million in online subscriptions in 3Q 2011 — and Zynga ($306 million).  

Netease’s profits were also impressive, up 42.2% to $133 million. As a comparison, the Blizzard division of Activision/Blizzard reported $120 million profit in the 3rd quarter, while Zynga reported only $12.5 million.  

Like Western companies, Netease’s margins are under pressure from the cost of developing new content. The company benefits from running families of games under similar IPs and engines — there are two Tianxia games, and three Westward Journeys. However, R&D remains a major cost. 

Royalties paid to Blizzard for World of Warcraft and Starcraft II also eat into profits. If Netease can keep a steady flow of new games and expansions, though, there may be plenty of money for everyone.

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