Yesterday China's General Administration of Press and Publication (GAPP) announced it would suspend the application from NetEase NTES for operation of World of Warcraft (WOW), criticizing NetEase and its affiliate company EaseNet for commercializing the game without the approval of GAPP. The government agency said it is evaluating whether to impose penalties on the company. NetEase obtained the approval from the Ministry of Culture (MOC) in July for running Burning Crusade, the latest version of WOW in China, and the company started to charge for the game in mid-September without approval from GAPP. According to NetEase, the commercialization of WOW is justified by an announcement in mid-September from the MOC, which stressed that it is the main government authority for supervising online games in China. However, the other regulatory body, GAPP, seems to take a different view and insists that the online game should obtain GAPP's approval before commercialization. Early in July, China's State Council promulgated the "three-determination regulation," which stipulates that the MOC, the GAPP, and the State General Administration For Radio, Film And Television all play a role in regulating online games in China. However, these regulatory bodies seem to have different interpretations of this regulation. We think this reflects the tough regulatory environment for Chinese online game operators, especially for those that offer imported games. As expected, NetEase will have to stop commercialization of the game and discontinue new account registration. We're concerned that NetEase may need to pay a huge fine for the violation, and the delay in commercialization may cause more players to switch to other games. We're leaving our fair value estimate unchanged, since our current fair value estimate reflects the dim outlook on NetEase's operation of WOW.

Iris Tan is a stock analyst covering the consumer and healthcare industries in China. Prior to joining Morningstar in August 2006, she worked as a financial analyst at San Miguel Brewery Company and an assistant researcher on Chinese stock market at GTA Information Company in China. Iris holds a master's degree in Finance from the University of Strathclyde in the UK and is a Level III candidate in the CFA program.