VZCZCXRO1807
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #2899/01 2891056
ZNR UUUUU ZZH
O 161056Z OCT 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6474
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHIN/AIT TAIPEI 7403
RUEHKO/AMEMBASSY TOKYO 0069
RUEHUL/AMEMBASSY SEOUL 1372
RUEHGV/USMISSION GENEVA 2551
RUEAHLC/DHS WASHDC
RUCPDOC/USDOC WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC
RHMCSUU/FBI WASHINGTON DC

UNCLAS SECTION 01 OF 02 BEIJING 002899 
 
SENSITIVE 
SIPDIS 
 
State for EAP/CM - WKlein, SFlatt 
State for EEB/CIP - SFlynn, FSaeed 
USTR for Awinter, JMcHale, TWineland, AMain 
Commerce for MAC 
Commerce for ITA - IKasoff, NMelcher 
DOJ for CCIPS - MDubose and SChemtob 
FBI for LBryant 
State for White House OSTP Ambassador Richard 
Russell 
NSC for Melissa Hathaway 
 
E.O. 12958: N/A 
TAGS: ETRD PGOV PHUM SOCI SCUL ECON CH
SUBJECT: CHINA TARGETS ONLINE GAMES: BATTLES ON 
SEVERAL FRONTS 
 
SENSITIVE BUT UNCLASSIFIED - PLEASE HANDLE 
ACCORDINGLY. 
 
¶1. (SBU) Summary. China's General Administration of 
Press and Publication (GAPP) issued a circular on 
October 10 prohibiting foreign investment in the 
domestic online games operations through joint 
ventures, wholly-owned enterprises and cooperatives. 
The new directive comprehensively prohibits foreign 
firms from virtually any involvement with Chinese 
gaming firms and is the first time Chinese 
authorities have expressly prohibited contractual 
and other control arrangements used to facilitate 
foreign investment.  Implementation remains unclear 
given the lack of MOFCOM endorsement, but hostility 
toward foreign interests in this multi-billion 
dollar sector, with an estimated 65 million online 
Chinese gamers, is readily apparent.  End summary. 
 
¶2. (SBU) China's would-be online game industry 
regulator and copyright watchdog, the General 
Administration of Press and Publication (GAPP), 
issued a circular (Notice 13) on October 10 
prohibiting foreign investment in domestic online 
game operations through joint ventures, wholly owned 
enterprises and cooperatives.  The new directive 
comprehensively restricts foreign firms from 
indirectly influencing Chinese game firms through 
agreements or technology support. 
 
¶3. (SBU) While foreign online game interests have 
long operated in a nebulous regulatory universe 
here, using such devices as "variable interest 
entity" (VIE) agreements to operate here, this 
latest development pinpoints two main issues: PRC 
regulatory territorial battles in the burgeoning 
online universe are intensifying, creating more 
uncertainty for technology firms; additionally, 
targeted hostility toward foreign interests in the 
online sector is becoming increasingly overt. 
China's online game sector is one of the world's 
fastest growing where 2009 sales are expected to 
rise 30 to 50 percent to USD 3.5 to 4 billion, and 
may reach USD 5.5 billion by 2012, according to 
Pearl Research, dwarfing U.S. film industry 
interests here. 
 
Regulatory Battle: Hostility to Foreign Gaming 
--------------------------------------------- - 
¶4. (SBU) GAPP has recently lost ground in its 
regulatory purview over online content to the 
Ministry of Culture given separate State Council 
July 2008 Regulation and a Ministry of Culture 
September 2009 Interpretation pronouncements, which 
seemed to conclude content license purview for 
online operations, among other authorities, resides 
with the Ministry of Culture (MOC).  This latest 
development thus heightens tensions between GAPP and 
MOC. 
 
¶5. (SBU) As friction develops over the role of 
regulatory approval, one U.S. company, "Activision 
Blizzard," faces protracted challenges.  A Chinese 
firm, NetEase, earlier this year obtained the China 
operating license for Blizzard's world-wide 
blockbuster, World of Warcraft, following Blizzard's 
decision to cut ties with its prior licensee, 
"THE9".  World of Warcraft, however, has yet to 
receive a new license since moving over to NetEase 
and has been unavailable online legally in China 
since June 1, 2009, with some local analysts 
 
BEIJING 00002899  002 OF 002 
 
 
speculating that Chinese regulators have decided to 
more vigorously scrutinize the new NetEase 
contractual arrangement with Blizzard. 
 
Industry Interests Massive; Consensus Lacking 
--------------------------------------------- 
¶6. (SBU) Washington colleagues have been in touch 
with the leading online gaming industry association, 
Entertainment Software Association, but note that 
association has yet to react definitively to the 
latest development.  Embassy has also yet to receive 
approaches requesting USG engagement at this stage, 
though local industry association USITO, AmCham, and 
our EU colleagues have queried whether we are 
preparing to weigh in.  We remain engaged with 
interested parties to facilitate a consistent 
message should USG support be desired. 
 
¶7. (SBU) Law firm Morrison Foerster's Hong Kong 
offices also on October 16 released its China Update, 
noting the GAPP notice has captured the attention of 
the China internet gaming, private equity, and 
venture capital investment community.   Notice 13, 
if applied literally and uniformly, according to 
Morrison Foerster, would render the VIE structure 
used by many Chinese gaming portals invalid and 
illegal.  However, Morrison Foerster's China update 
notes it is too early to determine whether Notice 13 
will be successfully implemented given it has not 
yet been endorsed by other PRC authorities, most 
importantly MOFCOM. 
 
¶8.  (SBU) A Beijing-based U.S. online game 
entrepreneur echoed similar sentiments regarding 
GAPP's notice.  The entrepreneur's most recent 
business efforts met an unfortunate demise in 2008 
following several years' effort to launch an online 
company, Red Mushroom.  He views GAPP's notice as 
another negative harbinger for the lack of 
transparency in China's operating environment, which 
he said will only get tougher, including more bias 
against foreign participation.  However, he notes 
GAPP's circular was unlikely to be supported by 
other PRC authorities as it would mean profitable 
Chinese online game operators, such as NetEase, Sohu, 
THE9, will become illegal, eliminating a lucrative 
industry, which is heavily-reliant on foreign 
participation.  This entrepreneur, however, believes 
that if the notice is ultimately implemented, it 
will be used selectively to target non-domestic 
interests. 
 
¶9. (SBU) Comment:  Post views with concern these 
developments in the online game sector, which 
compound a climate of confusion regarding 
appropriate regulatory bodies and action in this 
lucrative sector.  In a best case scenario, the 
Ministry of Commerce may assert a firm hand, given 
its investment implications, and determine GAPP has 
no authority to issue such foreign investment 
restrictions.  In any case, given the stakes, we 
expect the competition between the PRC regulatory 
bodies to regulate and control this sector will 
continue to intensify and create obstacles to U.S. 
companies' access.  Meanwhile, major Chinese game 
companies, such as Perfect World, KingSoft, 
NetDragon, are increasingly expanding in the U.S. 
domestic market. 
 
HUNTSMAN