Surging expenses for game promotions and dwindling advertising revenues could weigh on NetEase.com Inc as the online gaming operator grapples with fierce competition in the crowded industry.

The company may also suffer due to the regulatory spat over its operation of blockbuster online game World of Warcraft (WoW).

NetEase earlier said net income during the third quarter rose to 393.8 million yuan from 313.3 million yuan a year earlier. But its gross profit margin of online game services declined to 79.9 percent from 89.7 percent in the same period of last year.

The company said additional operating expenses for its online games, especially WoW, hurt margins. It also had to spend more on promotions and royalty charges after it relaunched WoW in September, under license from Activision Blizzard Inc.

Earlier this month, the General Administration of Press and Publications (GAPP) suspended approval for WoW, while the Ministry of Culture insists online games are out of GAPP's portfolio.

The future development of the popular game now looks bleak as the game is slowly losing its sheen with players, said industry experts.

Advertising sales of NetEase fell 24 percent year-on-year to 86 million yuan in the third quarter because "the 2008 Olympic-effect ceased", said NetEase.

China's online advertising market had been severely hit after the Beijing Olympic Games last year as companies cut their advertising and marketing budgets due to the global economic slowdown.

But Liu Ning, an analyst with research firm BDA China, said online advertising market was recovering faster than TV and newspaper advertising markets.