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NetEase.com Inc, one of China's biggest online game providers, yesterday announced it posted 15 percent growth in the fourth quarter as profit surpassed expectations.

The company operates the popular Westward Online Journey II game.

Beijing-based NetEase posted net profit of 320.2 million yuan for the three months ending on December 31, compared with 314.8 million yuan in the previous quarter, and 276.7 million yuan a year earlier, a net profit of 30 cents per American Depositary Share, beating previous estimates of 25 cents per share made by Reuters Estimates.

Although profit was up in the quarter, NetEase's revenue decreased slightly compared with the previous quarter as students took summer vacations.

Daniel Vlad, an analyst from Casual Analyst, earlier predicted that Fantasy Westward Journey's average concurrent users (ACU) in the fourth quarter would decrease by 8 percent to 430,000, from 468,000 in the previous quarter, while the ACU of Westward Online Journey II fell around 2 percent.

The two games contributed 98 percent of NetEase's online gaming revenue.

Liu Ning, an analyst from research house BDA China, said NetEase's revenue decrease in the fourth quarter was mostly due to the fading appeal of its two flagship games and the company's subscription-based business model.

"Every game has its life cycle in which at the end it becomes less appealing to users," said Liu, noting that it was long time before NetEase made significant improvements to "Fantasy Westward Journey" and "Westward Journey Online II" after they were launched in 2003 and 2002 respectively.

NetEase plans to launch a new game, "Tian Xia II", on March 1 and to upgrade its "Westward Journey Online II" to "Westward Journey Online III" in the second quarter of this year.

But Liu said if NetEase does not change its current subscription-based business model, it may find itself in a difficult position competing with rivals like Shanda, which offers role-playing games for free and receives nearly half of its revenue by selling virtual weapons and vehicles rather than charging subscription fees.

"In 2007, people will see fierce competition in China's online game market as leaders such as NetEase, Shanda and The9 all launch new games, while small players like Tencent, Kingsoft and Perfect World also plan to release their own ones," said Liu.

"Playing games for free is an industry trend," he said. "I don't know whether NetEase will change its business model for its new game, but I think they should take it into consideration very seriously."

While all NetEase's games are currently subscription based, Liu noted about 80 percent of games in the Chinese market were run similarly to Shanda's model.

(China Daily February 28, 2007)