NetEase.com, Inc. (网易) (NASDAQ NTES) provides online games, web-based communication services, and interactive content in China. The overwhelming majority of the company's FY 2010 revenue was from its Online Game Services segment (89.8%). The company also sells advertising on its internet portal site (providing free and fee-based services for registered and unregistered users). Advertising is a relatively small part of the company's business, about 11.2% of FY 2010 revenue.
As of FY 2010, the company had 495 million accumulated registered users for its online games, and about 1.3 billion registered users for other online services. According to Alexa, the company operates one of the top 10 web sites in China.
NetEase was founded in 1997 to develop web search and email software, but evolved to operating its own web sites in 1998. The company's efforts to monetize its web sites started in 1999 when the company added a dedicated sales force to sell advertising. An IPO followed in 2000, and the company launched its fee-based products in 2001 and also entered the online game market with "Westward Journey Online" following an acquisition of a Chinese game company.. Entry into the online game industry was the main driver of the company's growth: Online Game revenues were 15.9% of total FY 2002 revenues (233 million RMB) and were 81.4% of total FY 2005 revenues (1.7 billion RMB).
As of FY 2010, Online Games remained the largest contributor of revenue and gross profit, making the company a "pure play" for the Chinese online gaming business.
Net revenue grew +39.5% YoY, driven by revenue growth in all segments. Online Game revenues grew +39.8% YoY, Advertising revenue grew +36.1% YoY, and Wireless and Other revenue grew +50%.
Gross profit grew +39.4% YoY, and gross profit margin was flat YoY (67.8% in Q3 FY 2011 vs. 68.0% in Q3 FY 2010).
Operating profit grew +56.6% YoY to 919.2 million RMB and the operating profit margin was 47.0% vs. 41.9% in Q3 FY 2010.
Net income grew +41.4% YoY to 825.8 million RMB and the net profit margin was 42.2% vs. 41.8% in Q3 FY 2010.
The company reported about 11.6 billion RMB on its balance sheet.
Net revenue grew +32.4% YoY, driven by revenue growth in the Online Game segment. 
Gross profit grew +32.4% YoY and gross profit margin was flat YoY, with improvements in the Wireless and Other segments offsetting gross profit margin declines in the Online Game (70.2% vs. 71.0% in Q2 2010) and Advertising segments (43.9% vs. 43.9% in Q2 2010).
Operating profit increased +29.1% YoY and operating profit margin declined to 45.4% vs. 46.6% in Q2 2010. The decline in profit margin was due to increased selling and marketing expenses (+67.2% YoY) and R&D spending (+36.1% YoY).
Net income grew +59.1% YoY and net profit margin was 43.7% vs 37.1% in Q2 FY 2010. The change in net margin was mostly FX factors (a loss in 2010 vs. a gain in 2011).
The company reported about 11.1 billion RMB on its balance sheet.
Net revenue grew +28.8% YoY to 1.5 billion RMB driven by strong growth in Online Game (+27.7% YoY) and Advertising (+38.5% YoY) segments. 
Gross profit increased +27.5% to 985.0 million RMB, with margin expansion in the Advertising segment (33.4% in Q1 FY 2011 vs. 16.9% in Q1 FY 2010) offsetting wider losses in Wireless and Other segments. Margins in the Online Game segment declined YoY to 79.0% vs. 71.9% in Q1 FY 2010.
Operating profit grew by +24.9% YoY but operating profit margin declined to 46.2% (vs. 47.7% in Q1 FY 2010) mostly due to higher general and administrative and R&D spending.
Net income to common shareholders grew +63.1% YoY due to the FX gains (a non-operating item, vs. FX losses booked in Q1 2010).
The company had about 10.4 billion RMB of cash on its balance sheet at quarter-end.
The company reports performance in three segments (Online Game, Advertising Services, Wireless Value-Added Services and Others), however due to the overwhelming contribution of Online Game to FY 2010 revenue (87%) and gross profit (92%), detailed discussion of other segments is omitted.
The company offers massively multi-player online role playing games (MMORPG) where players compete in virtual worlds with other players or game characters. Typically, players install game software on their computer and then connect with game servers to begin play. Because game software runs on the player's computer but interacts with the game server, hardware on the player's machine and the speed of the network connection can impact game play (a slow connection to the server could result in an untimely demise for a character in the middle of a fight, for example). Players build up experience points as gameplay progresses which enhances the playing experience.
Along with the core game map, existing games can be expanded with expansion packs (new maps or challenges for players). Because expansion packs are built on the existing game software, they can be relatively lower cost to develop than new game releases, therefore extending the playing time for existing players and also potentially drawing in new players.
The company develops its own games in-house and licenses games from other companies. Notable titles that the company had licensed (as of 2010) included Blizzard's World of Warcraft and Starcraft games.
Games are monetized in two ways: either the player pays for a period of play (a monthly subscription, for example) or on a per-item basis (a player buys accessories for the in-game character). The monthly fee for Westward Journey, Westward Journey Online II, Datang, and Westward Journey Online III was 0.6 RMB per month as of FY 2010. Most of the company's games use the time-based model, however the company has said that the item-based model would be used more in the future.
To pay for games, players purchase point cards either directly from NetEase or through distributors (who sell the cards in Internet cafes, etc.). Distributors purchase the point cards from NetEase at a discount and then re-sell the cards at face value to players. The distributors purchase price discount had historically been about 11-14%, but the company reduced the discounts to 6-12% in March 2009 (specific discounts are determined on total volume and other factors). The company reported 2,900 distributors as of FY 2010. Discounts for the company's Blizzard-licensed games were about 9-12% in FY 2010. 
As of 2010, games developed by the company included:
|Title||Revenue Model||Original Release||Latest Expansion Pack|
|Westward Journey Online II||Time-based||August 2002||June 2011|
|Fantasy Westward Journey||Time-based||December 2004||January 2011|
|Datang||Time-based||July 2006||April 2011|
|Tianxia II||Item-based||June 2008||April 2010|
|Legend of Westward Journey||Item-based||September 2008||November 2010|
|New Fly For Fun||Item-based||October 2008||January 2011|
|Heroes of Tang Dynasty||Item-based||April 2010||June 2011|
|Westward Journey:Genesis||Item-based||April 2010||March 2011|
|Source: NetEase 2010 20-F|
The company commented that the Online Game segment was seasonally busy during holiday periods like the Chinese New Year (Q1) and other vacation periods (summer vacation, for example).
The company reported a server farm of about 23,500 machines powering its online games as of FY 2010.
The absolute size of the online game market has been growing, although the YoY growth rate has been declining. A CNNIC survey in 2011 suggested that the slowing growth rate in the online game market was a result of the maturity of the industry (the early exponential growth period was over) and a lack of compelling content from game providers.
According to the company, player preferences are shifting from games using 2D technology to those using 3D. Shifting player preferences could present a difficult problem for NetEase and its competitors: investing in R&D to develop new games (or paying licensing fees) while trying to maintain competitive positioning with existing 2D games.
Game development can be a long process from initial concept to public beta testing (and eventual launch), making the entire process labor (R&D) intensive. One possible solution to internally developing games is in-licensing games from other game companies (NetEase used this approach when it licensed World of Warcraft and Starcraft from Activision Blizzard).