Thursday, August 4, 2011

How's Blizzard Doing At the Bank?

Pork bellies and Activision Blizzard are on the rise
Activision Blizzard held it's 2nd Quarter earnings call the other day and announced that they lost another 300,000 subscribers between April and June of this year. Add that to the 600,000 lost in the first quarter, and that's around a 7% subscriber loss this year.

Before continuing forth, we should review Blizzard's Parent Company structure, just so that the rest of this article maintains context.  The company that makes and develops WoW is called "Blizzard Entertainment."  The company that publishes WoW is called Activision Blizzard. The company that owns Activision Blizzard is a French super-conglomerate called Vivendi. Vivendi is traded on one public stock exchange or another.

Is Blizzard in trouble?  Emphatically: No.

At the same time subscribers are down, the revenues from "properties such as WoW" hit a new record, showing a 27% increase from the same quarter a year ago.  Opening up Cataclysm in China this year has certainly been a part of that growth. Next quarter, we can look forward to hearing about WoW's recent expansion into Portuguese in Brazil has upped the bottom line as well.

On the earnings call, they said that there has also been a significant increase in the number of new accounts formed, which is attributed to the success of the new trial system.  I'm dubious about this however, and even Mike Morhaime says that it's "still to early to tell" how often these new players become new subscribers. I still want to hear how Blizzard separates real "new players" from gold sellers banging up new accounts so they can hack us.  I feel like this number of "new players" must be inflated that way.

A friend of mine was reading about trouble with Vivendi stock recently and suggested that subscription rates for WoW would probably rise to fend off earnings losses. But that will not happen. Vivendi's "role" as such in the life of WoW is to help it become more global. In that regard, Vivendi's market plan, hitting more and more countries is pretty excitingly successful.  If Vivendi is hemorrhaging money, they are going to have to look at subsidiaries like the Universal Music Group to staunch the flow. (And seriously, if there is any company that is in big big trouble, it would be a record company.)

But seriously, They cannot raise subscription prices for WoW. Although we still love it, it is a seven year old game. You cannot start charging more for a game that far along in the development cycle. You just can't. The press would explode with negative press and a certain, not-insignificant number of players would leave Blizzard and WoW in anger. And they won't come back either. 

If you look at Blizzard business practice, one has to remember that right now, Blizzard is the single most successful game company in the world. By a long ways too. They are bringing in licensing monies no other game company can aspire to. They can re-color a companion pet in WoW and spit up almost seven million in sales for that through the Blizzard Pet Store.  Earlier this week, they showed off the new Diablo Auction House, which will use real money (as opposed to fake gold) and Blizzard will be earning a micro-transaction percentage off every time somebody puts down money on something there.

But more than anything, Blizzard is outrageously successful at the very simplest business model undertaken by game companies:  They pour resources into developing a new game, and then they put that game in a box that sits out on the shelf of the Electronic Boutique, and people buy it.  At first, sales are very brisk, but they gradually taper down and down, and then they reprice the box and get a little swell out of it, and eventually, the game leaves shelves and its product life is effectively over. 

You know what's going to be the highest-earning game of the year (assuming they do manage to get it out by Christmas, and if not, the game of next year)? Diablo III. You know why EVERY game analyst in the world says this? Because Blizzard has such a good reputation for producing high-quality game entertainment and because everybody knows that as soon as Diablo III becomes available, you, me and everyone we know is going to charge straight out and buy that sucker. And lots of people we don't know will buy it too. 

This is what Blizzard does and they are the most successful game company in the world at doing it.

The MMO business plan... that's a harder monster to understand, especially since we are watching the rules of that market fall into place still. But Blizzard has outperformed any reasonable expectations one could have for that a long time ago. From the first quarter that it launched, WoW beat any estimate for subscriber numbers that could be set for it. When we say that WoW is the largest MMO in the world, we mean that it's more than 10 times bigger than it's nearest competition. MMOs are designed to be around for a long time as well, but WoW has outlasted most of its competition as well.

Activision Blizzard, the publisher knows enough to leave 'em alone. If Vivendi needs to shore up their bottom line, they know better than to tinker around with a component in their portfolio that is running just fine. 


  1. Ok, some quick mathematics.

    Assume WOW has 12 million subscribers, to make it easy.

    Current: 12 million X $15 per month = $180 million per month in revenue

    Possible: 12 million X $18 per month = $216 million per month in revenue.

    A simple price rise of $3 per month, a seemingly small rise, provides Blizzard with an immediate boost of $36 million per month or $492 million per annum.

    Remember, Blizzard will not have to increase "costs" at all to enjoy an increase in revenue of 20%.

    Consequently, all of this revenue will drop to the bottom line as profit.

    Remember, all of Blizzards profits are attributed to Vivendi, as the parent company.

    If WOW were to suffer a drop of 5% of subscribers, Vivendi is still way ahead. 10%, still ahead.

    I personally can see a rise in the subscriber price soon-ish.


  2. Nope. There will be no price increases.

    Bad Press would outweigh the 10% in your model, which is overlooking a few revenue sources.
    t does not compute cost for future expansion upgrades that a 15% loss of subscriptions will no longer buy. Blizzard NEEDS WoW to remain the most popular MMO in the world. Scare off 15% of your subscribers and that will be 15% fewer box sales when the next expansion comes out: roughly $100 million or each expansion that alienated subscribers are not going to buy.

    And how is that going to get reported you think? The mainstream press bonks Blizzard for what amounts to about a 7% subscriber loss this year. Expect a crucifixion if they lose any amount of subscribers because they made the illogical mistake of trying to charge for a game that is technologically an antique.

    And then, look at the potential for micro-transactions. This is the main reason that Blizzard is introducing the real-money auction house to They are going to reap a fortune from that. But not if they don't maintain their player base at an acceptable level.

    Also, let me bring you this nugget from the merger agreement in 2007 to put these Vivendi concerns to rest:

    "World Of Warcraft creator Blizzard Entertainment has been designated a stand-alone division reporting to VU Games' CEO, and is not part of Tremblay's [Martin Tremblay, COO of Vivendi Games] product development mandate."

    Translation: Blizzard turns over a dividends check but does not suffer input from Vivendi overseers.

    Gamasutra says this, talking about 2007 financial numbers:

    "And there's a reason why Blizzard have been and are left well alone - the clout that comes with this mindblowing statistic: "Blizzard Entertainment [which has "over 9.3 million subscribers" to World Of Warcraft] has projected calendar 2007 revenues of $1.1 billion, operating margins of over 40% and approximately $520 million of operating profit."

    Come to think of it, if they were working a $520 million profit in 2007 (real numbers), your projection that they could get $492 million with a $3 cost increase just can't be accurate. At all. I'm not enough of an accountant to understand why though. :(

  3. The GAAP revenue for WoW is up from a year ago, but that's because the GAAP revenue includes deferred box sales revenue from Q1 2011 and Q4 2010.

    The non-GAAP revenue, which does not defer such sources, is actually down slightly from Q2 2010.