Can ATVI WoW?

By Callum Turcan - August 14, 2012 | Tickers: ATVI, EA, ZNGA | 0 Comments

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Video Games are fun

Activision Blizzards Inc's (NASDAQ: ATVI) stock has taken a bit of a beating this year, even as the S&P 500 rose 11.5% YTD. A lot of this has to do with the amount of World of Warcraft (WoW) users decreasing. Management says this is because of the release of Diablo 3 and because a new expansion hasn't come out in a while. But is history about to play out again?

WoW

Wow indeed, since its 12 million peak in 2010, World of Warcraft has lost 2.9 million subscribers to rest at 9.1 million right now. Management points towards the release of Diablo 3 and the fact that no new expansion has come out for WoW in a while. WoW has been a cash cow for ATVI, as roughly 4.5 million European and North Americans pay $14.99 a month (or a bit cheaper if they pay for several months at a time), which equals out to be ~$67.5 million a month or ~$810 million a year, before operational expenses. Now, most international players pay less than in the established markets; for instance in China WoW subscribers pay by the hour, so it doesn't make ATVI as much money as they would like, but it is a cash cow nonetheless. There are several reasons why the number of WoW subs have gone down over the past three years. Management asserts that the drop in numbers, especially in the recent quarters, is due to the release of Diablo 3 and because an expansion hasn't been released in a while (since December 2010). They say that once gamers finish with Diablo, they will go back to WoW. To back up this claim, they point to the fact that 1.2 million gamers bought a year-long WoW pass and got Diablo 3 for free. They also say that once the new expansion comes out, Mists of Pandaria, then subs will come flocking back in like they have in the past.

Personal Experience

I used to play WoW a while back, so I will offer a little bit of inside insight into the matter. When Wrath of the Lich King came out, it bumped the level cap up to 80 from 70, and created a bunch of new dungeons for the players to try to beat. It was fun leveling up the extra 10 levels, getting new gear, and trying to beat the new dungeons. One area that ATVI did very well in was to create dungeons that were both challenging, fun, and made the game worth playing hours a day. It also created a bunch of new PvP (player versus player) maps for Battleground, so players looking for a more competitive angle were happy. There was also this thing called Wintergrasp, which is a long BG where two small armies would try to either breach a fortress and capture it or defend that fortress for a certain amount of time. This got the players more focused on the game and made it more exciting. In Cataclysm, there wasn't the same amount of new and interesting content for the subscribers. They did try to revamp the old layout and did add two new races, but once you leveled up your guy to 85 (the new cap), then there wasn't much to do. Unlike in Lich King, there wasn't as many dungeons, and the dungeons that were there weren't original or particularly interesting.

This, coupled with other things, is probably why the sub count has been low recently. One great quantitative way to see this is in player reviews. Wrath of the Lich King got a 4.1 out of 5 star review on Amazon.com, with the Collector's Edition at 4.6 out of 5 stars. Cataclysm, on the other hand, only got 3.1 out of 5 stars, and the Collector's Edition got 4.2 out of 5 stars. The Collector's Edition is geared towards the more hardcore gamers, so the "standard" edition gives us a better view of what consumers are thinking. So one thing you should look at to see if WoW will last and how well it will do going forward, are the reviews of Mists of Pandaria and any future expansion pack. After Wrath of the Lich King was released, the number of WoW subs bumped up for a bit, but when Cataclsym was released, that number edged down as the players weren't as satisfied as they were before. These three graphs explain this.

As you can see, during the financial crisis the sub number took a big dip, but leading up to Wrath of the Lich King it bounced back up.

A different look at the first two expansions, both of which were very popular, so the sub count kept on rising. I personally enjoyed both, and The Burning Crusade (TBC) also got great reviews, with consumers on Amazon.com giving it 4.2 out of 5 stars for the "standard" game and 4.3 out of 5 stars on the Battle Chest expansion, which is the normal game combined with the expansion.

Now, as you can see in this graph, Cataclysm failed to raise long term interest in WoW and thus the number of subscriptions started to fall. Also, another thing that is taking away from WoW sub numbers is competition.

EA and the competition

Electronic Arts Inc (NASDAQ: EA) has tried to get into the MMO (Massively Multiplayer Online game) space by releasing their own game, Star Wars: The Old Republic (TOR). TOR is facing some problems, as the number of subs has fallen from 1.8 million down to 1.3 million in a relatively short period of time. While TOR will be a competitor with WoW, it isn't going to downright ruin it for ATVI. It will provide another option for gamers willing to spend a monthly fee, but so far EA is having some trouble getting off of the ground. The bigger problem for WoW is the entire industry as a whole. If more and more companies start making MMO's, then it put a lot more pressure on ATVI to continuously produce a high quality game that justifies a $14.99 a month fee. As far as The Old Republic goes, it will take away some of WoW's subs, but if the expansion gets good reviews and players like it, expect to see a drop in subs for TOR as those who left WoW come back.

On a different side of things, some analysts think that social games, such as the ones produced by Zygna Inc (NASDAQ: ZNGA), are also hurting ATVI, EA, and other game makers by offering a low cost to free alternative. While there could be some truth to this, the simple fact of the matter is that most gamers want to play a real game, not happy-go-lucky Farmville. People don't want to sit down and play Draw Something instead of Call of Duty or WoW or TOR or Halo or any other video game. Social games are not a replacement for video games. While it may marginally hurt ATVI or EA, most of those people who would rather be on Farmville watering their plants and tending to the garden than playing Gears of War 3 or Just Cause probably aren't the core consumers video game companies target or even care about. While I admit this isn't concrete evidence, this is just my opinion, as I am a hardcore gamer, I play with other hardcore gamers, and none of us would rather be on Zygna playing some stupid little game than blowing helicopters out of the sky in Battlefield 3.

What is beyond the Mist

So, for WoW to see its sub count go back above 10 million, it needs a good expansion such as The Burning Crusade or Wrath of the Lich King. If the expansion is as good as either of these, expect good things from this stock. The newest expansion coming out this September 25 is Mists of Pandaria, which will add both a new race and a new class to WoW. One of the interesting things in this expansion is the addition of cross-server zones. One problem WoW is facing is that when 1.1 million subs leave in three months (which is what happened last quarter), a lot of servers can see their "population" drop significantly. It is hard to justify spending all this money on WoW when no one else is ever on. Well, cross-servers helps fix this. This enables players in low-pop servers to go join servers with other people, giving them more incentive to stay on WoW.

Also, it takes a long time to level up your character to 85 and get all the right gear. Many don't want to pay $25 or so to move that character to a different realm. What this does is enables WoW players to play with their friends but not have to pay a large fee to do so. I am very bullish on this new idea and hope it pans out smoothly for ATVI. Another thing they are adding is pet battles, which is like having Pokémon as a mini-game within WoW. This is a good idea as it will add more depth to WoW, and will encourage players to play more to not only duel with their pets, but also to spend large amounts of time "farming" enough gold to buy the "better" pets so they can show up their friends and foes. IGN did a review of the beta of Pandaria, and overall they seemed pretty thrilled about the upcoming expansion.

Final Thoughts

World of Warcraft has been great to Activision Blizzard over the years, and I expect will continue to be so for at least a few more years. It is always hard to keep an old game new and exciting, but as ATVI pushes into emerging markets and revamps WoW with this new expansion, it may have a chance. The bull case for ATVI is that when the expansion comes out, those who left for The Old Republic will come back, those who left for Diablo 3 will come back, and those who used to play but got bored will also come back. The bear case is that the expansion will be a flop like Cataclysm and WoW will continue to hemorrhage subscribers until the game is forced to become a free to play platform. This all hinges largely on how gamers take to the new expansion, which is why I recommend looking not only at professional reviews of the new expansion, but also at consumer reviews, such as on Amazon, but also in blogs and chat forms about WoW. This may not be the classic "look at the numbers approach," but it is nice to think outside of the box once in a while.

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