Why the World of Warcraft Doomsayers Are Wrong

Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Activision Blizzard (NASDAQ: ATVI) announced in late July that its flagship MMO, World of Warcraft, had dropped another 600,000 players, bringing its current player base to 7.7 million. 

To be fair, many industry watchers have been saying for months that World of Warcraft's subscription model is not sustainable in the new era of free-to-play games, and that the company is going to continue to experience a sharp decline in revenue as WoW ages.

So when Activision announced the drop in its second-quarter results, it really just brought on more of the same tongue-clucking. But what a lot of the forum trolls didn't seem to notice as they prepared Blizzard's tombstone is that the company has already begun a shift in its business model. Blizzard is already well on its way to ensuring that World of Warcraft continues padding revenue to Activision's bottom line for many years to come, potentially with or without subscribers.

A toe in the water

What some of World of Warcraft's detractors have failed to realize as they extol the virtues of the free-to-play business model is that Blizzard has been laying the groundwork of a free-to-play game in World of Warcraft for years.

The company first waded into the micro-transaction pool in late 2009 with the launch of a store that offered World of Warcraft in-game pets for real world cash. The concept soon expanded and the store now has 21 different in-game pets, mounts, and decorative gear for sale.

Blizzard has a long history of rolling out major changes to its game in baby steps over time. When the company decided that it wanted to make raiding, one of Warcraft's end game activities more accessible, it didn't just do it all in one fell swoop. The game went from difficult 40 man raids in the original release to mostly 25 man raids and couple of 10 mans in the first expansion pack. In Wrath of the Lich King, a 10-man version was created for every raid. Finally, the end of Cataclysm saw the introduction of the Raid Finder tool, a version of 25 man raids that was designed to be beaten in one night so that all players could finally see the content.

World of Warcraft isn't going to go free-to-play tomorrow, Blizzard has said as much. But there's no doubt looking at the company's history that it had started positioning itself for that possibility quite some time ago.


It should be no surprise then that as Blizzard has bled WoW subscribers over the last couple of years, the company has just recently taken the next logical step towards a free to play model.

The company is building an in-game micro-transaction store that will allow players to buy the pets, mounts, and vanity gear mentioned earlier without actually having to leave the game.

But this new tool that may at first glance be viewed as a way to offer an extra convenience to players could also be a bit of a Trojan horse.

At the bottom of Blizzard's announcement was the information that this new in-game store will also offer two never before seen items: a potion that increases a player's leveling speed by buffing their experience points per kill and an item called Lesser Charms of Good Fortune, which can be converted to get extra opportunities at new gear from raids.

As Blizzard knew these items, especially the charms, might be controversial on its Western servers, the company is testing these items out in just its Asian regions first. Again, Blizzard is preparing players for major change by slowly introducing them to a new idea, one step at a time.

Assuming these items make it over to North American servers at some point, the last chains of the subscription model will be broken. Sure, Blizzard is likely to keep charging a subscription for some time to come.

But if players become used to buying those lesser charms for more chances at getting gear, which is essentially one of the main draws of the end game, the final transition to free-to-play won't seem nearly as drastic.

One transaction at a time

But if Blizzard does go free-to-play, you say, it won't make nearly as much money as it does from all of those subscriptions.

Not so fast.

The MMO market is filled with success stories of companies who have done exactly what Blizzard seems to be positioning to do within the next few years.

Perhaps the most well-known story is that of Electronic Arts(NASDAQ: EA) Star Wars: The Old Republic, a game that was once seen as WoW's biggest potential rival.

The game released in late 2011 to critical acclaim and saw 1 million new players sign up in its first three days, using a monthly subscription model similar to World of Warcraft. But, as players gobbled up the game's max level content faster than the developers could release more, players became bored and the subscriptions suffered a steep and continuous drop

EA announced the game would be moving to a free-to-play model that would make money through an optional subscription and micro-transactions. Most gamers and industry analysts were ready to add the game to the large pile of other MMO failures.

But then, the empire struck back.

The Old Republic saw an immediate surge that more than doubled its monthly revenue thanks to the switch. EA found that plenty of players who had unsubscribed re-installed the game once the cost of admission was eliminated.

Sony's (NYSE: SNE) Everquest titles experienced a similar story a year earlier when both Everquest and Everquest II moved to a freemium model, similar to The Old Republic. Everquest II saw a 200% increase of in game item sales in the months after the switch, and the original Everquest, the game that heavily influenced WoW's early developers, saw a 125% sales jump.

Yes, it's true that neither The Old Republic or Everquest ever had the amount of revenue from subscribers boasted by World of Warcraft, which had 12 million subs in 2010, so perhaps it's been easier for those games to post a big comeback. 

But stop to think about just how many people have ever played World of Warcraft over the last nine years. Twelve million was the high subscription point, but players have constantly unsubscribed and been replaced with new blood over the years. Blizzard has never released the total number of unique users to ever log in to the game, but it's safe to say that number is far north of 12 million. 

Check the comments on any WoW fan site or the game's Facebook page and you'll quickly see that there's a large community of players who may not subscribe any longer, but still actively follow happenings in the game. The eventual introduction of a free-to-play business model could re-invigorate the WoW subscriber base and send plenty of former players back home to Azeroth. Given the success of past games like The Old Republic making the switch, it's not unreasonable to conclude that WoW could experience the same level of success, but on a much larger scale.

For now, Blizzard seems to be content to see where its subscription model goes from here. But if World of Warcraft one day starts bringing in plenty of revenue for Activision Blizzard using a free-to-play model, don't be surprised. The truth is that Blizzard has been planning for such a day all along.

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Jason Gallagher has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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