What do corporate goals mean for WoW?

We recently got the public Q4 2017 report from Activision Blizzard (ATVI), along with the investors’ conference call transcript. The actual report, unless you are a real accounting geek or investor, is pretty dry reading (okay, it is dead boring), but the conference call is often interesting because you can get some excellent ideas of priorities for ATVI and then use some deductive reasoning to gather pretty decent insights into what is going on in WoW and more importantly what the future may hold for the game.

Usually the main content of the conference call is the various CEO’s and financial execs touting how great they did and what they are “excited about” for the immediate future, followed by a couple of questions from the investors. The Q4 2017 transcript went a bit lighter on the canned presentations and included a few more investor questions. Here are some notable quotes from the transcript (lightly edited for clarity), along with my observations:

Bobby Kotick (ATVI CEO): Blizzard delivered their highest operating income ever for year with no major game releases.

Spencer Neumann (ATVI CFO): Blizzard also delivered a $2.1 billion of revenue and $712 million of operating income. Blizzard generated record results for the year with no major game release, fueled by a steady stream of content and events across their franchises, in particular Overwatch, Hearthstone and World of Warcraft. Revenue, operating income and segment operating income margin were down year-over-year as expected given the difficult comps to last year’s World of Warcraft expansion and Overwatch release. We did see some incremental margin compression in Q4, primarily due to additional marketing initiatives. Nonetheless, with 33% full-year OI margins, the team did a nice job delivering the core business while investing in key growth initiatives across the Overwatch League, mobile incubation and MLG network.

What we see here is the CFO doing a bit of reality-speak to amplify the CEO’s comment. Kotick said that Blizz is doing fine, considering that there were no major new releases in 2017. Neumann basically went on to say Blizz actually did worse in 2017 than they had in 2016, but there are reasons for it. Plus, Blizz is still making a profit.

What can we take from this? My opinion, only, of course, but Blizz is still hampered by the cyclical nature of its games. Without major new releases in its franchises, it struggles to compete financially with other elements of ATVI. Pushing constant new “content” (like we have seen in Legion) helps in the off years, but it cannot begin to match the revenue generated by new releases.

This in no way means Blizz is going away, nor does it portend the imminent demise of WoW, but one thing it means is we can expect to see a continuation of what many of us perceive as “enforced grinding” in expansions from now on.

There’s also this —

Amrita Ahuja (ATVI Senior Vice President of Investor Relations): Starting this quarter, we are introducing a new operating metric, net bookings. Net bookings is defined as the net amount of products and services sold digitally or sold-in physically in the period and is equal to revenues plus the impacts from deferrals.

Cut out the accounting babble, and we see that Blizz will now have a separate quarterly reporting category called “net bookings”, where they will be accountable for “goods and services” they sell. They have always been accountable for this, of course, but the numbers were all kind of rolled up into other reporting vehicles. Now, though, it will be a big glaring number that can be held up in direct comparison to other corporate entities like King.

Remember the turn WoW took when ATVI imposed the “Monthly Active User” reporting metric? The game started a long slide into “enforced grinding” — everything became RNG to encourage the “just one more nickel” Las Vegas gambler approach to gear, Legion brought us artifact weapons and the never-ending chase for AP, professions became months-long slogs to max out, leveling new characters became longer by about 33%, and so forth. Again just my opinion, but the introduction of MAU as a reportable metric was a significant factor in bringing the game emphasis redirection we saw in Legion.

So how might the introduction of “net bookings” change the game? Certainly there are some obvious possibilities, like pushing Blizz store sales (can you say, “Purchased character boost”?) and Blizzcon virtual tickets. There are also some less direct avenues, such as really hyping spectator participation for M+ dungeon competitions — so far, this is “free”, but of course everyone is subjected to advertising, which in turn inevitably results in revenue in one way or another. Not to mention, how long these events will remain free probably depends on how popular they become.

But there was another somewhat ominous thread during the conference call.

Spencer Neumann (ATVI CFO): We expect in-game revenues to be a primary driver of our growth for both the top and bottom line. Coming off a record year in 2017, we expect in-game net bookings to grow by a double-digit percentage in 2018 as we continue to innovate and deliver more engaging content to our players.

We expect Blizzard to grow year-over-year with the release of World of Warcraft’s Battle for Azeroth this summer. I am glad to say the presales for Azeroth kicked off last week and are off to an encouraging start. In addition, Blizzard has exciting plans for live ops and additional in-game content across franchises, including Hearthstone’s three expansions in 2018 and Overwatch’s in-game events.

At this point, I am likely veering into some tinfoil hat theories, but here’s a trend I am seeing:

  • Just before Legion went live, ATVI imposed the MAU metric on all its companies, including even the subscription services like WoW. This never made sense to me, since if players are sending the company a set number of $$ every month, who cares how many hours they play, or indeed if they don’t play at all?
  • Now that there are established MAU baselines for all ATVI games (including WoW), there is a corporate push to maximize “in-game” sales and services. Presumably, this push came about because of some math projecting new revenue from expected average active player response in that area. And the first part of the above quote tells me that ATVI is really going to lean on their companies to meet their expected “in-game net bookings” goal for 2018.
  • Blizz has thus far done a good job of keeping extraneous commercialization out of WoW. They have prided themselves on their principle that the game is a not “pay to play” genre, and they deserve credit for that. But I am wondering if they will be able to hold the line in the face of what is clearly a corporate push to sell sell sell? Will we see things like in-game advertising? Rare in-game mounts that players have been grinding for years for sale in the store? Special-skinned hunter pets for sale?

There might be zero WoW fallout from the push for in-game revenues, but I am going to remain watchful on this one.

Last, a couple of  miscellaneous interesting quotes (emphasis mine):

Blizzard finished the year with 40 million monthly active users, continuing a sixth quarter streak of 40 million monthly active users or more.

I am not sure I have had a baseline number like this for Blizz before — it would be nice to know what that number is specifically for WoW. (Also, if the MAU had dropped to 1 million, would we have had a comment like “Blizzard finished the year with 1 million monthly active users, continuing a sixth quarter streak of 1 million monthly active users or more”?)

Hearthstone’s monthly active users increased year-over-year this quarter as players enjoyed the latest expansion, Kobolds and Catacombs and the introduction of new free content. While net bookings did not match the prior expansion’s record performance, players did log more play time, which brings me to our second strategic pillar, deepening the engagement. For Activision Blizzard and King overall, daily time spent per user was over 50 minutes for the second quarter in a row, placing us on par with Facebook’s time per day across Facebook, Instagram and Messenger. Now, that 50 minutes per day is just the time spent in our games; it does not include the growing popularity of watching our games on other online platforms.

Some day we will look back at Legion as the good old days, when “enforced grinding” was just getting started…

Blizzard will also start to see the benefit of its investment initiatives, as we expect the Overwatch League to be profitable in 2018, its first full year of operations.

I don’t play Overwatch, but I guess all of Blizz’s hype on it as such a major franchise led me to believe it must be a money-maker for them. Apparently not yet.

And, though I am not going to go into this in detail, the conference call really hyped ATVI’s “all in” stance on esports. There is no doubt they see esports as one day rather soon being as big and as all-encompassing as the NFL or any of the top soccer leagues, with screaming fans and godlike heroes and everything else that goes along with it.

And with all that, my head hurts. I believe a weekend is in order. See you on the other side.

Is Legion the final make-or-break for WoW?

While I was on my short hiatus I played quite a bit of WoW and also read a lot of blogs and online articles I usually don’t have time for. There included some scholarly research on various aspects of gaming (yes, indeed there is such research) as well as some economic outlook stuff for the gaming industry in general and Activision Blizzard (ATVI) in particular. I enjoy reading that stuff, but it is sometimes very hard to plow through — not exactly good bedtime reading unless you are using it in place of sleep medication.

At any rate, when I read it these articles, I  try to absorb the ideas, then apply some deductive analysis to see if I can trace them down to things I see happening with the game. Sometimes this gives me a lot of insight, and other times honestly it just leads me down a road of poo. I leave it to you to decide which is happening with today’s post!

With that intro, on to today’s subject: The economic outlook for ATVI and most especially for World of Warcraft. 

First, let me say that this is in no way intended to be a woe-is-us-the-end-of-WoW-is-nigh piece. Those kinds of dire predictions have been around for a few years now — they have become a standing joke in the community. More, this is intended to describe a few business realities that may have a hand in determining WoW’s future and then extrapolating from those to come to some notion of really where the game is in its lifespan.

Most economic analysts I have read recently still are optimistic about ATVI. But in contrast to the universally-exuberant recommendations on it from a year or two ago, now a few analysts are advising caution buying ATVI stock. Again, they are only a few and there is a good chance they are outliers, so they do not represent the group thinking in any way. But the interesting thing is that these analysts, in looking at ATVI prospects as a whole, point to some problems with stock market “tricks of the trade” as well as with “aging franchises” such as Call of Duty and WoW.

One analyst says it is time to short the stock. (Check out the Wikipedia link if you are not familiar with the term “short”.) His reasoning is summarized as:

Activision Blizzard (NASDAQ:ATVI) has produced some of the most successful gaming franchises of all time, including the World of Warcraft and the Call of Duty series. While many of its video game creations have been unique and innovative, the stock has far outran [sic] the fundamentals of the company. While the company has seen no real sales growth in the last five years, the stock has nearly quadrupled …

With price far outpacing fundamentals, along with flat sales due to aging game series, the opportunity has come to short Activision.

The analyst goes on to say that much of the rise in the company’s stock over the past few years has been artificial, due in no small part to ATVI buying back large portions of its stock, in effect reducing the supply in order to increase the demand and this the price. This practice is noted as a huge drawback by another analyst, who actually is of the doom-and-gloom mindset on ATVI.

The meteoric growth of this stock from 2013 to the present is solely due to share buybacks. Hilariously, this was the same time the company’s revenue and net income started to decline. Retail investors who thought they were investing in a growing and dynamic gaming company have been completely hoodwinked!

The story gets worse. As ATVI expands its share buyback programs, it expands its liabilities to finance the purchases. While this is fine so long as interest rates are near zero, as soon as rates rise this is a recipe for disaster for the company.

A third analyst advises holding ATVI stock pending the success or failure of new releases this year. The new releases must all be at least average, indicating if one is a disaster, it will be a very significant setback for the company. (My take: In other words, ATVI and Blizzard in particular cannot afford another Warlords of Draenor.)

This is a company that heavily relies on establishing immersive franchises which tend to grow and retain its consumer base. This is evidenced by the cyclical releases of new content for old franchises – a new Call of Duty game released each and every year, for instance. These established franchises are extremely material to the financial well being of the company – the Call of Duty, World of Warcraft, Skylanders and Destiny franchises accounted for 71% of consolidated net revenues in FY15. As these franchises become more and more dated, I would speculate that they will start seeing stagnant sales growth. Although Call of Duty sales have remained strong, we have seen an ongoing decline in World of Warcraft subscribers ever since the peak near 12.5 million in 2010 (to below 8 million subscribers in this past year).

This type of business atmosphere puts pressure on Activision Blizzard to replace dying – or at least declining – franchises with new ones in order to replace lost sales and develop future growth prospects.

Last in my list of economic “pessimists” is the analyst who is very high on Blizz’s new money-making strategy for Hearthstone. If you read the article, you will see the analyst is actually very positive on Hearthstone as a growing market for ATVI, but I call it a pessimistic outlook because clearly the company is moving away from the single-platform MMO model and putting a lot of resources into developing mobile and multi-platform games which are NOT WoW. This is not exactly news, but it is confirmation of what they have been saying now for a couple of years.

So now on to my deductive insight/road of poo/wacko theories.

I think there is no doubt whatsoever that WoW is approaching the end of its useful life. It remains to be seen how long it can exist on life support — it may be a matter of months™ or it may be years yet. And it may yet rally before its final gasp.

We have some indications that Blizz understands how important it is that Legion be well received by their remaining — and hopefully new and returning as a result of the movie — players. They have shown a willingness not only to listen to player feedback on Legion changes, even after implementation in the alpha test, but also to reverse themselves in the face of strong negative feedback. This is something they seemed never to consider during the testing of WoD.

Examples that immediately come to mind are:

  • The water strider flap.
  • For BM hunters, there now will be an alternative focus generation option to balance the much-maligned constant use of Dire Beast. And Stampede pets will be from a hunter’s stable, not some random collection of beasts.
  • After a huge outcry, Marks hunters will not be an enforced petless spec.
  • Blizz devs have gone to some length to try and allay player fears that the mission table in Legion does not/not signify a return to the hated mission/garrison aspects of WoD.

There are almost certainly more examples of reversing themselves on changes to other classes and specs, I just don’t follow them as closely as I do hunters. Although I still think it was a major mistake to completely remake every class and spec in Legion (it remains to be seen if it will turn out to have been a fatal mistake), there is no denying that Blizz has seemed more willing to back off of some very controversial design decisions this time, in stark contrast to their attitude during WoD testing.

We also saw another interesting development last week: Official recognition that there is a significant desire among some players to have a “vanilla” experience. Blizz explaining themselves like this was certainly unusual, but even more interesting is that within the explanation was an admission that Blizz is not in principle opposed to providing such an experience, but that the technical challenges are just too overwhelming, and possibly insurmountable.

Thus my latest wacko prediction:

If the movie combined with Legion fails to significantly increase WoW subscriptions, it will be the last expansion in the game. And if WoW folds after Legion, look for it to be licensed to private servers, for example Nostalrius.

Such an action would serve to blunt what would certainly be anguished cries of company betrayal from whatever game fans remain, and it might also stave off an echo drop-off of players for ATVI’s other games (on the grounds that “You can’t trust this company.”) Last but not least, it could be a way to continue deriving revenue from WoW, with little or no continuing maintenance and development costs. If a deal were properly structured, not only would Blizz keep getting the licensing payments from Nostalrius and similar franchisees, but they could conceivably keep selling WoW items in the Blizz store, possibly derive some fees from any WoW eSports endeavors, etc. For Blizz, WoW could become the zombie franchise that just keeps on giving.

You heard it here.