Tobold's Blog
Thursday, December 06, 2007
 
WoW makes $520 million of profit a year

Businessweek has an article about the Activision Blizzard merger, and among the financial results that had to be revealed for that merger is the nugget that World of Warcraft is projected to make a profit of $520 million on revenues of $1.1 billion. Given how the development cost for World of Warcraft was estimated to have been less than $50 million, making over 10 times your investment per year in profit is really outstanding. No wonder everybody wants a piece of that pie.

On the other hand careful observers will have noted the disparity between the reported 9.3 million users and the $1.1 billion of revenues. World of Warcraft is still one of the best-selling video games every month, and they sold millions of copies of Burning Crusade for $40 each this year, so a good part of those revenues comes from box sales. Thus Blizzard makes less than $100 per subscriber per year. A US subscriber pays between $156 and $180 per year. To bring the average down to $100, there must be a lot of Chinese subscribers all bringing in a lot less than $100 per year to Blizzard. If we assume 4 million US / Euro players each paying $160 a year ($640 million total), and $300 million is box sales of TBC and WoW in 2007, that leaves us only $160 million revenue for the remaining 5.3 million Chinese players, each paying $30 per year. If we believe the Chinese to bring in more than $30 per year revenue, we'd have to revise our estimates on the number of US / Euro players downwards. Which would be my best guess, albeit only based on anecdotal evidence of reported problems with underpopulated servers.

Furthermore the recent growth in China can be explained by the fact that they got the expansion only in September. It is reasonable to assume that in China the player numbers will decrease as well a few months after the TBC release, just like they did over here. The financial result of World of Warcraft in 2008 will depend very much on when that expansion comes out in the different regions, and whether they can again get such a huge wave of resubscriptions for the second expansion as they got for the first. I'd say Vivendi picked a good time for their merger, it is totally possible that next years profit numbers will be lower. Which is still a ton of money, but financial analysts don't like decreasing profits.
Comments:
I went to the Vivendi website to see the merger presentation so I saw where you got the numbers (it takes an incredibly long time to load the pdf, unfortunately). I noted that besides Blizzard, they also own Sierra, which appears to be losing them $150M per year ($450M from Blizzard as a whole less $150M from Sierra equals approx $300M from the group). It's amazing how much this business can be either feast or famine. I'm not going to bash Sierra, I even somewhat fuzzily recall playing some of their titles in the past (No One Lives Forever??).
 
I'm pretty sure WoW was developed on a budget of around 80 million, not 50; however, that hardly makes a difference in their case.
 
It does beg the question of why they're not putting more of that money back into maintenance and development of their cash cow. People have always complained about the money mmorpgs rake in with subscriptions and fanboys have always defended their favorite game with the argument that gross income does not equal profit. With the numbers released we can see that Blizzard's profit margin is obscene.

Their is no excuse for server outages during prime playing hours (has happened twice in the past week for me), broken login servers, broken authentication servers, 3-6 months between content patches, 1 1/2 - 2 years between expansions, underpaid understaffed GMs and customer service, etc.

Blizzard has no excuse, and my alread dubious perception of them as a company has gone down even further. Clearly they are solely interested in milking as much money from the customer as possible, and that makes them no better than the soulless execs of EA.
 
"A US subscriber pays between $156 and $180 per year"

This figure does not include the free months that players get for recruiting a friend. Albeit, i have only applied this twice to my account, it still may make a difference in your calculations.
 
[...Blizzard has no excuse, and my alread dubious perception of them as a company has gone down even further. Clearly they are solely interested in milking as much money from the customer as possible, and that makes them no better than the soulless execs of EA....]

You, my friend, are really naive about the true meaning of Capitalism, and the foundation of the American Corporation.

By all buisiness views, every company in the world is guilty of the 'flaws' that you assign to Blizzard. They look at the bare minimum expense that they need to lay out to reap maximum return. Thats just smart business.
 
Graktar -
Yes, outages can be a pain, and I grumble as much as the next person when I can't get my fix or have to wait until the next evening to log in, but I think Blizz needs a little leeway here.

The game is MASSIVE. Millions of players are populating dozens of servers across different continents. GMs and devs are juggling tech questions regarding innumerable operating systems and system specs. In the United States, we pay 40-60 cents per day for this service after the basic price box price. That's a helluva lot less than a monthly cable bill or an overpriced night at the movies. And this is for a game we can play ANY TIME WE WANT, barring any technical difficulties, which, surprisingly are pretty rare.

And without getting into the minutae of players' disagreements over design decisions, so much of the game DOES work perfectly well for the majority of the player base.

So while I must admit that from time to time, stuff doesn't work when I want or need it to, more often than not it does work.

And I'm fine with the time they take in releasing content because I know that they're largely concerned with getting it right than getting it out on time.
 
Ummm... this is accounting profits, not economic profits, so it takes into account almost none of the tangible things that Blizzard could be spending the profit on. I would be a lot more interested to see how much of that actually goes into their cash reserves.
 
Your calculations about subscribers are pretty inaccurate but I think it's because you don't understand the system in China. Chinese players don't pay a monthly subscription fee. Instead, they buy a pay-to-play card that they add minutes to, and they only play for the time they play. It's because they can't afford to just have a blanket monthly subscription.
 
Teni: chinese players pay on average 3 cents per hour. Tobold's numbers are a bit low for chinese players, but given the numbers posted and the9's quarterly earnings, some back-of-the-napkin calculations posted that each chinese "subscriber" pays approximately $3 a month.

There was an article here that suggests WoW's churn rate to be around 4-5% a month (which is pretty low given the market). However, since they have so many people, 4-5% monthly is actually a fairly significant number if they are losing from the heavy payers and making it up with the lesser-paying Asian subscribers. However, that same analyst suggests that the attach rate is in the "low teens" for monthly fees per user. That's something I'm not sure I'd be able to agree with, since the minimal teens for each user would indicate $1.45 billion (9.3M x 13) in revenue from subscriptions alone, which is obviously more than their posted revenues. You can read the article yourself here:

http://www.gamasutra.com/php-bin/news_index.php?story=16519

--Rawr
 
Heartless,

I don't follow your train of thought. Why would a company keep its profits as cash instead of reinvesting it as new capital?
 
Where do you jokers get the dev costs for WoW in the first place. It's never been released and the numbers you are making up -what does that account for? The servers at launch? Advertising? What the actual developers were paid? The bandwidth?

Where are the facts?
 
Where do you jokers get the dev costs for WoW in the first place. It's never been released and the numbers you are making up -what does that account for? The servers at launch? Advertising? What the actual developers were paid? The bandwidth?

Where are the facts?


Just because you are ignorant of the facts doesn't mean that they don't exist and I made them up. The dev costs of a Blizzard MMORPG are on file with the SEC here.

Development cost does include some hardware investment, although you can write down server cost over time as well and count part of it as operational cost (the difference between revenue and profit). Pre-game advertising certainly was part of that cost too. But the biggest part of the developmental cost is paying the devs for several years from the first design to the day the game launches. Bandwith is operational cost.
 
No where in that link does it say how much World of Warcraft cost to develop.

Are you referring to this graph?

http://www.sec.gov/Archives/edgar/data/1127055/000095012306007628/y22210y22210z0008.gif
 
Yes, unless you suggest that Blizzard stating that a new MMORPG would cost "over $50 MM" is in no way related to them having spent up to $50 MM on WoW and expect the next one to be slightly more expensive. It's a SEC filing after all, they can't just put random numbers in there that have nothing to do with previous development cost.
 
[By all buisiness views, every company in the world is guilty of the 'flaws' that you assign to Blizzard. They look at the bare minimum expense that they need to lay out to reap maximum return. Thats just smart business.]

Actually, no, what Blizzard is doing is not good sense from a corporate view. A good capitalist corporation takes its profits and reinvests them in itself to make itself bigger, better, and more powerful. This is why companies that don't pay dividends historically perform better than those that do. Blizzard should be investing their vast profits in better server technology, more support staff, and more development personnel. If blizzard was able to develop one expansion a year they would do a better job of retaining their current customer base, add new customers, and increase revenue from box sales. A proper level of customer support would improve their corporate reputation and cement their position as the #1 MMORPG development company. Toyota doesn't do as well as it does because its vehicles are vastly superior to U.S. vehicles. It does so well because they're slightly better but the company has a much better reputation. Microsoft didn't get to where they are today by developing one product and then putting the bare minimum of effort into developing it from then on. Companies that aggressively develop and promote new product are the ones that thrive, not the ones that pinch pennies and short change their customers.

Refusal to reinvest your profits in your business leads to stagnation and the eventual decline of the very revenue stream that created the profits in the first place. Your 'naive' view of economics might work if you're running a corner shop, but it won't get a major company very far.
 
Two nuggest to look for in future SEC filings are churn and subscriber acquisition cost Tobold. I think you'd get a lot of the information you're looking for out of these. Most subscription based companies report these as key metrics in their 10k.

Churn is relative to gaining & losing subscribers and at what pace. Sometimes it's inclusive of the free trial, often after free-trial (first paying). The 10k should define how they do it. The higher the churn - they are losing more than they are gaining, the lower the churn, the opposite.

SAC (Subscriber Acquisition Cost) is typically the marketing divided into the net new paying subscribers. It is correlated strongly with the churn because if they fail to gain new subscribers after a big marketing push the SAC will go way up.

For examples of how these are used just grab any recent NetFlix 10k and see how they use churn and SAC.
 
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