Friday, September 19, 2008

Blizzard L00t

A recent article in PC Magazine estimated that World of Warcraft brought in revenues of $120 to $135 million per month, compared to cumulative upkeep costs of just $200 million since Nov. 2004. The motivation for that article was a post on Kotaku reporting that during an analysts’ call, Blizzard Entertainment revealed that its cost of upkeep for World of Warcraft was $200 million. Although the exact scope of that amount appears to be vague and poorly defined, the implication was that it covered all ongoing costs (but not development costs) since Warcraft launched. That presumably includes hardware infrastructure (servers), marketing, customer service, and other expenses. The PC Magazine article based its $135 million estimate on the latest Warcraft subscriber count of 10 million as of January 2008.

World of Warcraft is unequivocally a highly profitable game. However, I seriously doubt it is really that profitable. Just to put things in perspective, Blizzard’s total revenues – including all its properties – was $270 million in the 2nd quarter of 2008, or an average of $90 million per month, according to an article on Gamasutra. Clearly, PC Magazine was way off the mark with its “conservative estimate”; its estimate was 50% higher than all Blizzard revenue combined. I don’t mean to pick on PC Magazine, as I subscribe to it and enjoy reading it, but this article sparked my curiosity and got me wondering how much revenue Warcraft actually did generate per month.

There are two significant factors that PC Magazine did not take into consideration. First, the subscriber base of 10 million is a moving target. Although the author of the article did not imply otherwise, it is still important to keep in mind that revenue figures for previous periods would be less due to a smaller number of subscribers. For example, one year prior to the 10 million subscriber announcement, Blizzard reported just 8 million subscribers (Blizzard press release, 1/11/2007).

The second and more important consideration is the different subscriber model in Asia, particularly China. There, account fees are structured based on hourly usage, not a flat monthly rate. According to DFC Intelligence:

[T]hese Chinese users are not subscribers in the Western sense of the word: they do not pay a recurring monthly fee. In fact, they generate about 0.36 yuan per hour of gameplay; that’s about 4 cents an hour. Of course, Chinese users log a lot of hours. In the second quarter of 2006, World of Warcraft generated $32 million. While this is a substantial sum in the Chinese MMOG world, 5 million Western subscribers would have generated more than $200 million over the same time period. Thus, Chinese players generate about 15% as much revenue as their Western neighbors.

So, let’s take another look at these back-of-the-envelope calculations. Starting with North America and Europe, let’s assume all these users pay a flat monthly fee ranging from $13 to $15 per month, depending on the length of subscription. Furthermore, some of these accounts are in their first month of free play. Blizzard also gets revenue from the provision of services, such as paid realm transfers. Thus, a conservative assumption is that the average monthly revenue per Western player is $13 (including service revenue, which would pull the average down). Blizzard only provides an estimate of the number of Asian players, and presumably the average revenue per player is higher in South Korea and Japan than in China. Still, to be conservative, let’s assume DFC’s estimate holds for all Asia, so that in generating 15 percent of the standard subscriber rates, Asian players average $1.95 in revenue each month.

With 4.5 million subscribers in North America and Europe paying $13 per month, the associated revenue would be $58.5 million per month. With 5.5 Asian players at $1.95 per month, their revenue would be $10.7 million. Worldwide, one might reasonably estimate Warcraft’s subscriber revenue at $69.2 million, and perhap shigher.

According to financial statements, Warcraft’s subscriber base had risen to 10.9 million by mid-year, an increase of 9%. Assuming even subscriber growth across geographic regions, a 9% increase means that monthly revenue from Warcraft is currently about $75.5 million. Thus, the $135 million estimated in PC Magazine appears to overstate subscriber revenue by nearly 80% according to my calculations.

In addition to subscriber revenue, Blizzard also earns revenue from sales of the game software to new players. There is also revenue from merchandise and other sources, though probably not much. Although there are a variety of different software options, the base package runs about $20 and versions go up from there. (The upcoming expansion Wrath of the Lich King will cost $39.) The updated subscriber count from Gamasutra suggests that new unit sales of Warcraft software run somewhere in the neighborhood of 150,000 per month [900,000 new subs / 6 months]. If we just arbitrarily assume that unit sales average $30 (though I have no basis for that figure), the implied sales revenue is $4.5 million per month. Combined subscriber and sales revenue from Warcraft, therefore, total (very) roughly $79.96 million per month.

As noted above, Blizzard had 2nd quarter revenues that averaged $90 million a month. If Warcraft generates $80 million a month, the implication is that all of Blizzard’s other games generate $10 million a month. Does that sound reasonable? It’s hard to say, but I don’t think it’s unreasonable. In fact, I wouldn’t be surprised if it were a bit high. Although Blizzard has some highly-anticipated games in development, like Diablo III and Starcraft II, it has no other major property actively generating revenue. Warcraft III: The Frozen Throne, for instance, was its last major release, and it came out in 2003. The latest Diablo and Starcraft releases are 7 and 10 years old, respectively.

Thus, $80 million in monthly revenue from World of Warcraft appears to be a reasonable, if extremely rough, back-of-the-envelope estimate. Returning to the original impetus for this post, if the total cost of running Warcraft is a cumulative $200 million since 2004, then the game is indeed highly profitable, though perhaps not as profitable as suggested by PC Magazine.

However, I remain skeptical about how comprehensive that $200 million figure is. I did not listen in to the analysts' call, so I don't know the context for the statement, but I suspect it only paints a partial picture of the costs. Consider that Warcraft has been out on the market for approximately 43 months as of mid-year 2008. That means that upkeep of Warcraft has averaged a rather meager $4.65 million a month. Even if you were to fit the $200 million to a monthly exponential growth curve (which would shift costs toward the present), you’d still get average costs of just $19 million a month during the 2nd quarter, versus revenues of $80 million. These numbers would seem to indicate a monthly profit of $61 million for a profit margin of 76%. The net income for the entire operations of Activision Blizzard Inc. was just $59 million for the entire quarter! While possible, it does not seem plausible that Warcraft’s profit in one month would exceed its parent company’s combined profits for an entire quarter. My guess is that the ongoing costs of providing Warcraft is significantly greater than $200 million.

Well, I didn’t intend to get into all these calculations, but there you have it. Feel free to comment and point out what I overlooked or may have done wrong.

Friday, September 12, 2008

The Air Force Embraces Virtual Worlds

The U.S. military has been at the forefront of exploring the uses of online gaming technology, primarily as a training tool. In January 2008, the Air Force published “On Learning: The Future of Air Force Education and Training,” a white paper from the Air Education and Training Command. The paper was notable because it laid out in some detail a proposal for an Air Force virtual world called MyBase.

Well, now there is an official RFP (request for proposal), with an October 3rd deadline. According to the Statement of Need, the proposed MyBase virtual world is rather limited in scope, with just 600 total users. Still, the Statement of Need envisions a fairly complete virtual world:

AETC requires a software application capable of simulating a training classroom on a typical Air Force base with both a flying and technical training mission. … The experience inside the virtual world will be 3D, geospatially accurate, and real-time. Users will participate in MyBase as avatars as well as take part in real-time live audio/video activities. The virtual world is persistent and when users are in-world, any changes they make to MyBase affect it forever forward and for all users until new changes occur. Users feel immersed in their experience as they engage with other users and content.

Returning to the white paper, the AETC foresaw a number of potential uses for MyBase.

Through an Avatar, Airmen will be afforded opportunities to participate in live, virtual and constructive learning opportunities in online classrooms, receive mentoring or personnel services, attend [Professional Military Education], participate in meetings, access knowledge bases, or collaborate on projects. Upon leaving the Air Force, some Airmen may even remain as valued mentors in the MyBase learning environment. …

Another appealing use of MyBase is assessing skills and aptitudes of new recruits:

Air Force systems must support the assessment and selection of the best and brightest to serve as future Airmen. Precise identification of viable recruits using advanced aptitude and skill assessment tools will ensure optimal selection and career field assignment and learning management systems will “push learning to the left.” The Airmen of Air Force 2.0 will supply the versatility and agility needed to increase Air Force combat capability in an era of smaller force levels and constrained financial resources to sustain them.

A program such a MyBase would allow targeted training exercises that can enhance and nurture decision-making abilities.

Advances in scenario-based virtual learning and decision simulation will mature and refine the learner’s innate talents and experiential skill sets, as well as give the learner an appreciation for the limits of software, hardware, and “brainware.” (pg. 13)

The paper shows recognition in the military that for today’s recruits a virtual world like MyBase will seem a familiar interface.

Our future Airmen are comfortable with these technologies and they will enjoy learning and working in these environments. Due to the sophisticated social networking websites in operation today, our newest Airmen will be extremely comfortable networking, collaborating, and learning through MyBase.

This MyBase project, along with other similar ventures underway or planned elsewhere in the military, will be worth watching to see how they develop and if they prove effective.

Wednesday, September 10, 2008

Virtual Inheritance

Ben Duranske (as well as Virtual Worlds News) picked up on an interesting article in the Swedish daily newspaper Göteborgs-Posten, the nation’s second largest. Although it is in Swedish, a couple of Entropia fans have posted translations at (see here and a more polished version here). The main point of the article is that MindArk will begin allowing residents of Entropia to draw up wills to allocate rights to the decedent’s virtual assets. This is an interesting development, but hardly unexpected. The article quotes MindArk Chief Marketing Officer Carl Uggla about the motivation:

“There is land in the game of considerable value which if the player would die is uncertain who would claim [it],” says Carl Uggla.

In fact, at the 2006 State of Play/Terra Nova Symposium, William LaPiana, the Director of Estate Planning at New York Law School, observed that “Anything you own in a very broad sense that has value is property for purposes of these [estate] taxes.” (You can find audio of his comments here, under the Tax and Finance panel).

Of greater significance is the indication that Sweden has begun to tax virtual worlds, as pointed out in this passage:

The [Swedish version of the] IRS has since spring begun to tax the activities within online worlds. “We’re not performing any bigger investigations. It’s more of a service and a way for us to be clear about the rules. I have got questions from several entrepreneurs who want to start activities in these worlds and about how they should go about it. People want to do what’s right,” says Dag Hardyson at the Swedish IRS.

Martina Bertilsson sees the IRS's actions as the logical one. “it’s about validating this business sector,” she says. “A lot of what happens online is still in a legislative gray area and open for pure legal interpretation, but there are now rules implemented regarding income tax for people living in Sweden,” she says.

I believe the translator of this passage has substituted IRS in place of the Swedish tax agency, the Skatteverket. A look at the first sentence of this passage in the original article in Swedish confirms this to be the case: “Skatteverket har sedan våren börjat beskatta verksamheten inom onlinevärlden” (emphasis mine). Also, I’ve added quotation marks where I believe them to be appropriate, as they don't appear in the original article (perhaps Swedish doesn’t use them).

Regardless of the punctuation, the key take-away here is that Sweden has apparently stuck its fingers into the financial aspects of virtual worlds. This could be a precursor to similar moves by other E.U. nations, and even the United States.