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.