On the Drop in World of Warcraft Subscriber Numbers

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Activision BlizzardThe internet is currently awash in sites reporting that World of Warcraft subscriptions have dropped to 9.1 million in Activision Blizzard's most recent fiscal quarter ended June 30, 2012. That compares to the last reported number of 10.2 million on March 31, 2012. Previous numbers were as high as 12 million. That sounds like a more than 10% drop. It also sounds bad. But the reality is probably a lot worse. Read on to understand why we think so...
We don't have any more information than is available in Activision Blizzard's public press releases and SEC filings, but those documents paint a darker picture.

The 9.1 million subscriber statistic comes from a bullet point near the top of Activision Blizzard's press release announcing its quarterly results:

"As of June 30, 2012, Blizzard Entertainment's World of Warcraft remains the #1 subscription-based MMORPG and had approximately 9.1 million subscribers"

It's also followed by a disclaimer, pointing out that number is "According to Activision Blizzard internal estimates." The first caveat we offer is that those numbers typically include Asian subscribers (more than half of WoW players in 2008). who may be playing at internet establishments with site licenses rather than individual subscribers. The company does note that there was "a greater loss of subscribers in the East than in the West for both the 3-month and 12-month periods"

More importantly, Activision Blizzard's reported financial numbers suggest a more precipitous drop. This can easily be explained through discount offers such as the deal that got annual subscribers a digital copy of Diablo III. That promotion sold 1.2 million copies of Diablo III, and it's hard to argue the motivation of those subscribers based on financial statements alone. Let's look at the reported revenue numbers.

Activision Blizzard reported GAAP Net Revenues in the quarter ended June 30, 2012 for "Digital Online Channels" of $343 million. That compares to GAAP Net Revenues for the same channels in the quarter ended June 30, 2011 of $423 million. That's a drop of 19%, but it's not just World of Warcraft revenue. The company wants to adjust that by modifying the numbers with Deferred Net Revenues, but we're going to stick with the numbers reported in compliance with Generally Accepted Accounting Principles (GAAP) since we don't get to see all of the company's underlying logic.

Making things even more complicated, "Digital Online Channels" include "revenues from subscriptions and memberships, licensing royalties, value-added services, downloadable content, digitally distributed products, and wireless devices." The way we read that, it includes not only WoW subscriptions, but Call of Duty's "Elite" program and downloadable content, not to mention downloadable copies of games such as Diablo III (that has sold around 10 million copies).

Fortunately, Activision Blizzard has broken out "Online Subscriptions" (that "consists of revenue from all World of Warcraft products, including subscriptions, boxed products, expansion packs, licensing royalties, and value-added services. It also includes revenues from Call of Duty Elite memberships." GAAP Net Revenues for Online Subscriptions in the latest quarter is $220 million, compared to $359 million in the same quarter the previous year.

It's never simple when it comes to financial statements. Activision reduced the latest number by $11 million due to a previous accounting error, so let's call it $231 million of Online Subscriptions compared to $359 million (a 36% drop).

Now, can we estimate how much of the latest revenues are from the Call of Duty Elite program? In the company's investor presentation, Activision claimed 2.3 million "premium" members for Call of Duty Elite in July. That's after the end of the quarter, so let's go with the 2.0 million subscribers reported for April, 2012. At $50 apiece, that accounts for $100 million of revenues. Since the company is reporting net revenues, let's assume half of that is the cost of sales and that it is contributing $50 million to GAAP Net Revenues for Online Subscriptions. Since the public beta for Call of Duty Elite was launched after the previous comparable quarter ended, we can safely assume it did not contribute to those revenues.

That leaves us assuming that World of Warcraft related GAAP Net revenues (including "subscriptions, boxed products, expansion packs, licensing royalties, and value-added services") were $181 million in the latest quarter compared to $359 million in the comparable quarter a year earlier. That's a 50% drop.

There are substantial assumptions in the above calculations, but there's no question that Activision Blizzard's cash WoW-cow is floundering. Clearly, the company hopes that Mists of Pandaria, coming out on September 25 will fix things. Can anthropomorphic pandas fix the problem?

Comments and corrections are most welcome.

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This page contains a single entry by Editor published on August 4, 2012 6:14 PM.

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