Blizzard of Loss

Orcs, trolls, and dwarves are being handed pink slips. They don't have to like it.

Activision Blizzard's (Nasdaq: ATVI  ) Blizzard Entertainment will be trimming its payroll, letting go of 600 employees as it copes with the problematic slide in World of Warcraft players.

The number of gamers participating in Blizzard's online role-playing realm peaked at 12 million a little more than a year ago. There are now just 10.2 million players. Defections have slowed. Activision Blizzard suffered a net loss of just 100,000 players of the premium fantasy game during the holiday quarter, a welcome break after shaking 800,000 diehard gamers loose a quarter earlier.

However, until the trend reverses, the smart money has to be on the franchise continuing to fade in popularity. Yesterday's layoffs announcement pretty much makes it a lock. After all, would Blizzard be wrecking morale to save some money if it was going to need warm bodies again for the eventual turnaround?

The video game giant is making it clear that the World of Warcraft development team will not be touched, and 90% of the global workforce cuts will come outside of departments directly related to general game development.

It's the right call. If Blizzard is going to drum up another marquee franchise, it's going to need the development team to remain largely intact.

Will that happen? It won't be easy. The traditional video game industry has been largely slipping for three years. Activision Blizzard's Call of Duty franchise is as popular as ever, but a lot of other properties and developers are falling by the wayside.

We can blame social gaming. Zynga (Nasadq: ZNGA) has been a thorn in the industry's side with its quick and casual diversions. Will these entries satisfy hardcore gamers? Of course not. However, it's more than enough for the masses.

Then again, maybe even that's slipping. Zynga's growing quickly but average daily active users -- an important metric that measures the Zynga faithful that are playing on a daily basis -- have fallen sequentially for three consecutive quarters.

Blizzard thought it had a friend in China. Its licensing partner there -- NetEase.com (Nasdaq: NTES  ) -- was holding up well when World of Warcraft gamers were slipping globally. However, even NetEase conceded that players for that particular franchise slipped sequentially in its latest quarter.

Layoffs are never ideal. Dismissals create tension, and a lot of good people are lost. Investors occasionally cheer these cost-cutting initiatives, but they're missing the point. If a company is scaling back it can't be too upbeat about its near-term prospects.

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The Motley Fool owns shares of Activision Blizzard. The Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Activision Blizzard and NetEase.com, as well as creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (6) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 01, 2012, at 10:05 AM, QuarkHadron wrote:

    I have to take the streamlining as a good thing. The company is fundamentally sound. Good Price/Earnings, good Price/Sales, good Price/Book, and lots of cash on hand (really important for a developer).

    Being a gamer, I know how fickle MMORPG gamers are - always jumping to the next 'new' game. But I also know how fleeting that fickleness is. They'll come right back for the next 'new' expansion/release. It is really hard to hold a gamer's attention for long. But EQ and WoW prove it is possible. It just takes a really big hit game.

    While there is overlap, the FPS gamers are another big market segment that are also twitch-happy and need a rush.

    I just can't see simple social media games really taking the place of MMORPG or FPS games. They are very different market segments - with room for growth in all. It is like board games versus video games. Board games are still around, but no one can honestly envision them ever pulling market segment from video games. ATVI's competition isn't social media. It is other MMO and FPS developers. ATVI's cash will help ensure they are in the competition for the next 'big winner.'

    And in the meantime, they are a fundamentally sound company.

  • Report this Comment On March 01, 2012, at 1:07 PM, chrisguns521 wrote:

    Yes, I agree. They are for sure fundamentally sound. I don't no why this insignificant news has caused the stock to plummit today but its fine I guess cuz ill just pick up 25 more shares for cheap. I keep saying this but why is "only" 10 million a depressing number for subscribers? I can agree that WoW is just about on its way out in term of its life span but doesn't 10mil still make it the most popular subscriber based game by a long shot? What's the next most popular, star wars crap mmo with some measly number id guess to only be a few mil if that. I'm a real gamer who actually knows investing

  • Report this Comment On March 01, 2012, at 2:24 PM, ClimbinFool wrote:

    "There are now JUST 10.2 million players"

    Are you trying to be facetious?

  • Report this Comment On March 03, 2012, at 2:01 PM, thesmartestfool wrote:

    Not sure why all the analysts are linking the cuts to WoW sub losses? The news of WoW sub losses is old news. ATVI's Feb investors call confirms that sub losses have leveled at 10.2 million.

    The more plausible explanation for the cuts would be the finalization and impending release of Diablo III. Most of the recent in game design changes lead one to believe that serious development was necessary to make the game compatible with gaming consoles.

    If this is the case, then ATVI would have had to hire significant staff to code and program the game for each platform. A large number of employees would have been required to write this code and even more would have been required to establish pre-distribution of the game, enter into agreements with retailers, provide admin support to the extra staff, etc.

    The major loss of WoW subs happened before the last quarter of 2011. Bobby Kotick is about as ruthless as they come, so I find it difficult to believe that he would've kept 600 employees he didn't need on ATVI's payrolls for an extra three months.

    I think the more reasonable and more logical explanation for the layoffs is that Diablo III is at the end of its development and will be released soon.

    More importantly, a multi-platform release of the game will have Activision absolutely CRUSHING its 1Q estimates. Frankly, I wouldn't be surprised if ATVI is happy with the current rumor mill...since it allows the company to buy back its stock at super cheap prices. They have to know how big Diablo III will be based on pre-book sales and WoW annual subscription trades for a free copy of the game. I also wouldn't be surprised if the company hasn't already predicted the amount of revenue it will expect to generate through its in game auction house. With a billion dollar share buy back program...all I have to say is - Well done Mr. Kotick...well done.

  • Report this Comment On March 03, 2012, at 2:02 PM, thesmartestfool wrote:

    Not sure why all the analysts are linking the cuts to WoW sub losses? The news of WoW sub losses is old news. ATVI's Feb investors call confirms that sub losses have leveled at 10.2 million.

    The more plausible explanation for the cuts would be the finalization and impending release of Diablo III. Most of the recent in game design changes lead one to believe that serious development was necessary to make the game compatible with gaming consoles.

    If this is the case, then ATVI would have had to hire significant staff to code and program the game for each platform. A large number of employees would have been required to write this code and even more would have been required to establish pre-distribution of the game, enter into agreements with retailers, provide admin support to the extra staff, etc.

    The major loss of WoW subs happened before the last quarter of 2011. Bobby Kotick is about as ruthless as they come, so I find it difficult to believe that he would've kept 600 employees he didn't need on ATVI's payrolls for an extra three months.

    I think the more reasonable and more logical explanation for the layoffs is that Diablo III is at the end of its development and will be released soon.

    More importantly, a multi-platform release of the game will have Activision absolutely CRUSHING its 1Q estimates. Frankly, I wouldn't be surprised if ATVI is happy with the current rumor mill...since it allows the company to buy back its stock at super cheap prices. They have to know how big Diablo III will be based on pre-book sales and WoW annual subscription trades for a free copy of the game. I also wouldn't be surprised if the company hasn't already predicted the amount of revenue it will expect to generate through its in game auction house. With a billion dollar share buy back program...all I have to say is - Well done Mr. Kotick...well done.

  • Report this Comment On March 03, 2012, at 2:04 PM, thesmartestfool wrote:

    Not sure why all the analysts are linking the cuts to WoW sub losses? The news of WoW sub losses is old news. ATVI's Feb investors call confirms that sub losses have leveled at 10.2 million.

    The more plausible explanation for the cuts would be the finalization and impending release of Diablo III. Most of the recent in game design changes lead one to believe that serious development was necessary to make the game compatible with gaming consoles.

    If this is the case, then ATVI would have had to hire significant staff to code and program the game for each platform. A large number of employees would have been required to write this code and even more would have been required to establish pre-distribution of the game, enter into agreements with retailers, provide admin support to the extra staff, etc.

    The major loss of WoW subs happened before the last quarter of 2011. Bobby Kotick is about as ruthless as they come, so I find it difficult to believe that he would've kept 600 employees he didn't need on ATVI's payrolls for an extra three months.

    I think the more reasonable and more logical explanation for the layoffs is that Diablo III is at the end of its development and will be released soon.

    More importantly, a multi-platform release of the game will have Activision absolutely CRUSHING its very conservative1Q estimates. Frankly, I wouldn't be surprised if ATVI is happy with the current rumor mill...since it allows the company to buy back its stock at super cheap prices. They have to know how big Diablo III will be based on pre-book sales and WoW annual subscription trades for a free copy of the game. I also wouldn't be surprised if the company hasn't already predicted the amount of revenue it will expect to generate through its in game auction house. With a billion dollar share buy back program...all I have to say is - Well done Mr. Kotick...well done.

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