Activision's World of Warcraft Franchise Isn't Dead Yet

At ten years old, the World of Warcraft franchise is still growing. At least in terms of revenue. Sales tied to the aging video game were up this past quarter, which helped Activision Blizzard (NASDAQ: ATVI  ) post strong gains for the brand despite a drop in overall sales.

Subscriber growth, though, is a much different story. The franchise shed 800,000 players last quarter, speeding up the negative trend we've seen since 2010. 

Still, that's no reason to think the brand is on its last legs. I'll explain why in a moment. But first let's put that subscriber drop in perspective.

A rough quarter
There's no denying that last quarter was a bad one for the brand. In fact, the sequential quarterly loss was roughly four times as large, percentage-wise, as the drop that Activision booked in the prior quarter.

Source: Activision Blizzard financial filings. Annual numbers are as of year end.

So instead of subscribers slipping away at a modest 2.5% pace, as they did in the spring, last quarter's 10% loss looked more like a stampede. Activation now claims just 6.8 million active Warcraft gamers, the lowest total in about eight years. 

With some bright spots
However, there are two important points to remember about these losses. First, a big portion of the recent defections have been gamers in emerging markets, particularly in Asia. Those players tend to pay less for their subscriptions and aren't as profitable to Activision. That geographic skew has softened the financial blow to the company, since its most profitable customers are by and large sticking around.

And second, the subscriber losses don't look nearly as bad when you consider them in the bigger picture of the franchise's life cycle. We're at the tail end of one chapter, Mists of Pandaria, with a new expansion, Warlords of Draenor, set for launch sometime in December. Expansions tend to be preceded by a drop in subscribers, and then followed by a surge. 

For evidence of that cycle, take a look at the Mists refresh, which launched in the third quarter of 2012. In the months leading up to that release World of Warcraft suffered an almost identical 10% plunge in subscribers: The base shrunk from 10.2 million to 9.1 million. But the expansion sold almost 3 million copies in its first week, helping membership snap back above the 10 million mark over the third quarter.

Quarter

World of Warcraft Subscribers (millions)

2012 Q1 10.2
2012 Q2 9.1
2012 Q3 10.0

Source: Activision Blizzard financial filings.

By the end of the year the new content had helped Warcraft's subscriber base almost completely recover. It ended 2012 with just a modest 6% membership loss.

There are good reasons to expect Warlords of Draenor to spark a similar rebound, including the fact that preorder sales are running strong at over 1.5 million to date. Of course, those preorders help explain how Blizzard could manage sales growth for the brand last quarter even while its Warcraft subscriber base was shrinking.

Source: Activision Blizzard.

Foolish bottom line
No one would argue that World of Warcraft is headed back toward its 2010 record of 12 million paying members. On its way to just half that figure, WoW's best days are clearly behind it.

But it's also far from a dead franchise. Sales are up, the game remains highly profitable, and the Warlords expansion should pump some life back into subscriber growth into next year.

Activision has a big slate of exciting new releases ahead of it. These include a fresh approach to the Call of Duty franchise as well as an ambitious piece of new intellectual property, Destiny. With all of that novelty, its easy to overlook an aging video game brand that's shedding subscribers. But Warcraft is likely to keep contributing to Activision's results for years, and it might easily survive to see its sixth major content expansion around 2016.

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