Stating the obvious

Via pΘtshΘt I got the news that Activision Blizzard filed their preliminary proxy with the SEC. This is a document to inform shareholders of all the details of the Activision Blizzard merger. As you can get into serious trouble if you file misleading or incomplete information with the SEC, such documents tend to be truthful, but long, with a lot of statements of the obvious. As pΘtshΘt remarked, one interesting part is the Risk Factors, where Activision Blizzard states what could go wrong with their business in the future. I'd like to quote some of them here:

Vivendi Games is dependent on Blizzard's World of Warcraft franchise.

The majority of Vivendi Games' total net sales are derived from Blizzard's World of Warcraft franchise. For the nine month period ended September 30, 2007, and the years ended December 31, 2006 and 2005, Blizzard's World of Warcraft titles accounted for approximately 85%, 62%, and 48%, respectively, of Vivendi Games' total net sales. Vivendi Games is the current leading global developer, publisher and distributor in terms of subscriber base and revenues in the subscription-based MMORPG category, due to the popularity of World of Warcraft and related expansion packs. To remain the leader in the MMORPG category, it is important that Vivendi Games continue to refresh World of Warcraft or develop new MMORPG products that are favorably received by its existing customer base and new customers. A number of software publishers have developed and commercialized or are currently developing online games for use by consumers over the Internet which pose a threat to the popularity of World of Warcraft, and Vivendi Games expects new competitors to continue to emerge in the MMOG category. If consumer demand for World of Warcraft games declines and Vivendi Games has not introduced new MMOG or other products that replace World of Warcraft's potentially decreasing revenue, or added other sources of revenue, Vivendi Games' financial condition could suffer. Additionally, if new technologies are developed that replace MMOG games, if consumer preferences trend away from MMOG games or if new business models emerge that offer online subscriptions for free or at a substantial discount to current MMOG subscription fees, Vivendi Games' revenue and profitability will decline.

85% of Vivendi Game's sales are from World of Warcraft, that's both impressive and scary. Note how the numbers are going up from 2005 to 2007. It is interesting that they see other MMO games as a threat, and see both "refreshing" WoW or a new MMOG as the solution to "World of Warcraft's potentially decreasing revenue".

The development of MMOG products requires substantial up-front expenditures. Vivendi Games may not be able to recover development costs for its future MMOG products.

Consumer preferences for games are usually cyclical and difficult to predict, and even the most successful titles remain popular for only limited periods of time, unless refreshed with new content. In order to remain competitive in the MMOG market, Vivendi Games must continuously develop new products and enhancements to existing products. Because of the significant complexity of MMOG games, these products require a longer development time and are more expensive to create than traditional console game products. In addition, the long lead time involved in developing a MMOG product and the significant allocation of financial resources that each product requires means it is critical that Vivendi Games accurately predict consumer demand for new MMOG products. While World of Warcraft's popularity allowed it to recoup its production costs, if future MMOG products do not achieve expected market acceptance or generate sufficient sales and subscription revenues upon introduction, Vivendi Games may not be able to recover the development and marketing costs associated with new products, and its financial results could suffer.

In other words, while World of Warcraft is extremely successful, Blizzard does not have the recipe for the secret sauce of MMO design, which would guarantee their next game to be successful as well. The danger here is developers being scared from moving away from what worked in the past, with the next game being something too similar to World of Warcraft.

A substantial portion of Vivendi Games' revenues are derived from subscriptions paid by World of Warcraft subscribers. If these customers cancel their subscriptions, Vivendi Games' financial condition could suffer.

A substantial portion of Vivendi Games' revenues are generated by subscription fees paid by consumers who play World of Warcraft. Typically, World of Warcraft subscribers purchase one (1) to three (3) month memberships that are cancellable, without penalty, at the end of the membership period. If World of Warcraft subscribers become dissatisfied, they may chose not to renew their memberships in order to engage in other forms of entertainment (including competing MMOG offerings) and Vivendi Games may not be able to replace lost subscribers. Additionally, if general economic conditions decline, consumers may decrease their discretionary spending on entertainment items such as MMOG games and users may choose not to renew their World of Warcraft subscriptions. A decrease in the overall subscription base of World of Warcraft could substantially harm Vivendi Games' operating results.

This one disappointed me a bit, because it just states the obvious, without offering a solution. What does Blizzard plan to do if "World of Warcraft subscribers become dissatisfied"? Later in the document the current development of the second expansion is mentioned, and "Additional content is expected to be provided in future years to bring new features and gaming experiences to the game's players, both through regular downloadable patches and through periodic larger expansion packs, such as the recently announced expansion pack World of Warcraft: The Wrath of Lich King." I would have loved to hear whether Blizzard is planning to invest more into such additional content, to get expansions out a bit faster than now.

Nevertheless it is pretty clear that at least 2008 will be another record year for Blizzard if they manage to bring out the Wrath of the Lich King before christmas. And World of Warcraft will probably remain king of the hill for 2009 as well. But as the game ages, some erosion of the player base is inevitable, and I wonder what we will see in either added content or new Blizzard MMORPGs. And some serious competition from another company would probably do them good.