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The Lawbringer: Let's read Activision Blizzard's 2010 10-K annual report

Pop law abounds in The Lawbringer, your weekly dose of WoW, the law, video games and the MMO genre. Running parallel to the games we love and enjoy is a world full of rules, regulations, pitfalls and traps. How about you hang out with us as we discuss some of the more esoteric aspects of the games we love to play?

One of the best perks associated with living in a free society is transparency. In a society of rules and laws, transparency helps keep people honest. Does it always work? Of course not, but to me, it's better than the alternative. Activision Blizzard filed and released its Form 10-K earlier this year and, as usual, made this filing public to all investors of the company and subsequently to the world.

What is a Form 10-K, anyway? In the United States, companies that meet certain criteria and more than $10 million in assets have annual filing requirements with the Securities and Exchange Commission. Each fiscal year, a new document in filed discussing the company's structure, executive compensation and pay, audited financial statements, risks, and more. Basically, Activision Blizzard files this form to let the government and the public know about the company's performance. The best part is we get to see it, too.

Now, I'm not going to go into super analysis of Activision Blizzard's 10-K because, frankly, there is a lot in there that is not Blizzard-specific. Remember, the company is filing this one document for both aspects of the business -- we're interested in the Blizzard MMO stuff, right? There are three very interesting points about World of Warcraft that we can extrapolate from this document.

Three interesting points

If you'd like to read along, check out the 10-K at Activision Blizzard's investor site here. In fact, you can go back all the way to the 1995 filings from Activision and gaze into the industry's past, when computers were labeled "Apple Macintosh" and "IBM-compatible." What scary times! We are interested in the most recent document, filed after fiscal 2010. The three most interesting WoW-related items in this SEC filing are WoW's absurd predominance as a revenue generator for Blizzard, a focus on success in markets where piracy is an issue, and how Blizzard calculates subscriber numbers.

89% of net revenues

According to Activision Blizzard's Form 10-K, World of Warcraft accounted for 89% of Blizzard's consolidated net revenues for 2010. In 2009 and 2008 respectively, World of Warcraft revenues made up 98% and 97% of consolidated net revenues. With no releases outside of the Warcraft franchise in 2008 and 2009, 2010 was going to be a big Blizzard year with both StarCraft 2 and Cataclysm. Even with StarCraft's monumental success, the revenues it generated only put a 9% dent in WoW's revenue-generating behemoth. Of course, this "dent" is just percentages, meaning StarCraft generated a ton of revenue for Blizzard, but it only skewed the WoW percentage 9%. If that doesn't show you how huge WoW is compared to non-Blizzard MMOs and its own blockbuster Blizzard games, I don't know what could.

Remember that episode of The Jace Hall Show where Jeff Kaplan interrupts the StarCraft 2 development meeting, steals their hat and Nerf gun, and taunts the team, saying that the only reason the lights are on is because of WoW? Every joke has a hint of truth.

The take away from the 89% number shouldn't be that StarCraft is not a powerhouse -- it is. StarCraft is huge. World of Warcraft licensing, revenues, subscriptions, box sales, and everything in between is just so huge that nothing can really compare.

Piracy

One of the biggest issues the games industry struggles with on a daily basis is piracy. From lost sales to early leaks, games are getting more expensive to make and easier to steal. Strict digital rights management has shown in the past that it only agitates the casual user, and "check-in" internet authentication has been a crap shoot for developers.

Even with the prevalence of private servers and the number of emulation packages available for World of Warcraft, the full, well-maintained and (somewhat) regularly updated experience is a paid subscription affair. You don't get to play the full experience if you don't pay to play.

Here's the sentence relating to piracy:
Further, as World of Warcraft is a server-based game, only playable online, Blizzard is one of the few companies that can target markets that have been dominated by piracy and monetize former illegitimate players as well as expand in markets that have not been penetrated by consoles, but offer a large PC installed base.
Activision Blizzard is probably talking about two of the most problem-filled markets in the world -- Russia and Brazil. Piracy is rampant in Russia, and the taxes and costs associated make gaming in Brazil a costly affair. By touting its successes in high-piracy markets and turning illegitimate players into paying customers, Activision Blizzard lets shareholders and the public know that its strategy involves changing piracy dynamics through online-specific gaming.

As an aside, I very much enjoyed the tip-of-the-cap to European PC gaming, where the prevalence of PC gaming makes up the backbone of gaming in these markets. Blizzard isn't going to quit on the PC any time soon, no matter the portents of doom that happen every few years about the death of PC gaming.

The subscriber number

Finally, the most interesting piece of information to me is the way Blizzard calculates the number of people named as subscribers for the purpose of subscription numbers. According to the 10-K, as of Dec. 31, 2010, WoW still sports more than 12 million subscribers.

You'd think that the subscriber number would be an easy number to pull -- open World of Warcraft magic developer panel, click "number of subscribers," profit. As with most things in life, it isn't that simple.

"Subscribers" could mean anything from "paying customer" to "individual accounts currently unsubscribed" to an average number of people per PC club who log into the game. You need to have a definition of what a subscriber is before you can count that number. Here is Blizzard's definition of subscribers:
World of Warcraft subscribers are defined to include: (1) individuals who have paid a subscription fee or have an active prepaid card to play World of Warcraft , (2) those who have purchased the game and are within their free month of access, and (3) Internet Game Room players who have accessed the game over the last thirty days. The definition of subscribers does not include any players under free promotional subscriptions, expired or cancelled subscriptions, or expired prepaid cards.
This definition surprised me because of how honest it is and, at the same time, how impressive it is. WoW's subscriber number is not the number of people who have played WoW in its lifetime, nor how many people have made accounts and just let them sit dormant or character-vacant. The 12 million players number is the number of people who played and/or paid within the last 30 days.

In the past, some MMOs have been a little shady with their subscriber numbers, grabbing the headlines for the quick sell and scrambled once the free month was over and the subscriber base fell off a cliff when the monthly fee came a-calling. Blizzard could have easily used some gimmicky number to pull subscriber data, but it's a fairly straightforward calculation.

Of course, we could delve even deeper down into the money and the figures and the risks associated with the business, but from these three points, Blizzard knows what the strategy is for the near future and is in a position to be honest about its admittedly high numbers. If you take anything away from the 10-K, it should be the perspective from the other guys -- World of Warcraft is the colossus, even after all these years.

This column is for entertainment only; if you need legal advice, contact a lawyer. For comments or general questions about law or for The Lawbringer, contact Mat at mat@wowinsider.com.

Filed under: Analysis / Opinion, The Lawbringer

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