The Lawbringer: Let's read Activision Blizzard's 2010 10-K annual report
by Mathew McCurley 
Apr 22nd 2011 at 4:00PM
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.
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.
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
Reader Comments (Page 1 of 3)
GiveBite Apr 22nd 2011 4:02PM
Didn't this get posted yesterday?
sd_fuller Apr 22nd 2011 6:34PM
It is interesting to see how much WoW continues to dominate Blizzard's revenue, but not that unexpected. The subscription numbers still seem in some way out of whack. When you look at sites that show users (like WoWRealms etc.) the numbers are much, much lower. On my server it seems like there has been a steady reduction of players as well. That said, still a very nice article.
Achiew Apr 22nd 2011 7:55PM
The sites like the one you mention are largely dependent on players downloading the addon which polls the server on its population. The more players who have in per server the more acurate their data. Blizzard themselves dont post things like horde vs alliance population per server or total overall players per server. That being said those websites wont ever be able to provide the full picture because only blizzard themselves know.
Skarn Apr 25th 2011 12:58AM
It's also important to note that those subscriber numbers were from December 2010. In other words, shortly after the release of Cataclysm. We're now 4 months past that. Subscriber numbers are likely different now.
jfofla Apr 22nd 2011 4:12PM
I laugh at the people who think SWTOR can challenge WOW.
Blizzard is King.
zvermm Apr 22nd 2011 5:42PM
I actually think that in contrast to Rift, SWTOR can actually be successful over time. Here's my reasoning.(1) SWTOR uses one of the most popular franchises in film and fiction, the beloved Star Wars, and thus has an instant pull. (2) SWTOR is not trying to take over WoW's territory as it's set in a Sci-fi setting. (3) Bioware is a behemoth in RPG games with some of the best titles in the history of PC gaming under their belt (BG2 anyone? Still my favorite RPG of all time..) so if anyone can pull off a great Star Wars MMORPG experience, it's them.
Now, Rift, on the other hand is in my opinion just another WoW clone in many ways and if games like Conan and Warhammer have failed despite being based on strong and popular franchises, Rift will soon follow. Besides, they really piss me off with their 'you're no longer in Azeroth' commercials. I guess not, you're in generic WoW clone land. See you when you're F2P in 2012 Rift!
Amaxe Apr 22nd 2011 9:39PM
Can other games challenge WoW? It's a hard call. I don't think that a new MMO will do things both differently and better in terms of mechanics to make people just dump the game.
However, there is a part of the WoW population (I can't say what % they make up) who expressed a disappointment over Cataclysm content (when all is said and done, we paid $40 for two new races, 5 short zones, 525 skills and old world flight).
If Blizzard ever starts taking WoW for granted, they could allow it to slip to the point where people stop coming back after taking time to try the new game.
Back before LK, people used to say "Can't wait for WAR." Now they say "Can't wait for SWTOR." Most come back... but not all.
Blizzard and WoW can fail if they let things slide so that more people than Blizz can sustain begin leaving and finding it not worth it to return.
Time will tell if this is the case, or later will be the case, or not at all. It all depends on whether Blizz is vigilant.
CrimsonKing Apr 23rd 2011 2:42AM
Here's one thing that I don't really understand. Why do people think one of these games will topple WoW or be the WoW killer? Also what do these statements even mean? WoW has millions of players but it's been shown many many times that a MMO doesn't need millions of players to turn a profit, they usually have to have a number ranging in the thousands for a healthy profit. I could see WoW losing the number one spot and maybe even eventually having a number in the thousands instead of millions but I can never see it "dying" to another game. So is the whole WoW killer statement even a logical one to make?
Tenko Apr 23rd 2011 7:34AM
I think calling SW:ToR a WoW "beater" is a little simple.
As described by other commentators above it's a "sci-fi" game so it's a slightly different market.
Now obviously many people like both fantasy and Sci-Fi but with the average age of game players getting older all the time, with the commensurate increase in their income what I think we'll see is a lot of people subscribing to both.
I know I will.
Thyrial Apr 24th 2011 11:07PM
WoW is now way too ingrained in the MMO market to ever be "beaten" by a single game. WoW will eventually die like all MMOs will but it won't have anything to do with any one game. The only thing that can kill WoW now is time. eventually it will stop gaining players as fast as it loses them and after that each new game that takes some players will slowly take it's toll. even that however is quite a ways away considering they are still sitting at 12m subs.
Revanel Apr 22nd 2011 4:20PM
That's because you haven't played SWTOR. It's amazing.
And I don't think about it as "challenging Wow". I think of it as a different game that is awesome that I will play. I, like most gamers I know, can play more than one game at a time. :)
flawless Apr 23rd 2011 12:52AM
SWTOR won't be a WoW challenger. It will likely co-exist quite happily alongside it, as many other MMOs that are also entirely different to WoW such as EVE, CoH/V, etc.
Will it pull some full-timers away? No doubt. It'll probably pull more people away than Rift did, given what SWTOR represents - not only the second Star Wars MMO (SW:G was great until CU/NGE, just thought I'd put that in there) but also a BioWare game.
But it's not trying to topple WoW - I think even Guild Wars 2 doesn't aspire to that, at least not in the short run - and I really can't see it trying to be a cocky SOB like Rift, followed by a meagre showing, so I expect it to do quite well.
Kuroshiro Apr 22nd 2011 4:28PM
Mat, you're wrong. According to the language, a subscriber is someone who fits any one of those three criteria. The "last 30 days" criteria only applies to Internet Game Room players. So people who have auto-renewing subscriptions and don't actually play still count as subscribers, as they fall under criteria 1.
Mathew McCurley Apr 22nd 2011 4:42PM
Paying subscribers who don't play are still creating game revenue and are actually subscribers. Whether they play or not isn't part of the question or the answer -- all that I am concerned about here is the number of people playing Blizzard to play the game.
Jimbo Apr 22nd 2011 4:43PM
Read the last sentence after #3.
"The definition of subscribers does not include any players under free promotional subscriptions, expired or cancelled subscriptions, or expired prepaid cards."
If someone has an auto-renewing subscription and they're still paying for the game even if they don't play, they do still count as subscribers which from a financial point of view they SHOULD since they're paying customers.
talkingmike Apr 22nd 2011 4:49PM
"people playing Blizzard"
Heh, like forum trolls?
kingoomieiii Apr 22nd 2011 4:55PM
They'll probably notice in a few months when their bank account gets tagged with a $75 charge to Blizzard.
In any case, a paying customer is a paying customer. If you're paying for cable, but not watching TV, the cable company isn't lying to include you in its list of subscribers.
Kuroshiro Apr 22nd 2011 5:01PM
"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 paid within the last 30 days."
Then you should probably update this sentence to reflect that, instead of implying the subscriber numbers means people that are actually *playing* within the last 30 days. The subscriber numbers reflect the number of people who have either activated a new account, or have given them money to play the game in the past 30 days. If you meant "dormant or character-vacant" to imply an expired account (it did not to me) then you should probably reword it.
Yes, I'm being nitpicky. I like your column a lot, and being about the law I expect it to be factually correct. :)
CrimsonKing Apr 22nd 2011 5:06PM
If people who did have an auto-renewing subscription but weren't playing wouldn't that still be money going to Blizzard? These people might not be playing but for some reason it sounds like they haven't canceled yet so until they do their still giving money to Blizzard, is that correct?
DarkWalker Apr 22nd 2011 6:26PM
Two tidbit relating to the subscription numbers:
- Blizzard's own methodology for measuring subscribers would still report those inflated post-launch numbers Mat complained about. Blizzard counts players that bought the game and are still in the 30-day free period as subscribers. Not really different from any of the myriad subscription MMOs that touted huge post-launch numbers.
- Blizzard's methodology for where it bills hourly (Asia, I believe) is that anyone who paid any small amount to play during a month is considered a subscriber, even if he spent less than a dollar total during the month. It's reasonably similar to how most F2P games count paying customers - anyone who spent any amount of money with the game during the last month.
Blizzard is not really any more forthcoming with it's subscription data than most competing games, and it's methodology is not anything to be proud of. It's just something minimally adequate, but has the glaring issue of bundling the $15 per month players with the pay-as-you-play players, thus misleading unaware readers into thinking WoW's revenue stream is significantly larger than it really is.