Blizzard layoffs could mean many things
by Mathew McCurley 
Mar 2nd 2012 at 12:00PM
It was a shock to many on Wednesday when Blizzard announced that it would be cutting 600 positions from the company, including many support and customer service jobs and even some developer spots. Very sad news for a great group of people, absolutely. Maybe we can do a little digging and figure out why Blizzard cut these positions and make some sense of it.
You don't just cut workers "because." Activision Blizzard is a publicly traded company in the United States, where corporations are beholden to their shareholders, profits, and the bottom line. We still live in a world where the price of stock is paramount, so raising the price of stock combined with investor satisfaction is key. Every decision by Activision Blizzard must, at the end of the day, be made with the knowledge that the investors matter.
Let's start with what employee staff reductions do not mean. Blizzard is not going broke or bankrupt because of these 600 jobs. World of Warcraft, StarCraft, Diablo, and unannounced titles are still being developed and pored over. Mike Morhaime himself said that the active positions cut were mostly non-developmental, which leaves support, customer service, and potential redundancies in the company's structure. All in all, 600 jobs is a large enough number that there is a reason for all of this.
Why do companies fire people?
I know it sounds like a stupid question, but in its simplicity is the probable answer to everything. Employees are company expenses that cost money to maintain. A large workforce requires a large amount of infrastructure and support around it. You don't just pay your workers -- employees cost a lot of money to maintain, especially in the gaming industry. People need to be fed, kept happy, and given the incentive to stay in the position they are in since the company has invested so much into training and skills. Look at the pictures of Blizzard's campus and headquarters. That place is not an inexpensive place to run.
Companies don't always fire people lightly and I truly wish I had the insider information on what all went down, but sadly I don't, so we have to make some educated guesses.
There are a ton of reasons why Activision Blizzard could have made these personnel cuts, but I am under the firm belief that 2012 is a year of scaling back for Blizzard. 2011 brought World of Warcraft's subscriber numbers down to 10.2 million players, a marked difference from the booming Wrath of the Lich King player base that declined over the course of the Cataclysm expansion.
Support and customer service automation programs that work
One of the biggest roles of customer support and service people for Blizzard is fixing player accounts after they have been hacked or stolen, restoring characters to the best of their ability. Over the years, Blizzard has been developing ways to speed up the time between restorations as well as launching a campaign to inform players what to do if they've been hacked or their accounts have been stolen. The account recovery page has changed dramatically over time, potentially putting support personnel out of a job.
The other side of the same coin is that there might just be fewer hacking attempts and account compromises these days for the number of dedicated support personnel. If that was the case, it ties in very well with the second point I'll make about populations in a couple of sentences. Authenticators have done much to alleviate a lot of hacking fears as well as make safe many players who otherwise would have been hacker fodder in the open internet seas.
We are still on the assumption that a majority of the jobs cut at Blizzard are support and customer service, as Mike Morhaime himself said that developers were not the focus of the downsizing. Morhaime also said that World of Warcraft experienced a period of growth that, over time, became an overstaffing issue. This is plain to see: Over the course of Wrath of the Lich King and Cataclysm, the player population fluctuated by over 2 million players subscribed, not to mention the number of new players coming in and out.
Blizzard has had unprecedented success in MMO customer support, especially since its evolution of the support process and its staffing to accomodate the incredible number of players who need assistance. Well, reduce that projected support load by about 2 million potential tickets, and new estimates have to be made. Morhaime discussed the company's current organizational needs, which strikes me as a comment on the game's current population.
Is WoW development easier?
Some developers were laid off in the firings, but I have no idea which teams they were part of. If World of Warcraft has recently completed some sort of software tests of a new development platform of some kind or new tools developed concurrently with Mists of Pandaria, maybe they just don't need as many developers working on the WoW back end. It's kind of a long shot, but it crossed my mind. Better programs that do more of the work for you could be a big boon, especially in reducing development costs for WoW expansions and potentially reducing the time between releases.
After the setbacks to the subscriber base during the end of Wrath of the Lich King and the lack of accessible endgame content that Morhaime said plagued Cataclysm, Blizzard fought for over a year to stop the subscriber bleed. First, it staggered the release of Cataclysm patches to push out content that was ready immediately and continue development of almost-ready content for a couple of more months. Noble in spirit, the remade Zandalari heroics were fun at first but quickly grew tiresome for players. With Firelands months away and the relative difficulty of the new tier of raiding and even heroic dungeons, many players were turned off.
Second, Blizzard successfully wrapped a bandage on the wound with the WoW Annual Pass, announced at BlizzCon. Players could sign up for a yearly commitment to WoW to get a cool mount and Diablo III on release. A million accounts signed up for the annual pass, contributing to the much less dangerous drop of only 100,000 to 200,000 subscribers in the last quarter. With that drop comes a reduction in work force.
This round of deep layoffs puts some big numbers in terms of cutting costs relative to profits for the next earnings call. A gangbusters quarter for Blizzard lets the investors stay happy while Blizzard postures itself for its future releases this year. In March, the press tour begins for Mists, and Morhaime has an announcement in the near future about a Diablo III release date. Combine all of these big news events with consumer hype, as well as the sales from the Heart of the Aspects and whichever games make release by the time investors have to pick up their phones again, and you have a lot of money to report.
A year to scale back and refocus
The infrastructure that surrounds the WoW machine took some hits on Wednesday to bring it in line with the other demands of the company. With Project Titan on the horizon and WoW sitting comfortably at its 10 million mark, Blizzard is in a position to trim costs, cut overstaffing, and show tangible results at the next investor call.
With both BlizzCon being cancelled and 600 layoffs, Blizzard is looking to have a huge year for profits to shore up against further WoW losses. Cancellation reasons aside, BlizzCon was a huge cost to the company, and not having to put that red mark in the spending column can go a long way in keeping the books tighter. StarCraft and Diablo are franchises that do perfectly well on their own, sure, but even Blizzard jokes about how much WoW contributes to the success of the company and its continued growth. I think you will also see the rise of some excellent Blizzard producers from this time, watching them reshape tasks for smaller, more dedicated teams.
Maybe we're at the time where Blizzard slows its growth and settles into WoW for the remainder of its life, while harvesting the new MMO until the time is just right. No more "four products at once after this cycle," I would think. Let WoW bring in a steady income and keep new products under a tighter development schedule with a less unwieldy support structure. Blizzard is curling into a little ball, and soon, that little ball will unfurl with Diablo III and Mists of Pandaria information. Until then, we're still open during remodeling.
At least that's what it looks like to me.
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 4 of 4)
eleoth08 Mar 2nd 2012 3:35PM
You also have to take into effect quality control and developmental changes within the company. Over the years Blizzard has created and streamlined its own internal programs and procedures, developing programs and cutting steps for things like atmospheric/landscape lighting (which means it could now take one person to touch up those areas whereas it might have taken 10 people in the past to work on that type of stuff), and as mentioned above their customer service/support areas. 600 people still sounds like a huge amount though, it always makes me wonder why a company suddenly realizes "wow - we have 600 people that we don't need" as opposed to figuring that out when they were only overstaffed by 100.
However it happened though, all of those people had some input into making Blizzard the success it is and my gaming experience a joy over the years. I thank them and hope they are able to find a new job quickly!
DarkWalker Mar 2nd 2012 3:49PM
Little things to remember: Blizzard launched WoW in Brazil, and is launching it in Italy. Meaning it's hiring support people who speak the local languages. This, in turn, makes a number of support people who only speak English redundant.
I don't think this is the whole story, but it's another factor to remember. WoW getting global means more opportunities for support people in the countries Blizzard opens shop on, and less opportunities at headquarters as some players that were previously supported there gain localized support.
Tristan Phillips Mar 2nd 2012 4:31PM
Drakkenfyre:
Your continuing ranting about my miscalculation is funny. I think that no matter what number I pick you won't be happy. Even with the low estimate of $8 million a month is still a lot of money for a gaming company. Most games do not have a subscription; they have to rely on new game sales and the occasional DLC. To ignore or downplay the wave of money that comes in monthly is disingenuous. How many game companies can have a reasonable expectation on $8mx12 months as a revenue stream?
To your next point: I'm not ranting about PvP, PvE, Top Guilds, etc. so I don't know why you even bother mentioning them. They're not relevant to what I originally posted so this is as far as I will pay any attention to them.
All I'm pointing out is that Activision is in charge (Not Blizzard), that Activision has a long history of doing not nice things, and in the light of that history as well the revenue generated by WoW (And soon to be D3) I would not believe the platitudes of any statement issued by anyone without some verifiable information. I'm suggest that Activision is being Activision and is maximizing their profits while sticking it to their employees. Activision's history backs that up more than anything else.
Finally, I didn't count operating costs because I don't know them. That's why I said REVENUE and not PROFIT. The former does not take into account expenses, while the latter does.
Who looks like a moron, to use your words?
Drakkenfyre Mar 2nd 2012 5:20PM
You used a statement which has been as overused as people ranting about PVE and PVP using the things I talked about.
I see your problem. You cannot understand what I said.
You used a moronic statement to back up your point. Making you look like a moron.
My point? Don't use uninformed statements if you don't want to look like a moron, and have people take your point seriously.
The fact that at it's highest point, only 2 million of the 12 million subscriptions came from the US, and 7 million came from Asia, where there is no monthly fee, when you try to use the monthly fee to describe the profits is ridiculously out of whack. Use better info, don't look like an idiot.
Tristan Phillips Mar 2nd 2012 6:37PM
Drakkenfyre:
I understand. You have nothing but my overestimation of the monthly revenue from WoW subscriptions, so you're going to stick with that and harp on it. You have nothing else but a silly comparison, and won't even admit you misrepresented my statements about revenue versus profit.
That's ok. When you can't refute run with what you know. Let me know when you've got something more.
Drakkenfyre Mar 2nd 2012 9:53PM
It's funny when you apparantly haven't read my last reply to your comment on the first page.
I said I wasn't saying this was all true, that this wasn't just PR talk, but don't use lame examples which haven't held true since day 1. I am not defending what the release said, I am criticizing you for using the example you did.
You couldn't even understand my comparision of your overused statement with overused statements about PVE and PVP. No one listens to those guys, and no one is going to listen to you when you used what you did.
And yes, there is a difference between revenue and profit. But people who use examples like you did generally lump it all together, and act like they have a huge money pile they do nothing with.
Jon Mar 2nd 2012 5:17PM
As a business owner, I have a strict zero employment policy. This prevents me from having to deal with any negative public relations fallout. Never hire, never fire!
Tristan Phillips Mar 2nd 2012 6:50PM
bwh000:
You are correct Vivendi SA is the parent company. However it was announced at the time that it was Activision would merge with Blizzard, not the other way around. You can use Wikipedia for the info, but there are better sources that go into the detail of the purchase, stock buyback, and "merger". Other sources (Kotaku 7/11/2008) quote Mr. Kotich as saying he offered an outright purchase of Blizzard first. "Mergers" that start out first as outright buyouts are not a combination of equals.
And it's Bobby Kotick who is in charge, and he's the one who sets the tone for the organization. Which corporate culture do you think he runs by: the one he had when he was in charge of Activision, or the culture of the company he had no interactions with until after the "merger"?
bwh000 Mar 2nd 2012 11:01PM
Vivendi already owned Blizzard before it bought Activision.
lilyofthemyst Mar 2nd 2012 7:12PM
Layoffs happen at every company at some time or even multiple times in their history. It's normal. Does it suck? Yes of course it does! Losing your job is the one of the worse things that can happen - especially if you have a family to support. However, business is all about the bottom line, making money/profit for those investors and shareholders while providing a good product for your customers to retain their service/money.
The company I work for is small - we have 10 employees on site plus around 20 at headquarters. They recently made our full time customer service worker redundant, that's 10% of our onsite workforce gone, not to mention 50% of our front line staff gone since there are only two other part time customer service workers. They completely re-structured the way they wanted us to work, cut down business hours, and this is because this year was tough and we didn't hit our expected targets. If we end up picking up in the next year, could we hire more staff? Absolutely, but at this point in time they had to make cuts to make up for the loss. I would guess the same thing goes for Blizzard (but on a grander scale!)
Andras Mar 2nd 2012 8:44PM
I only hope that your right and Mist of Pandaria is as awesome as your describing it...
Possum Mar 2nd 2012 9:02PM
Aw, those poor 600 people. :(
vortalism Mar 3rd 2012 3:33AM
I just hope World of Warcraft ages gracefully like it's counterpart Everquest.
Despite it's slow decline and a "hope for the best, plan for the worst" strategy, I just think it deserves as much to go with the way of Everquest receding back into the scene of "older" Warcraft gamers. Leaving all the problems of future MMOs to the next generation and enjoying a quite existence of expansion packs.
Well I guess this is the best I can hope for WoW to become.
Paul Mar 3rd 2012 8:10AM
The actions Blizzard has taken was actually taken by SOE over a year ago. Once again, because various people only look at Blizzard, they seem to think no one else is doing the same thing.
SOE has been in the MMO market for a longer period of time, the have more experience with the market than almost any other MMO company. The fact that they had to take this action a year before Blizzard, AND conpound it with 4 products being shut down this week, all this jumping up and down over "what this means" without looking at what the industry AS A WHOLE is doing is just highlighting how many of the players really haven't a clue as to what is going on and why.
kay Mar 3rd 2012 3:32PM
The "change" our president promised is happening, no money, no wow, no job..how many massive layoffs have we heard of now..
MassivelyFTW Mar 4th 2012 7:24AM
They employ about 5,000 people worldwide so 600 is 12%. It's not an insignificant number, but it's hardly cataclysmic considering they are looking to hire about 100.
Tannhauser Mar 4th 2012 7:11PM
I have a belated but different perspective from Mr. McCurley that is not so sanguine. The following is purely speculation on my part based on publically available data and lots of business experience. I have no access to insider information at Vivendi or Activision Blizzard.
1. This was no small restructuring. In 2011 Activision Blizzard had about 5,000 employees, so this was a 12% headcount reduction company-wide. Blizzard represents about 40% of Activision Blizzard’s operating expenses, so Blizzard probably had about 2,000 employees before the layoffs. This represents about 30% of Blizzard’s headcount. This is not resizing for 10 million subscribers when you had hired for 12. This is not a periodic cleansing of deadwood. In the business world we call this a massive, probably strategic, restructuring of the business. This is the type of restructuring you see when a company is shrinking, bleeding cash, and desperate to survive. But Blizzard is significantly profitable, with operating margins approaching 50% of revenues, so why such a crisis-like reduction in headcount?
2. Let’s not kid ourselves where this restructuring initiative came from. Blizzard may still have creative independence, but the company is run financially by Activision Blizzard. This significant a headcount reduction was a corporate-directed initiative. It may even have been directed by Vivendi, who is the 60% owner of Activision Blizzard. If a restructuring of this size wasn’t a French idea, they at least were consulted and agreed. What would be the point of this?
3. Revenue growth at Activision Blizzard has been slow, in the low single digits annually. But operating and net income has been growing significantly faster. The way this happens is by reducing costs.
In high tech, if you are not growing then you are dying, and from the Vivendi perspective, Activision Blizzard has maxed out its vision and its franchise. A subsidiary in this position is treated as a “cash cow” to have its cash milked out of it rather than investing it in less productive initiatives. You can see this in what Activision Blizzard is doing with its cash.
Activision Blizzard is not wholly owned by Vivendi, so it can’t just transfer cash to France. Activision Blizzard is transferring cash to Vivendi through dividends and share buybacks. In 2011, 93% of the cash generated by operations at Activision Blizzard was paid out to investors (i.e., Vivendi) this way. You see this behavior in highly profitable high tech companies that have no good remaining options to invest for growth (e.g., Microsoft). It appears that Vivendi has decided that Activision Blizzard has topped out, that it will not be a growth engine in the future, and to “repatriate” the Activision Blizzard profits back to France. But why the crisis-like reaction to headcount reduction?
4. Most of the cash being sent to Vivendi by Activision Blizzard is being transferred using share buybacks, and they plan more in 2012. But when Activision Blizzard announced their Q3 earnings in early November 2011, their stock price tanked immediately and has not recovered; the stock price is down almost 20% from its high the morning of the announcement. This means that Vivendi has to surrender 25% more shares to extract the same amount of cash from Activision Blizzard as they did before the price drop. From that stock price drop until the layoffs were announced was about 3-1/2 months, about the right time for Activision Blizzard to panic and come up with a plan to goose the stock price. The planned headcount reduction should result in higher margins and earnings in the second half of 2012, and certainly Activision Blizzard is hoping that will lead to a higher stock price. So far investors, who bake expectations of future earnings into current stock prices, have not been impressed – Activision Blizzard’s stock price hasn’t moved significantly since the layoff announcement. Unlike the short-sighted French, most investors probably recognize what this investment posture means to future earnings growth at Activision Blizzard; that is, there won’t be much, since there is a limit to how long you can keep cutting costs to increase profits and maintain a viable business.
5. So what does this mean for us players? Unfortunately, Vivendi has decided to milk Activision Blizzard (especially Blizzard and its shrinking World of Warcraft franchise) for cash. This means we probably won’t see another seven years of World of Warcraft. Activision Blizzard is committed to the Mists of Panderia release to extend the franchise as long as possible, but you will probably see the pace of content release slow down after that. You will see the handwriting on the wall when some of the well-known developers start leaving – they will see it internally before the rest of us. The textbook for milking a declining franchise also means that price increases are in our future.
Remember, of course, this is all speculation on my part. You may read the numbers differently.