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  • Tannhauser
  • Member Since Dec 9th, 2008

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Blizzard layoffs could mean many things {WoW}

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.

Shifting Perspectives: Probing healer balance in Dragon Soul {WoW}

Jan 18th 2012 1:47PM Or another explanation might be that invariably, the holy palladin is the tank healer and one of the other classes is healing the raid. Even in very good raid teams the tank is taking a fair amount of damage, while the raid may be avoiding or mitigating much damage, reducing the abilty of the raid healer to pad the meters.

5 ways to keep your tank happy in 5-man heroics {WoW}

Jan 12th 2012 1:59PM When I was a healer running lots of 5 mans in Wrath, I used to run the following speech macro right after we all zoned in.

"Hello, I will be your healer today. Please remember the first rule of groups -- don't piss off the healer. This run will go smoothly if you observe the rest of the rules.
The tank is our leader. Stay behind the tank at all times. Let the tank pull. Let the tank get aggro before you dps. Don't pull aggro off the tank. I will not run out of mana in here, so the tank will set the pace. Keep up."

The tanks always thanked me. If I got too much snarl from the dps, that was my cue to drop group. After all, life is too short to put up with bad dps, and my requeue is shorter.

Breakfast Topic: What's your naming methodology? {WoW}

Jan 9th 2012 12:09PM My son guided me through my first character set-up in Vanilla. He picked my race and class, as well as my name. What did I know?
By the time BC arrived, I created a new character, who became my main, and still is today. And I chose the name of a Wagnerian opera hero -- Tannhauser. And all of my alts are similarly Wagnerian heroes -- Lohengrin, Parsifal and Brunhilde. After all, WoW and its lore strike me as operatic in its majesty, so it just seemed appropriate.

12 Days of Winter Veil Giveaway: Big Battle Bear from {WoW}

Jan 1st 2012 12:56AM Happy Winter Veil and Happy New Year.

12 Days of Winter Veil Giveaway: Spectral Kitten loot code from {WoW}

Jan 1st 2012 12:52AM Happy Winter Veil, and Happy New Year!

12 Days of Winter Veil: Fool's Gold loot code from {WoW}

Dec 28th 2011 2:21PM Happy WInter Veil to all!

12 Days of Winter Veil Giveaway: Faction iPhone cases {WoW}

Dec 24th 2011 7:49PM Happy WInter Veil!

12 Days of Winter Veil Giveaway: $20 J!NX gift certificates {WoW}

Dec 24th 2011 12:20AM Happy Winter Veil!