Monday, August 6, 2012

Killing My First Raid Boss: Why Forbes Got Their Analysis of Activision Completely Wrong

I grew up shouting spells in D&D instead of chanting "Defense!," playing multiple CCG's [Decipher, you will be missed] instead of collecting baseball cards, and ogling new computer parts instead of cars or bikini-clad models. The desire to "assimilate" all knowledge, the plumbing of rules for synergies and efficiencies, and the concepts of interactive roleplaying play a major role in my growth and development. In no small way, they are partially to blame for my present occupation as a data analyst/economist and my involvement with the theatre.
While I don't consider myself to be a "hardcore" gamer [cue the debate on that word] I am an avid fan of videogame culture. A large number of the sites and comics I read on a regular basis are invovled with this growing subset of our society in one fashion or another.

When I read about an analysis of Activision stock by, I was immediately hooked into reading it. After the relatively short article, I found myself rather disappointed that the guest-writers seem to be completely clueless on the socio-psychological mechanics of gaming and the industry.

The article seems benign enough - it focuses on the fact that with Guild Wars 2 coming out, Activision's stock may take a tumble as people flock from WoW to a new game. Simple premise.

Which brings me to another point: This was a guest piece in Forbes, written by individuals employed in Honne Capital, a NY based hedge fund. According to their website, This is their first publication in Forbes, and they appear to be less than a year old. From what I scanned, much of their material is parroting general market sensibility once it's already inevitable - do people really not know how screwed RIM is?

But there is something more subtle than that - NCSoft is a Korea based company, while Activision-Blizzard is US based. If you pay attention to Honne Capital's website, you'll notice that the page name begins with two Korean characters, though all other traces of the language have been scrubbed from the site. Nothing obvious on the site mentiones the Korean origin of the company. I'm not trying to imply anything, but it seems a bit strange that a hedge fund hiding it's Korean roots is rooting for the downfall of an American company to it's Korean counterpart. The article itself notes that Honne has tried to short Activision in the past and may do so in the future, Casting doubts and aspersions among the financial sector about the economic health of a company that has seen steady profits is clearly underhanded.

As the article points out "Subscription revenue alone totaled $1.2 billion both in 2008 and 2009, and an additional $1.36 billion in 2010...This means that WoW subscriptions have generated gross margins over 80% consistently." It then plays on the fear that people leaving WoW will cause such a huge financial hit to the companies stock that Vivendi will sell it's majority share, pushing prices into a freefall.
But they still are bringing in almost a BILLION IN PROFIT a year. The stock price, as the article notes, has been pretty stable, and it's probably the ONLY game company that can claim that stability and a steady yield. All in all, most game companies are subject to wild swings in valuation simply due to the fact that a single flop can flush millions down the drain. The stability of the WoW cash cow has insulated them from even MAJOR industry flops. This is a company that will outlive a stumble. Vivendi has a problem selling it's stock because Activision is, basically, a blue chip company that doesn't experience the rapid spurts of growth the stock market is so enamored of. It's the Coca-Cola of the gaming world

The whole premise of the article is that a game which hasn't been released yet, by a company that has already FAILED to beat WoW once before on this SAME property, will somehow triumph over evil now. Hell, even Star Wars and Lord of the Rings couldn't take down WoW, and if there's an IP with stronger draw than "You can be a kick-ass Jedi," I haven't seen it.

In fact, while the majority of the gaming industry has been crowing about the revolution of "Free-to-play" games, they're simultaneously alarmed that the existence of any F2P MMORPG is inevitably short-lived. The economics of the situation don't work out well, unless you start locking away significant portions of the game behind a paywall. As people start seeing that you need to pay money to advance, buy cool weapons, and generally to do anything, the begin to be resentful of the system. Most will fail to purchase anything entirely, and many will simply leave when confronted with an IN-GAME barrier. Various games have tried to get around that by being F2P up until a level cap, after which additional pay is required. The subscription model is, essentially, a necessary component of the MMORPG because it provides for steady income to develop the game while simultaneously preventing gamers from feeling like they have to shell out money to succeed.
Without subscriptions, GW2 is forced to subside on new players and in-game purchases. The first revenue stream will assuredly falter after an initial surge, and the second will hit against the same barrier every other game and the space meets. In order to generate significant revenue, GW2 must either 1) offer broadly appealing items for sale, so a large portion of the audience chooses to buy them, 2) ridiculously expensive cosmetic items, or 3) generate a fanbase larger than any game to date, so that the small percentage of people who buy in game items will provide the company with enough money to run the servers, patch the games, etc.

Activision has enough in the bank and a steady income. They can and will wait out Guild Wars 2. Eventually, when NCSoft realizes that they aren't generating the ever-increasing profits that their shareholders demand, they will either start selling subscriptions or close up shop on the game and start developing Guild Wars 3.
The continuity break in creating a new game without portable characters means that NCSoft will have to start building a user base from scratch, as they will be when releasing GW2.
The article bashes WoW for outdated graphics and gameplay, almost gloating over the newness of GW2, but it ignores the fact that the WoW universe has gone through multiple expansions and revisions. We are, essentially, talking about WoW 4. The graphics of the current game are incomparably better than the initial release, and gameplay has been constantly tweaked, upgraded, and improved. Rest assured Activision is working on the next iteration of the WoW universe, updating graphics and tweaking gameplay to take advantage of our constantly growing computing power.

All of this ignores the reason people play these games: gamers, like all humans, are social creatures, and that is THE reason WoW has never been beaten. I know it's strange to think of the stereotypical nerd sitting in front of there computer screen as an extrovert, but if you consider that the average raid has far more social interaction than a group of guys watching a football game, you'll start to get my point.
The MMORPG space is all about the MMO part - the existence of a large social circle that you can engage in relationships with. Ask any of the "hardcore" players for a story about their favority game, and you'll be sure to hear 10. These games create memories and shared experiences that won't get ripped away simply because "this next game is cheaper." The consistant customers who have been there for years are psychologically tied to the game - it gives them identity, and the hundreds of hours and dollars sunk into this virtual world form an inexorable bond to their characters, their guild, and their personalities. No game just starting up can match that. Avid WoW players create their own social networks, dating sites, and conventions. Rest assured, they will pass this affinity on to their children.
As WoW approaches 10 years of steady growth, Activision may be the only company to ever see it's old product picked up by a new wave of younger gamers, eager to pay for a glimpse into the world that was an indelible part of their upbringing.

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