The Activision-Blizzard Q4-2019 Earnings Call and My Armchair Analysis

While I’m not a financial analyst, I do find the Activision-Blizzard earnings calls interesting.

Today marks the Q4-2019 report, one year removed from the Q4-2018 report that spelled massive layoffs in the face of record profits, stated as preparation for what was expected to be a lean 2019.

Blizzard’s 2019 was fairly lean, yes. The layoffs were part of a larger wave of issues Blizzard ran up against in 2019, from those layoffs, to Shadowbringers, to Blitzchung, the patch schedule and content issues with Battle for Azeroth, all while trying to right the ship with WoW Classic and maintain any momentum they could through perpetual cash-cow Overwatch and the promises of new content from Blizzcon 2019.

Coming into this quarterly earnings call, there were some fan narratives about what was expected. A lot of people firmly on the boycott train expected to see their decision reflected in poor performance for the Blizzard side of things, even in the face of Blizzcon 2019 and the continued success of WoW Classic. Prior to Blitzchung, there was some speculation that MAUs would stay up on the back of Classic and there would be some clear evidence that Classic was the clear winner of the two WoWs and would blow retail out.

And, well…neither of those claims are provable with the data available.

At the top level of the company, they delivered an increase in revenue, net bookings, and earnings per share against their projections. Blizzard’s biggest claim that we’ll look at is that WoW overall has doubled its active playerbase from Q2-2019 to Q4, although the percentage of players in each can’t be derived from the data delivered.

MassivelyOP pulled out the MAU numbers with some editorial, and over the course of the last two years, Blizzard’s MAUs look like this:

Q1 18: 38,000,000
Q2 18: 37,000,000
Q3 18: 37,000,000 (BfA launch)
Q4 18: 35,000,000
Q1 19: 32,000,000 (Mass layoffs announced – the wrong quarter is attributed in the MassivelyOP piece)
Q2 19: 32,000,000
Q3 19: 33,000,000 (WoW Classic Launch)
Q4 19: 32,000,000 (Blitzchung)

So with two full years of data, mapped to the various events of concern, there is a trend – Blizzard launches still move the needle (sort of), but how much so is harder to tell at this level, since all of their games are included here. Hearthstone releases and promotions, Diablo seasons, Overwatch heroes and maps, or seasonal events could all also be driving movement in these numbers.

However, it isn’t difficult for me, as a WoW person, to draw a clear line down the numbers related solely to WoW. Q1 2018 was BfA launch date announcement and preorders for allied race access with the Legion-affiliated races – which likely drove player engagement and gameplay hours. That decayed very little through the end of Legion, which held strong into BfA, and then after BfA launch had settled, you can see an appreciable dip of 2 million people, then 3 million the next quarter, which has maintained as the floor for Blizzard’s MAUs since.

From this data, there are a few things I want to discuss from the WoW perspective:

-Battle for Azeroth showed no launch spike: Our expectations as a community is that an expansion launch should drive a boost in active users, however, BfA just didn’t do it. MAUs remained flat through launch and then dropped off the following quarter. With hindsight, we can say that the game didn’t deliver on the promised potential, but for Q3-2018 to be spiked to a net-zero increase in player engagement means it either didn’t drive people in the first place (before the problems with Azerite were widespread) or it means a shitton of people cancelled immediately after hitting 120 and spiked the September 2018 numbers. That is without factoring in the fact that MAUs are across the board for Blizzard, and not exclusive to WoW. If I had to guess, I’d suggest that people definitely came in for the expansion, played it, were turned off and left. Remembering that time, the issues with the game and Azerite were met with deafening silence from Blizzard, followed by some controversial claims (you’ll like it the more you interact with it, just wait!), followed by the Reddit AMA with Ion that went…kind of well, and all of that resulted in the announcements of content for 8.1 in an attempt to salvage the launch. It wouldn’t surprise me to learn that BfA did have a launch growth spike that was followed by a catastrophic drop-off. That is my opinion, but I think that it tracks with the anecdotal evidence available to us and some comparisons I made at the time (active raiding guilds on Wowprogress vs. Legion).

-Blizzard has lost 6 million active, regular players since Q1 2018: That isn’t to say that the players are gone altogether, but the trend has remained fairly constant – those people have not rebounded back into Blizzneyland since then. MAUs as a metric, of course, obfuscate this because we can’t even begin to draw into new vs. established players, MAUs by title, etc. My suspicion is that this is a genuine loss of one-title players – my fiancee, for example, was solely a Hearthstone player, and her not playing the game means she isn’t playing Blizzard titles at all – a lost MAU. A friend of mine, Jake, doesn’t play WoW much anymore, but he does play Overwatch, so he still counts for an MAU. My suspicion is this – Blizzard has a floor that is built on a foundation of multi-franchise players who like multiple Blizzard games enough to migrate around their ecosystem when a title gets stale to them. WoW players who leave WoW aren’t necessarily gone from the MAUs – they’re just not in WoW anymore. For them to lose 6 million MAUs in two year’s time, however, means that there is some big shift away from Blizzard. Saying that, however…

-Blizzard is mostly insulated from the fervor over Blitzchung: Q4 2019 did see a decrease in MAUs, one million in total down to 32 million. This put the company exactly where they were in Q2 2019, which, coupled with the vague datapoints from the call, gives us a few ideas to follow. The first is this – a decline of one million MAUs could be due to the boycott movement of October 2019, and I would definitely believe that at least a portion of the decline is from that. However, what we see isn’t a drastic decline or out of character for the games – it seems more like a return to normal after the launch spike for WoW Classic. I won’t write that off as a sole cause either – but, from an analytical standpoint, it seems difficult to claim a victory in the decline for the boycott movement when far more mundane reasons seem to be the case (and, anecdotally, even at Blizzcon where it was predicted they’d be a strong presence saw them reduced to a tiny number of people talking quietly and leaving trash at a fountain near the entrance, who were later outnumbered by a non-gaming protest that somehow popped up by the registration tent on day 2).

-WoW Classic has definitely caused growth, but the proportion is hard to tell: We knew very early on that once Blizzard confirmed Classic would be part of a standard WoW subscription, it meant that tracking the game’s growth separately from the modern game was going to be nigh-impossible. Indeed, it seems, that is much of the point. On the earnings calls since Classic came to life, much of the discussion and news pertains mostly to Classic and the impact it has had on engagement and player buy-in. However, it’s difficult to get a really strong read one way or another. On the one hand, MAU’s were up for Q3 2019 by about 3% across the board for Blizzard – that’s pretty good at that scale, but it also wasn’t the gangbusters number a lot of people expected. On the other hand, in the Q4-2019 earnings call this week, Blizzard said that WoW’s total active playerbase had doubled from Q2-2019 to Q4-2019. So we have some interesting things to look at here.

The first thing that stands out to me is that playerbase growth and contraction wasn’t that large – but because the number is an aggregate total across Blizzard titles, it is difficult to ascertain what it fully means. For us in the MMO space, it is easiest to assume that, as it was during WoW’s heyday, that WoW is THE needle-mover for Blizzard. While I think in a recurring revenue sense, this is likely true, the MAUs factor in all the buy once, earn through play types that engage with Overwatch. Overwatch is, by ATVI’s reporting, at a sales volume of 50 million. That doesn’t translate 1:1 to players, of course – if I buy on PS4 and PC, that’s two sales and 1 MAU, likewise for any other multi-platform players, and further there is a fair audience of people who bought the game and don’t currently play. Blizzard’s reporting has largely shown Overwatch as flat or slightly ascendant for most of it’s life – very rarely suffering any substantial or noteworthy decline.

The Q4-2019 explanation is that Hearthstone and Diablo were in decline, which is observable for Hearthstone via the fan reaction and seeming lack of buzz the game has these days, while Diablo, promising future in store, is currently encumbered with Diablo III entering its eighth year of life, 6 of which are post-Reaper of Souls expansion, 3 of which are post-Necromancer DLC, and 2 of which are post Diablo Immortal debut debacle. With those events in focus, it does make quite a bit of sense to attribute a fair amount of the 2019 dropoff in MAUs to these titles – both of which have had lackluster years of late and have hemorraged player interest. I think it is somewhat unfair to fully blame these titles for all the dropoff, though – Diablo likely fell off years ago and any remaining bleeding from that wound is likely insignificant. Hearthstone, on the other hand, has more likely contributed significantly to the overall MAU decline.

In April 2018, former game director of Hearthstone Ben Brode left Blizzard, and since that time, the game has struggled to find solid footing in the market, even considering the player retention issues the game was starting to have as many pros and high-level players came out talking about the severe cost of playing competitively, as each expansion could cost a pro player upwards of $1,000 to get the cards needed for a new metagame. Couple that with a decreased generosity in gameplay modes (reverting to a paid single-player campaign mode in newer expansion rather than the fun, free modes of 2017 and 2018) and it is easy to see why Hearthstone would be in decline. On top of that, I think the specific call out in Q4 2019 is probably the most direct place you would see the Blitzchung fiasco reflected – while a lot of people were all-or-nothing on the boycott movement, I could see a lot of edge cases decide to disengage from Hearthstone as a statement as the game Blitzchung was competing in.

So, back to the MAUs, the “doubling” of active WoW players, and what all of it means. Anecdotally, of the people in my guild who went to play Classic, just over 50% are either playing just the modern game or a mix of both now, while the rest are still off in Classic-land. At a broader level, I would hesitate to call any success for Battle for Azeroth in Q4-2019 – as it a second quarter during the tenure of BfA with no new patches released. The Q&A section of the conference call and the prepared slide deck makes clear that modern WoW, short of Shadowlands’ announcement, is not worth discussing in Q4-2019. Q2-2019, as the starting point for this comparison, helps in that it was prior to the launch of WoW Classic and at a point where returning players were extremely unlikely to have resubscribed for Classic, save for whatever people wanted to participate in the first or second stress tests for the game, which were open in Q2-2019.

So as a thought experiment, we’ll assume two simple things. One – while the effect of people subscribing and logging in for the first two rounds of stress testing should be accounted for, it is at least somewhat unlikely that a massive volume or some number of players outside of a margin of error resubscribed to WoW to log in for a purposefully bad time with congested servers. Two – for simplicity’s sake, we’ll assume that literally all playerbase growth from Q2-2019 through to Q4-2019 was exclusively for Classic.

With those two qualifiers on the table, what we have is a playerbase that is, roughly, 50/50 split between the two WoWs. If you assume any crossover, it is likely to Classic’s benefit, but at the same time, it paints an interesting picture. Classic partisans talk up the idea that Classic is, by their expectations, surely blowing retail out of the water to a point where it isn’t even worth development time. However, I think two quarters in to the WoW Classic experiment, things have shaken out about where I would expect them to – the nostalgia element of Classic combined with some genuine bits of better design have pulled in people who otherwise wouldn’t engage with the game in its modern state, but there are a lot of people for whom the modern game is still a good timewaster, and a fair number of folks who enjoy it for whatever they get from it (raid content/dungeons/being a really cool 3D chatroom). The audiences being roughly 50/50 actually makes a fair amount of sense to me at this point in time – I expect that a major event like Shadowlands launch will pull people to retail, and major content waves in Classic (or, say, TBC Classic) will pull the balance back in that direction, but I think Classic just existing means there is a foundation of players that will remain in the Blizzard MAU ecosystem for the immediate future.

To me, both of these are good pieces of news – Classic needs a strong playerbase per server to maintain gameplay, and retail having a strong playerbase means the content I enjoy can continue to be supported, and both of those are good things.

Speaking of content I (hope) to enjoy…

-Shadowlands confirmed for 2H 2020: I hope this news surprises no one, because it should not, but in case you know anyone who had theories about a February to June 2020 launch for Shadowlands, feel free to point and laugh at them now. This is both good and bad news – it means Shadowlands is being allocated a proper amount of time to develop and be polished, but it also means the absolute earliest (don’t expect it) the game will be out is July, which means 5 months of patch 8.3 content. Based on this, my expectation is that we won’t even see prepatch for 9.0 until July at the earliest, which means timing will be interesting. We didn’t see a BfA alpha until early February of 2018, which means…we could have more news soon (and now that the World First race on N’Zoth has concluded, it feels like a safe moment to push some new content to get interest drummed up).

Overall, I’m not an investor in ATVI and I only really engage with Blizzard’s games under that umbrella, so I’m not here to discuss the actual financial data. However, I do think the trendlines are interesting, especially because the narrative they illustrate is one that can be informed by the various discussions we have all over the blogosphere!

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