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Summary

  • World of Warcraft sales and subscriptions are declining due to a few reasons. Mostly because The League of Legends has stolen market share but is not an MMORPG.
  • World of Warcraft's sales and subscriptions should continue to decline because bethesda softworks has been developing an elder scrolls MMORPG to compete with world of warcraft.
  • Losing MMORPG market share is likely only going to result in short-term volatility. ATVI's long-term prospects appear attractive.

In the gaming industry, the value of the company is predicated upon the popularity of its products. Activision Blizzard (NASDAQ:ATVI) is ranked as one of the industry leaders within the gaming industry because of the immense popularity its products have. In the wake of the release of "Call of Duty: Ghosts," investors are looking toward the release of "World of Warcraft: Warlords of Draenor" in August. Competition within the massively multiplayer online role-playing game (MMORPG) market continues to heat up. Resulting from stiff competition and the emergence of its first real competitor in the MMORPG market space, World of Warcraft is under threat of losing its ranking as the number one subscription-based MMORPG.

Why World of Warcraft Sales and Subscriptions Have Been in Decline

The World of Warcraft franchise has been a cornerstone of Blizzard Entertainment's product line for nearly a decade. In 2013, World of Warcraft suffered a loss of 1.8 million subscribers compared to 2012 and has lost 4.2 million subscribers since 2010. This decline in subscriptions, or otherwise popularity, for the World of Warcraft franchise is the result of "free to play" MMORPG games entering that market, but, the emergence of a non-subscription based and free to download multiplayer online battle arena (MOBA), "The League of Legends," has likely been more of a factor. Since its release in October 2009, "The League of Legends" has grown into the most played PC game in North America and Europe.

According to the Riot Games:

"As of January 2014, over 67 million people play League of Legends per month, 27 million per day, and over 7.5 million concurrently during peak hours."

Why World of Warcraft Should be Expected to Lose Market Share

In April 2014, in collaboration with Zenimax Online Studios, Bethesda Softworks will release "The Elder Scrolls Online," a subscription-based MMORPG. For those unfamiliar with "The Elder Scrolls" franchise, its top accolades include: PC Game of the Year, Overall Game of the Year and RPG of the Year. The Elder Scrolls is the first real competitor World of Warcraft has ever had.

The most recent release in the Elder Scrolls franchise was "The Elder Scrolls V: Skyrim." Released in November of 2011, the action RPG had an estimated through sales of $450 million (roughly 7.5 million units) two weeks after it was released. As of June 2013, roughly 20 million units had been sold worldwide.

According to experienced beta tester and MMORPG expert Sebastian Ferlin:

"I've played WOW (World of Warcraft) and I'm ranked in the top 4 percent of all players playing League (League of Legends) in North America, but I've been playing ESO beta (Elder Scrolls Online Beta Release) a lot lately. If you ask me, it's about 1,000 times better than WOW."

Source: Elderscrollsonline.com

The Long-Term Prospects

After I came to the conclusion the World of Warcraft franchise would lose market share, I began to ask myself what the long-term outlook would look like. I see this pullback as a buying opportunity. The reasons I'm bullish over the long term are:

1. Management is committed returning capital to shareholders in the form of repurchasing shares to offset the dilutive effects of stock-based compensation and also by increasing the quarterly dividend payout.

2. As further progress is made in the transition away from sales of tangible discs towards sales by download, profit margins will expand. Apparently, the video game industry is the last to transition away from discs. The music and the film industries have already transitioned into digital sales and away from discs for the most part.

3. The brilliant financial engineering displayed in the later part of 2013 gives credit to the notion that Activision's management has a plan to offset the loss in the MMORPG market. This may come in the form of an acquisition or the unveiling of a new product.

Conclusion:

I do not doubt the long-term prospects of Activision Blizzard, or the abilities of the company's management. However, the opinions of the experts testing the beta release of "The Elder Scrolls Online" are keeping me from pulling the trigger and purchasing the stock. For me, personally, I need to see the consumer reaction to the entrance of The Elder Scrolls franchise into the MMORPG market. With "Warlords of Draenor" being released in the shadow of what could, potentially, be the 2014 PC game of the year, it's entirely possible that World of Warcraft loses the top spot in the MMORPG market. Investors will likely be granted another buying opportunity in the coming months.

Source: Activision Blizzard: Will World Of Warcraft Lose Market Share?

Additional disclosure: This is not a buy or sell recommendation. It is intended to provided investors with a starting point for their own research.