Activision Blizzard – Famine in the Midst of Plenty

I already had a post queued up for today, one about EverQuest and the anniversary progression servers they just announced. But events have overtaken that, so it has been pushed off until tomorrow.  It can wait.  Instead there is a fresh turd in the punch bowl calling attention to itself and which I can’t seem to ignore.

Let’s talk about Activision Blizzard for a moment.

There are few things that can raise the ire against capitalism than a company declaring record revenue and announcing layoffs on the same day.  And yet that was yesterday for Activision Blizzard.

Unless this blog is literally the only video game site you read… in which case I am sorry… you have probably seen the news of yesterday’s earnings call spread around.

Bobby Kotick led the investor call yesterday and was able to declare that Activision Blizzard had its best year ever, earning $2.38 billion in revenue.  However, it wasn’t as good as he had previously promised.  Wall Street was led to believe that the numbers would be closer to $3 billion.  Furthermore, there was expected to be some decline from this earnings summit, with 2019 being described as a “transition year.”

To appease Wall Street for this it was announced that the company would be laying off 8% of its staff, adding up to roughly 800 people.  In my mind I see the scene from The Fifth Element where Jean-Baptiste Emmanuel Zorg callously approves a layoff, though that probably flatters the Activision.

The company was quick to follow that with a statement that these layoffs would not be hitting the actual game developers and that “in aggregate” it was expected that game development staffing across the company and its many titles was expected to grow 20% over the course of the year.  What “in aggregate” means is left to the imagination, since I doubt that we’ll every see any follow on indicating if or how this came to pass.  In aggregate some more developers at NetEase working on mobile games for Blizzard might count.

But this ritual sacrifice apparently worked for the moment as ACTI stock has been up a bit today, though the share price is still almost half of what it was back in October before BlizzCon.  I’m not saying that BlizzCon tanked the stock completely.  The price was already down to 65 before then.  But the week following BlizzCon it was down to 50, after which it fell into the 40s during the tough December for the market, finally dropping to its recent nadir in anticipation of the overall company not meeting its estimates.

And so it goes with public companies, where stock price and margins are everything.

When I was younger, back in college, there used to be concern about the dividends that stocks paid.  That was a key factor in their valuation.  It was, you know, an actual investment.  There were programs from companies like Coca-Cola that would allow you to buy some of their stock and then use the regular dividends to buy more so that over time you might have an investment that provided a decent income, something to help you later on in life.

That changed, largely because of Silicon Valley, with the trend in the late 80s that companies would deliver value in the form of growing stock prices.  Companies like Apple and Microsoft pay dividends rarely and very reluctantly. [Edit: Okay, those two do now, but they fought doing that for ages, and a lot of tech companies do not.]  Thus the stock market became became much more about speculation.  What was important was not how consistent a company had been in paying dividends in the past but how much the stock would be worth in the future.  You didn’t buy stock to hold but to sell.

So stock price became all important, and margins became the key measure by which Wall Street valued stock.  Margins, the ratio of expenses to revenue, as the Wall Street obsession has its own distorting effect.  You can boost margins easily by laying people off, or at least look like you’re attempt to boost margins.  You can also boost margins by buying other companies for their products rather than building your own.  Activision spending $5.9 billion to develop a mobile games library?  A huge hit to margins.  Activision buying King for $5.9 billion?  No hit to margins at all since it is assumed in all such transactions that what you bought was worth what you paid for it.  Want to know why EA buys so many studios?  That’s why.

Anyway, that is all based on my experience over the last 30 years in Silicon Valley, where the CEO, the board of directors, and the major investors all care primarily about stock prices if your company is public, and about setting up an optimum structure for going public if you are not already.  I don’t like it.  But if I attempted to avoid companies that behaved that way, which is almost every publicly held company and most larger privately held companies looking to go public, I’m not sure how I would get by.  Go read this series about what it takes to avoid the big five tech giants.

More interesting I suppose is what all this will mean for Blizzard, the one part of the company I actually care about.

On that front things do not look good.  On slide six from the investor call presentation the Blizzard portion stands out in its tepidness.

Activision Blizzard Q4 2018 Financial Results Presentation – Slide 6

You may have to click on that to view it full size for it to be legible.

Both Q4 and in 2018 overall Blizzard was third place in margins and second place in revenue, with King running close behind on that front.

Meanwhile the highlights listed are pretty stark.  Activision had a huge Q4 because that is when the release the latest Call of Duty every year, so you expect that to be huge for them.  But this year it set records.

King also showed quarter over quarter and year over year growth and was recognized for having a leading entry in the mobile games market.

And Blizzard?  I don’t think “sequential stability” is a winning phrase on Wall Street.  Signing a renewal with NetEase is nice, but I don’t think that was a surprise after BlizzCon, where we found out that they were building Diablo Immortal.

And World of Warcraft seeing “expected declines” post expansion already is downright depressing.  That used to be what happen at least a year after an expansion launched, then maybe something that was referenced six to nine months down the road.  But Battle for Azeroth launched in August, in the middle of Q3, and we’re being told that the “expected declines” hit in Q4?  That’s not good, not good at all.  I’m tempted to double down on my “early launch for WoW Classic” prediction from the beginning of the year.

I’ve already seen somebody suggest that this means that Blizzard will abandon WoW, which is ludicrous.  It doesn’t track logically at all because Blizzard doesn’t have anything else to fall back on.  Heroes of the Storm getting set aside was easy, it wasn’t a key revenue generator.  WoW is practically the company’s right leg, and the left leg, Overwatch, hasn’t been doing so well recently either.

And, on top of all of that, it has come out that Blizzard has no major “frontline” releases slated for 2019.   I am assuming that WoW Classic doesn’t count towards that and, as I have said, I expect it will do well.  But reviving the WoW subscriber base for the months that WoW Classic with be hot doesn’t sound like it will be enough.  A remaster Warcraft III isn’t going to be a big enough draw either.  And you can only have so many Hearthstone expansions in a single year.  That doesn’t leave much.

So I expect 2019 will become the year that is marked as the one that Blizzard became something else.  The departure of Mike Morhaime, the Diablo Immortal fiasco at BlizzCon, the rumors and leaks that Activision is getting more and more into the daily operation of the division to make it more like the rest of the company… a company run by a man who said he wanted to take the fun out of game development… and less like the Blizzard that could take the time to hone and polish a product before launch.

Anyway, we shall see what happens.  But I do not think it bodes well.

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14 thoughts on “Activision Blizzard – Famine in the Midst of Plenty

  1. khoronado

    Am confused by the statement “Companies like Apple and Microsoft pay dividends rarely and very reluctantly.” A quick check of NASDAQ showed that both companies have paid regular quarterly dividends since announcing their decision to do so (AAPL 2012, MSFT 2003). Companies can decide to halt dividend payments if necessary (AAPL did so in 1995) when their business took a serious downturn.

    I think you meant to say that very few tech companies have chosen to pay dividends but a little more clarity would be appreciated. Nice article and site as always.

    Liked by 2 people

  2. Kaylriene

    Great writeup! I hadn’t looked over the full investor presentation, so that slide of metrics is quite telling. In isolation, 35 million monthly actives is pretty good, but considering that over 20 million copies of Overwatch have been sold and that peak WoW was near 14 million, it is rather interesting to imagine how those 35 million split across 6 franchises. It’s also a very stark data point to see an expected decline in users so close to an expansion launch – although, I imagine in business projections, you’d likely see some drop-off pretty soon after launch, since not everyone who rushes in on day 1 stays much longer than the first couple of weeks.

    I can’t help but be cynical and believe that we are seeing the decline of Blizzard in real time. They’re not going to disappear or fade away, but what remains labeled as Blizzard seems like it’s going to be a husk of what used to be, which is a bit sad.

    Liked by 2 people

  3. Wilhelm Arcturus Post author

    @khoronado – That is what I get for stream of consciousness writing. I was going to get into them paying dividends at some point, mostly because they were forced into it by investors eyeing the huge cash reserves they have kept. They both resisted doing so for ages. And they still both maintain their stock prices by doing what a lot of tech companies do, which is stock buy-backs, which was something else I was going to get to but didn’t before it was time to go to bed.

    Sometimes I just hit a certain number of words, call it done, and go to bed. Also, I was probably feeling I was getting a little side-tracked onto that, which wasn’t the main topic at hand.

    Liked by 2 people

  4. Krumm

    Wilhelm, I can tell you from a long time Wow player (since the AQ20/40 War effort back in Vanilla)is that I am extremely unhappy with many of their actions in this expansion and the leading up to it. So mad in fact that I unsubbed and will not sub again until Classic comes out. I’m hitting them where they will see it in their pocketbook. Everquest II is getting my money until then.

    Now they did do a few good things, the stat squish, and the re-balancing the zones so that they can scale. Although they still didn’t do the upper limit which should work like Guildwars2 where when you go into a zone your max level shrinks down to the zone your in. The allied races are a mixed bag but are generally a good addition minus some bits Ill talk about below.

    But of the good things they have done a lot of bad and stupid things as well. First was the change from us being Hero to Champion/Leader of the forces and so forth. I love how Lord of the Rings has us always as the side character whom helps either behind the scenes or in the background behind the main characters. When they made us the bosses we lost flexibility and in many ways immersion. Then add the fact that once you give us a taste of the power of artifacts, legendarily, and godlike abilities it hurts when they go poof.

    Then when we are recovering from that pain of power-loss they decide to take away our tiered armor system. The thing that has been in the game for what the beginning. Oh and we are going to add this new armor type “Azurite” that when you do get an upgrade you have to unlock it…through a grind and when you do unlock it the abilities will be the same ones or a multitude of other mehh abilities. .

    Its become world of Grindcraft focused on Mythic plus these days. They added extra grind lockouts in attempt to keep us playing but many make little sense and infact make you want to play less…grind this rep to exalted to unlock allied races so that they can join the alliance/horde. What is my rep with them matter in the larger scream of the story?

    Don’t remember the pandas, worgens, goblins or blood elves costing me more then an expansions worth of admission to unlock. And speaking about locks they couldn’t help themselves and they just had to place a Mythic dungeon barrier to the end story (I wont ruin it for you by giving you any real details). I don’t even do heroics anymore, as casual as I am these days I cant do a mythic.

    Lastly for my rant does go-ith; the two allied races featured heavy pre-expansion as being the bases for the expansion: Kultirans and Zandalari Trolls aren’t even in the game yet.

    *My son says that this expansion is only one step better than WOD because of the current raids verry good…he says anyway* I feel its all headed in the wrong direction even thoguh I am so happy they finally added the islands that (cough) have been here since the beginning.

    My hope is that Classic fever will readjust the companies direction to a more “classical” direction. Krumm “the Disgruntled” Paladin of Ysera.

    Liked by 1 person

  5. Redbeard

    I thought of that scene from Fifth Element almost immediately after I read the post by Jason Schreier, and that’s extremely sad. (Not sad that it’s a great scene in the movie, but sad because that’s being nice to Bobby Kotick.)

    And yes, I’m also getting tired of working on posts that end up getting derailed for a while.

    Liked by 1 person

  6. Redbeard


    Shout out to a fellow Ysera player! Well, ex-player in both cases. I unsubbed after Mists because I couldn’t stand the breakage of the storyline introduced in Cataclysm, and when I saw that Warlords was going to perform more sleight of hand to create an alternate Outland/Draenor, I just threw up my hands and said “Okay, that’s it!”

    Liked by 2 people

  7. Alunaria

    Thank you for such an intelligent breakdown. I cherish the blogging community so much, expanding my knowledge on important matters like this. That scene describes it well, but in such a sad way.

    And what an overview of Blizzard there, in the middle; I can almost feel it being consumed.

    I am not fond of the “Don´t worry, we will hire more developers” speech. Whos to say, that all of those ain’t meant to be just placed in the mobile-gaming-box. Sad times.

    Perhaps they are just looking to get rid of their old customers (old as in those of us who have played for a decade or more) and instead grab all the teenagers today, who has no connection to Blizzard or anything nostalgic.

    I´m not sure if Classic would be released early, how early would you say, like, April? I try to get it straight; I imagine many bought that “6 months subscription” package – but perhaps the release of Allied Races land just when that expires. So they are looking for their next big “injection” of money after that. I´m rubbish at English today, sorry!


  8. Alunaria

    “Don’t remember the pandas, worgens, goblins or blood elves costing me more then an expansions worth of admission to unlock. ”

    I never really thought about it that way, that is true. I bet some genius thought, it would be clever to do Allied Races this way and extend the life and get players to come back. But why not work on things to make them STAY instead.

    Then again. They are not even finished, those Allied Races. Just as I suspect that the world of Kul Tiras and Zandalar are not finished either, since we cannot fly there yet.


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  10. Esteban

    Would it have killed them, I wonder, to go easy on the dividends and management remuneration in the face of all this?


  11. SynCaine

    Funny thing about the stock market is that ultimately companies like Amazon and Apple win (have the highest price gains) long-term, but they do so because they don’t focus on the short-term as much. Both Bezos and Jobs (and today I think Cook as well) would push back on quarterly pressure by saying they are focused on the big picture.

    Of course that’s easier to say/do when you know you are a juggernaut with a massive lead (iPhones and everyone buying everything on Amazon), but on paper its such a basic idea; of course your company will do better long-term if you plan for the long term, and of course you are hurting yourself if you make cuts today that only look good short-term. Yet as you state, that is how many, if not most, major companies operate.

    For Blizz specifically, long-term planning is exactly what made them different and successful (more time polishing, fewer releases of meh quality), and now short-term aims (more titles, faster releases) is why their reputation and numbers are dropping.

    Liked by 1 person

  12. JThelen

    > So stock price became all important, and margins became the key measure by which Wall Street valued stock.

    Stock price has always been how a company is valued on a per-share basis. This has literally never changed. Stock price is the present value of all future cash flows; what those cash flows are varies from company to company however.

    > Thus the stock market became became much more about speculation.

    This too, has always been a thing. People have been buying and shorting stocks using varying analytical tools or even black box voodoo for decades.

    > Anyway, that is all based on my experience over the last 30 years in Silicon Valley, where the CEO, the board of directors, and the major investors all care primarily about stock prices if your company is public, and about setting up an optimum structure for going public if you are not already.

    I really loathe this mindset, and don’t get the massive amount of hate or dislike so many people seem to have for public companies. Yes, public companies are beholden to their stockholders. That is because shareholders generally own a significant portion of the company; owning stock grants you equity in the company. There is zero difference in the goals of a public company and a private company in that regard; the sole difference is that the public company has shares outstanding to large and varied groups or individuals; private companies, particularly closely held private companies, are beholden to only a few people in the C-suite. That semantic difference aside, they both have one over-arching goal: maximize value to the ownership.

    On going public, there’s a reason that it’s such a big deal, and the reason is very simple. Going public represents an easy, few strings attached cash inflow. Privately held companies are reliant on revenues to generate cash for expansion, or by issuing debt, which has its own problems attached. Going public, offering ownership can raise significant amounts of cash for expansion, and in the short term, nobody is expecting you to pay a dividend. They will expect to see positive free cash flow at the least, and would prefer to see positive net income. But if a company isn’t doing any of that, why would you give them money at all? You wouldn’t, because you’d be throwing money away.

    That’s the crux of why I can’t stand this point of view. I highly doubt any rational person railing against public companies has a habit of throwing money away. Why would you expect a company to do that?


  13. Wilhelm Arcturus Post author

    @JThelen – You do not know your history then.

    Stock price has always been part of the valuation, yes. But stock price changed from part of the valuation mix, which also included dividends, to being the primary way to reap rewards on a stock with a promise of ever growing stock prices. There was an inflection point when it was decided that CEOs ought to be compensated in stock, thus rewarded by stock performance, rather than straight up cash and bennies. That seemed like a logical economic solution to how to compensate CEOs, but it helped make stock price important beyond reason. You can find studies on this if you look. It gets brought up often enough on discussions of the history of the market.

    As for reasons for going public, that saw a transition from the 60s to the 90s, which started with the idea that was in my finance text back in the 80s, that you go public to finance growth/expansion of the company. That became much more about paying off initial investors, the VCs, in the 80s and 90s. I’ve been through a few startups, including one that went public 25 years ago next week. There was always a push by the VCs to go public for no reason other than for them to cash out. That is why they lock out the employees with stock options from selling for six months to a year. They don’t want the rabble to dilute their cash out move.

    But at least the company I went public with had to follow some old fashioned rules about profitability over time and having multiple successful product lines. A year and a half later Netscape went public on pretty much no viable business plan at all, just good feelings, brand visibility, and a lot of hot air. You were supposed to buy their browser, but nobody did. Their server end software was eclipsed pretty quickly. But at least they seemed to be interested in using the money for something… mostly putting up buildings on Middlefield Road and up Ellis Street in Mountain View to house all the people they hired in the hope that somebody could come up with a money making scheme. Netscape, and many other dotcom companies, give absolute lie to your assertion about needing to see positive income.

    And on the other side, there is Google, which had no reason at all to go public save for letting the VCs who backed it cash out. It made, and continues to make, so much money off of ads and search placement that everything else it does seems like a science experiment.

    I am not particularly against public companies. They serve their purpose. But, as always, where money is involved people will look for a way to optimize the metrics. For example, you can’t spend more money on R&D, because that is a hit to margins, but you can acquire other companies because that is not. Since margins are a Wall Street obsession that plays directly into stock price, guess what companies do.

    We’re not back to the way things ran in the 20s, where the stock market was largely a scam with insiders rigging everything in their favor. But we’re not far enough away from that for me to be happy either. The mortgage lending crisis of a decade back, for which nobody faced any government sanction, should serve as a reminder as to what can happen.

    And there is this absurd notion that stock price somehow directly equates to the health of a company, that it is the company rather than a measurement of a discreet aspect of a company, that is just wrong. Go look at IBM. They’ve kept their stock price up over the last decade or more by lying, doing stock buy backs, selling off parts of the company, with the occasional wild gamble. Their buying Red Hat was a shocker (no hit to margins though!) but the best hope reaction people had was that maybe the Red Hat exec team will end up running IBM and there will be some future for the ever shrinking company.

    And some companies do get fed up with the constant scrutiny and requirements of being public. The company I work for brought itself private, in part to stop all the noise you have to deal with when you’re public. Michael Dell did the same with Dell. If you want to do anything long term, it really helps to be private if you can afford it.

    Going public is a finance tool. After that though the stock price of a company has little bearing on its operations unless it plans to sell more stock. That is something else that used to be a thing, but rarely is these days. Companies doing things like stock buy backs to support the stock price are the tail wagging the dog.

    Liked by 1 person

  14. PhearalDrood

    I’ve wondered if there wasn’t more to Morhaime’s departure than was being said publically. I have no proof, what so ever, but I’d be surprised if if wasn’t actually nudged out because of the declining financial position of Blizzard. Morhaime is famous for his view on game development, which is diametrically opposed to Kotick’s. Maybe you don’t battle that out when the financial picture is good. But when the financial picture isn’t so good, it’s likely a different story.

    I stopped playing WoW at the end of November, couching it as a break. But 3 months later I’m strongly considering cancelling my sub with no plans to go back this expac. Whether I go back in the future is an open question. I’ve questioned many developmental decisions in recent years, and I honestly see no improvement on the horizon. None of the other current, or projected, Blizzard games interest me. Seems I’m one of the multitude Blizzard has slowly pushed away.


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