A new report from analyst group DFC Intelligence's David Cole looks at the unique path that gave rise to Blizzard's groundbreakingly-populated MMORPG World of Warcraft, including the myths behind its international impact, and the forecast for competitors hoping to break off a chunk of Blizzard's success.
The full text of Cole's report, which was released on the analyst firm's official website
as part of a new DFC Intelligence Online Game Market report, follows below:
"With the interactive entertainment world’s attention about to turn to the new console systems, we thought this month we’d instead take a look at one of the most successful PC game products ever, World of Warcraft (WoW). WoW is of course, a subscription-based massively multiplayer online game (MMOG). What makes the product unique is not necessarily the number of users, but the number of users that are willing to pay up to $15 a month to play the game. The game has raised the bar for MMOG products, particularly in terms of revenue generation. However, there are some fundamental misconceptions about the game that are particularly problematic.
In the end, it is a great game that has perhaps recalibrated investor expectations for MMOG products beyond what makes sense. There is a lot of supposedly new talk about the “World of Warcraft model”. To longtime industry observers, this talk is more retro (or even tired) than it is revolutionary. We have heard this tune before, only where the lyrics once featured EverQuest, now they sing World of Warcraft. Still, WoW developer Blizzard Entertainment obviously did something right and it only seems natural to ask what it was. It is only after understanding how Blizzard made WoW a success that companies can ask such questions as: is that success duplicable and if so is our particular company in a position to duplicate that success?
First, however, it is important to debunk a persistent myth about WoW’s success. The confusion results from WoW’s status as a truly global game. We know, from the game’s Chinese operator the9, that Warcraft has 5 million Chinese players. Of course, this is a terrific feat as WoW became the first Western game to penetrate the dense and difficult Chinese market. However, these Chinese users are not subscribers in the Western sense of the word: they do not pay a recurring monthly fee. In fact, they generate about 0.36 yuan per hour of gameplay; that’s about 4 cents an hour. Of course, Chinese users log a lot of hours. In the second quarter of 2006, World of Warcraft generated $32 million. While this is a substantial sum in the Chinese MMOG world, 5 million Western subscribers would have generated more than $200 million over the same time period. Thus, Chinese players generate about 15% as much revenue as their Western neighbors.
What we know for sure is that World of Warcraft has had one million North American subscribers and one million European subscribers for a total of over two million Western subscribers. This, in and of itself, is an astounding feat. No game had been able to top 750,000 subscribers in those territories, let alone one million or two million. It is important, however, to remember that in terms of revenue generation, World of Warcraft is just one star among the many high-flying video games with millions of unit sales.
For example, popular Electronic Arts franchises like Madden football and Need for Speed can sell over 5 million units a year at around $50 each. In addition, because World of Warcraft is a massively complicated online game, the cost structure is far different from a Madden or Need for Speed. WoW costs more to run and new content must be continuously added. The game generates more revenue per user, but costs per user are substantially higher than with traditional game products.
Nevertheless, a product like WoW is tremendously profitable and its success in the West did come as a bit of a surprise. To most outsiders, WoW looks pretty much like any other high-end fantasy MMOG. Did World of Warcraft actually change the MMOG template that products like EverQuest established or did it merely perfect the player experience for the genre? From the gameplay perspective, World of Warcraft made evolutionary changes to the MMOG. Namely, Blizzard made WoW a lot more like a traditional game. Taking the template as a starting point, WoW made it easier to play the game alone and/or without “making new friends”. Research by a group of researchers at the Palo Alto Research Center suggests that the majority of WoW players spend most of their time playing alone. Very few have dense or large online social networks. In other words, like most traditional videogame and PC players, they are playing by themselves or with a couple of friends.
Unlike some games which force players to cooperate, WoW facilitates the go-it-alone mode of gameplay. A good deal of the action in World of Warcraft does not occur within the massively multiplayer setting where there are hundreds to thousands of people. Many quests allow the player to enter into an “instance” which is a sort of parallel universe in which the player and whatever group they are part of leave the main gameworld and enter a “court” of their own. Instancing, as it is known, is a controversial practice among the hard-core MMOG crowd because it breaks the illusion of the game as one seamless “virtual world”.
On the other hand, it allows players greater control of their individual experience and reduces server overhead and lag. The practice also allowed Blizzard to provide direction for player versus player (PvP) gameplay. The normal MMOG focuses primarily on player versus environment (PvE) experience where a user goes on a “quest” and focuses on fighting computer generated monsters and building their character level. With PvP players fight each other. For WoW, Blizzard introduced “Battlegrounds” about 6 months after the original game release. These are essentially minigames that are almost like the “Deathmatches” from first person shooter (FPS) type games. In the first Battlegrounds release, there were an epic game with up to 40 players and a “Capture-the-Flag” 20 player match. The battles also provided a much needed boost to the factional strife that World of Warcraft fosters between the game universe’s races, the Alliance and the Horde.
Both the PvE and PvP instanced content has proven incredibly popular even as it has led to derisive commentary from MMOG purists. It appears to us that instanced content lets Blizzard formalize some of the way users play MMOG. For years, different play styles led to social problems among players who were following different implicit rules. Also, many users are not attracted to a purely open-ended game. Some players want clear winners and losers as in an FPS or sports game. Now, people who like PvP battles can engage in those in their own arena while PvE players can hang out in the auction house. This has enabled World of Warcraft to draw players who would normally be classified as moderate gamers, the types who play Counter-Strike, Call of Duty, or Battlefield.
Instancing and support for solo players, however, are not limited to World of Warcraft. Many other games provide the same types of play to various degrees. A great deal of WoW’s success can probably be attributed to the elusive “fun” factor. So is it simply about building another product that consumers find to be fun? Developing an online game with the quality of WoW is probably within the reach of several companies, assuming they have around $25 to $50 million to invest in creating a well-designed fun game. However, having a high-quality, fun product was only one part of WoW’s unprecedented success. There are several other key factors that will be much harder to duplicate. Blizzard’s global execution was based on years of experience and backed with very strong brand recognition. The foundation for WoW’s success was started years before actual product development commenced.
World of Warcraft is the first truly global online game. At least as impressive as the game’s success in China is its more than 1 million customers in Europe. No other MMOG has even claimed 100,000 European subscribers. Blizzard actually treated Europe like a different market that needed its own operations staff, etc. They released the game in German and French in addition to English and have a Spanish version planned. Blizzard Europe has 450 employees with 22 nationalities represented among them. No other online game company has even half of that presence in Europe except Jagex, the British developer of Runescape.
Blizzard was able to launch a product on a global basis because they had years of experience with releasing and operating online games around the world. For example, Blizzard’s StarCraft title helped kick start the entire South Korean game market in the late 1990s. Blizzard’s decade long experience with its free Battle.net online game service was clearly a major factor in WoW’s success. Most online game developers have had mere thousands or at best tens of thousands of users. Blizzard was used to dealing with hundreds of thousands of users on a daily basis. This type of large-scale operations experience cannot be underestimated. In China, companies like the9 take a substantial cut of revenue solely for their expertise in running these immensely complicated enterprises. WoW did not come out of nowhere and was the result of years of experience. This type of experience is probably impossible to duplicate.
Finally of course there is Blizzard’s reputation and the brand strength of Warcraft. Blizzard’s franchises like Warcraft, StarCraft and Diablo were among the most popular PC games of all time. Blizzard is definitely a company well-known for quality of product not quantity. They are a company with a reputation for taking the time to get things right. For example, it took over six years between the release of Warcraft II and Warcraft III. Furthermore, Blizzard, at the time of WoW’s release, was probably the most respected online gaming company in the world. Through years of supporting online games at Battle.net with a high level of service, the company was known as responsive to player desires and just plain good at running online games. Unlike many game company brands, Blizzard had proven its international appeal with massive popularity of StarCraft in Asia, particularly outside Japan. Blizzard even had some indirect benefit from piracy. Warcraft games were some of the most popular pirated games in China and other parts of Asia and this lead to strong brand recognition.
All of these factors point towards one conclusion: World of Warcraft’s success, admirable as it may be, will be extremely difficult to duplicate. This will be bad news for all the frothy investors who are suddenly discovering the MMOG business model. In the new DFC Intelligence Online Game Market report we forecast revenue in the MMOG market to grow over 150% from 2006 to 2011. However, this doesn’t account for all the investment money that is likely to be lost chasing after that revenue growth. After EverQuest’s success over five years ago, millions of dollars flowed into the MMOG industry, far beyond what it could support.
The fact of the matter is that most success with MMOG comes with smaller, dedicated online game companies that use small amounts of investment money to great effect. Jagex’s Runescape, CCP’s EVE Online, and Three Rings’ Puzzle Pirates are three games that found niche success by scaling their efforts to what was feasible. Jagex’s Runescape has even crossed into mainstream territory with over 800,000 subscribers as a result of its less demanding computer requirements and low cost ($5 a month). This is another example of how innovation with gameplay and business models tends to produce hits. For the health of investors and the MMOG space, let’s hope that this lesson doesn’t have to be relearned the hard way. However, when a product generates as much money as WoW it is inevitable that the dumb money will start flowing freely. Just don’t say we didn’t warn you."