Activision Blizzard's Layoffs May Be Tied to Demise of Popular Game

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Trefis) -- Activision Blizzard ( ATVI) is laying off around 600 employees.

The company said Wednesday that the cuts would occur in its Blizzard Entertainment unit, which runs the popular "World of Warcraft" (WoW) online fantasy game franchise.

While Blizzard justified that the staff reductions are in sync with its current organizational needs, it's not certain whether this move was due to declining "World of Warcraft" subscribers.

Activision Blizzard competes with other video game developers like Electronic Arts ( EA)SDAQ:EA), Take-Two Interactive Software ( TTWO) and casual gaming mainstays such as Zynga ( ZNGA).

See our full analysis for Activision Blizzard here.

In trying to understand the link between declining WoW subs and Blizzard's recent staff reduction, it's important to understand the impact of "World of Warcraft" on the company's value. "World of Warcraft" is officially the most played MMORPG throughout the world with a subscriber base surpassing more than 10 million members.

With the high gross margins involved in MMORPG genre, WoW is considered to be a cash cow for Activision Blizzard. As displayed in the chart above, WoW-related sales contribute roughly 28% to Activision's stock price.

However the company's blockbuster game has been on a decline since the beginning of 2011. We believe the decline is primarily related to the emergence of free to play and other competing subscription based MMOs.

The latest and most credible is the threat from rival EA's Star Wars: "The Old Republic" (SWTOR), which many critics believe may derail "World of Warcraft," owing to aging of WoW and SWTOR's technical superiority over WoW. The numbers also seem to support SWTOR at present, which has amassed a sizable subscription base of 1.7 million subscribers since its launch on Dec. 20, 2011.

A declining subscription base of "World of Warcraft" has in turn taken a toll on the company's recent stock performance. Despite solid quarterly results in the third and fourth quarters, Activision's stock price took a hit after the company announced a decline in WoW subscriptions.

Considering the immense importance of "World of Warcraft" for Blizzard and the scale of WoW's operations, we can make an educated guess that many of the lay-offs should come from its World of Warcraft division.

As Blizzard has denied that any of its World of Warcraft development team members are in the list of 600 sacked employees, we believe the cuts could come from WoW's operational division. This, in turn, suggests that since World of Warcraft's popularity has peaked, it is considering a reduction in the scale of WoW's operations.

Another aspect worth considering in this scenario is the company's attempt to change its strategy of relying too heavily on a single game. A heavy focus on WoW has reaped big gains for Activision Blizzard in the past, but the recent decline in WoW subs has also taken a toll on Activision's stock value, despite formidable success of "Call of Duty: Modern Warfare 3."

This trend is also visible through Blizzard's enhanced focus on "Diablo 3," without giving much attention to WoW's declining subs. Additionally, with its latest feature of auction house, the business model of Diablo 3 is based primarily on micro-transactions. While there was initial speculation in the gaming circles that Diablo 3 may also go World of Warcraft's way by adopting a subscription based business model, the eventual adoption of a micro-transaction model suggests that Blizzard's strong faith in relying on a subscription model has been shaken.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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