Activision’s dependance on World of Warcraft may mean that any subscriber loss will affect the bottom line.

We’ve seen the writing on the wall for some time now. After years of dominating the entire MMO marketplace, World of Warcraft is slowly but surely declining. That’s not to say the game is in trouble just yet; even if WoW didn’t have at least one major expansion to go, it continues to rake in millions of dollars in revenue. According to hedge fund experts Leonid Levit and Derek Cheung, however, those millions actually represent a much bigger problem. After taking a closer look at Activision Blizzard’s finances, they concluded that the publisher is so dependent on World of Warcraft‘s massive revenue that the game has actually become the publisher’s greatest weakness.

“After looking into Activision Blizzard, Inc. … we discovered an amazing looking company that is unfortunately almost completely sustained by the revenue it reaps from one game, World of Warcraft,” Levit and Cheung wrote in a Forbes guest post. “[WoW] has helped ATVI maintain its stock price, with this one single game providing roughly 30% of the revenue for the entire company via its expansion packs and monthly payments … Since WoW has very high operating leverage any decline in revenue will have dramatic effects on the bottom line.”

To prove their point, Levit and Cheung did some number crunching to see what would happen if World of Warcraft had a 25% drop of subscriptions, which is a lower percentage than Star Wars: The Old Republic recently suffered. “We estimate that ATVI’s gross profit of the subscription business could drop to $779 million from the current $1.12 billion and software gross profit could drop to $75 million from $100 million if a mere 25% of current subscribers stop playing WoW,” the report reads. “With the combination of these numbers, we project ATVI could experience a drop of up to $366 million in gross profit in the 6 months following the release of Guild Wars 2 at the end of August 2012.” At that point, even popular franchises like Diablo or Call of Duty won’t be enough to keep stock prices from dropping by $7 this fiscal year alone.

Levit and Cheung seem to think that Guild Wars 2 is a “fierce competitor” to WoW, since its popularity and lack of subscription fees puts it in an ideal position to be the fabled WoW killer gamers have been hearing about for years now. Whether that will actually happen or not remains to be seen, but the stark fact is that Activision isn’t just facing lack of interest in a flagship title; it might actually be facing losses for the entire company.

Source: Forbes

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