Activision's New WoW Expansion Pack

Video game developer and publisher Activision Blizzard Inc. (ATVI - Snapshot Report) recently launched the fourth expansion pack of its popular subscription-based massively multi-player online role-playing game (“MMORPG”) World of Warcraft (“WoW”).

The pack, named Mists of Pandaria, is already available to gamers in the U.S., Canada, Europe, Russia, South East Asia, Australia, New Zealand, Mexico, Argentina, Chile and Brazil. Players can buy the game from retail stores as well as from the World of Warcraft website for $39.99. Activision launched a special collector’s edition pack simultaneously. The pack contains a number of bonus items and is available at a retail price of $79.99.

The pack expands the game to the shores of a lost continent and challenges players to embark on new adventures to unveil its secrets. The game features a new race (the pandaren) and a new character class (the monk), which are the additional attractions.

The expansion pack is aimed at boosting the subscriber base of World of Warcraft. The MMORPG has been a major revenue contributor over the years. However, the lack of fresh gaming content and competition from other title releases have resulted in a significant decline in the subscriber base lately.

As of June 30, 2012, World of Warcraft’s subscriber base was 9.1 million, down by 1.1 million from the previous quarter (March 31, 2012) and by 2.0 million from the year-ago period (June 30, 2011). Activision noted that the subscriber loss was more rapid in the eastern markets of China, Taiwan and Korea compared to the western markets of North America and Europe.

In order to gain market share in these regions, Activision, for the first time in the franchise’s history, decided to launch the new game in Taiwan, Hong Kong and Macau (September 27) and in mainland China (October 2), within a week of its western release.

With video game sales slowing down in the major western markets, Activision has been focusing on boosting its presence in the emerging markets of China and South East Asia. Activision has licensing agreements with two of the leading Internet providers in China, which will help it to make inroads in the Chinese online gaming market. The market is expected to grow at a compound annual growth rate (CAGR) of 40% over the 2009-2015 period.

We believe that the new expansion pack will help Activision to solidify its position in China going forward. The game has already received approval from Chinese authorities, which removes a major obstacle in our view. We believe that the new content and features will provide a significant impetus to the dwindling customer base of the World of Warcraft game going forward.

We believe that subscriber expansion will drive top-line growth going forward. Moreover, the new expansion will provide Activision a significant competitive edge over Electronic Arts Inc. (EA - Analyst Report) going forward.

We maintain our Outperform recommendation on the company over the long term (6-12 months). Currently, Activision has a Zacks #1 Rank, which implies a ‘Strong Buy’ rating in the short term (1-3 months).