This is a transcript of the discussion by Blizzard Entertainment CEO Mike Morhaime at the Activision Blizzard Q3 2011 Financial Results Conference Call held on November 8, 2011 at 1:30pm PDT.

Our visitors can also view the slideshows presented at the event and listen to the voice recording which comprehends Mike Morhaime’s speech and the live Q&A with investors and shareholders.

Highlights

  • Diablo III Real-Money Auction House will be tested in beta very soon.
  • World of Warcraft localization version to hit Brazil on December 6th.

Transcript

Mike Morhaime: Blizzard has just enjoyed another successful BlizzCon a few weeks ago sharing exciting news with 26,000 live attendees and more than a million online viewers from 144 countries around the world.

We made several big announcements. This included the world premiere of our new World of Warcraft expansion: Mists of Pandaria, and a showcase of the multiplayer side of our upcoming expansion StarCraft II: Heart of the Swarm.

We also featured our upcoming Blizzard DOTA free-to-play online game, and generated even more excitement for Diablo III.

We hosted packs of crowds for our most exciting eSport tournaments yet; and finally we announced our World of Warcraft Annual Pass. I’ll go into more detail on everything in a moment.

First, I wanted to touch on our results for the past quarter. Our revenues for the first quarter of 2011 are down versus last year, which included the record setting launch of StarCraft II: Wings of Liberty.

World of Warcraft finished the quarter with 10.3 million active subscribers worldwide — which is down from our previous quarter.

While the majority of these declines are coming from the East. World of Warcraft continues to be one of the most popular online games in China, and remains by far the most popular subscription-based MMO in the world.

That said, we know there are improvements we can make in game content. The level up content in Cataclysm is some of our best works, but it was consumed quickly compared to our past expansion set: Wrath of the Lich King.

Once players reached max level, the end game content in Cataclysm is more difficult. Balancing this content for our diverse playerbase can be very challenging.

Our development team is constantly analyzing the game and we continue to explore ways that we can adjust the game to better satisfy both hardcore and casual players.

To that end, our next free major content update for World of Warcraft is already in testing, and will be available for the players in upcoming weeks.

This is our largest update since Cataclysm launched. We’ll include our biggest and best rated content ever featuring the iconic dragon Deathwing, as well as a new Raid Finder feature.

The Raid Finder will make it easier than ever for casual players to experience end-game content, and it will open up a big part of the World of Warcraft to more of our players.

Looking beyond our next content update, the development team is already hard at work on our next expansion set: Mists of Pandaria.

We introduced the Pandaren race to the Warcraft universe with Warcraft III, and players have always been eager to see them introduced to World of Warcraft.

We’re finally making them a playable race in Mists of Pandaria, and the announcement trailer has already collected more than 2 million views on YouTube.

We’ll be introducing a number of new features to this World of Warcraft expansion set, but one that has gotten a lot of possitive buzz from players and press is our new Pet Battle System which we believe will be very appealing to casual players.

For hardcore players we have plans to focus the story heavily on the Horde and Alliance conflict. Combined with some new PvP features, we believe the new expansion will have a lot of appeal for our diverse audience.

Aside from the new expansion set, we made another exciting announcement at BlizzCon: The World of Warcraft Annual Pass.

The Annual Pass is the initiative we created to reward the loyalty of our current subscribers as well as welcome back past players.

It’s very simple. If you make a 12 month commitment to World of Warcraft, we give you Diablo III for free, along with an invitation to the next World of Warcraft beta and an exclusive in-game mount.

This is a limited-time offer that is only available to players who have created a World of Warcraft account as of October 18th. We have seen a tremendous response to this promotion and we believe it’s a great way for us to leverage the size and passion of our World of Warcraft playerbase to drive even more momentum around Blizzard games.

We have other marketing plans in the coming months for World of Warcraft, but we are not ready to share details yet.

Closing our discussion on World of Warcraft, we have recently announced a new localized version of the game will hit the Brazilian market on December 6th.

As we’ve mentioned in the past, Brazil is one of the fastest growing markets in terms of online connectivity, and it’s already in the Top 10 countries in terms of Broadband users.

We’re looking forward to seeing our expansion in Brazil, our new content updates, and other initiatives which contribute to the growth of World of Warcraft.

Moving on to StarCraft II, we showed off the multiplayer aspect of StarCraft II: Heart of the Swarm at BlizzCon for the first time.

Players were very excited to play the new units, and the game has generated a ton of buzz.

The new trailer that we released for the game has also gotten a lot of press and attention with more than a million views on YouTube.

In addition to Heart of the Swarm, the StarCraft II development team has been hard at work on a new Free-to-Play online game: Blizzard DOTA.

This game was created by our development team using the StarCraft II engine and we debuted a new version of it at BlizzCon. Blizzard DOTA has gotten a lot of positive interest from Press who attended the show, and will be our entry into a increasingly popular genre of online games.

The newer games in the market operate on free-to-play basis, with micro-transaction elements. With that in mind, we’re currently exploring what type of business model will have for Blizzard DOTA, and we’ll look forward to share more details about the game in a near future.

On the Diablo III front, we’re still targeting an early 2012 launch. We’ve been collecting great feedback from our ongoing beta test, and Blizzcon; and the team is using that feedback to continue polishing and improving the game.

We have also been testing the Gold-based Auction House functionality through the beta, and we’re gearing up to test the Real-Money Auction House system very soon.

We’ve very high expectations for Diablo III. The buzz surrounding the game continues to be tremendous, and our new trailer of the game at Blizzcon was one of the highlights for the show.

In closing, 2012 is shaping up to be one of the busiest and most exciting years in Blizzard history. We plan on having at least two major releases, and as BlizzCon demonstrated, we have a lot of great games coming down the pipeline.

We continue to invest in development and customer service to support long-term growth, but for now the company is focusing on execution and giving great games out to players.

 

 

Conference Call Q&A

Answering questions to shareholders were Mike Morhaime, Thomas Tippl and Robert Kotick.

Brian Pitz – UBS Investment Bank

Pitz: Can you give us some additional color on what’s happening to engagement and subscriber levels for World of Warcraft, particularly following that big expansion pack announcement? Where do you think the subscribers are actually going? And I’ve got a quick follow up.

Morhaime: Okay. Well, as you know, we don’t provide a forecast on subscribership levels. But I’ll say is that the announcements at BlizzCon were incredibly well received. There’s a lot of excitement around the expansion and the upcoming content in the next patch, which will be introduced in the next couple of weeks. It is currently in test on our public test realm, and we’re very excited about that content. I guess, I can say this, the majority of the declines were in the East. China still represents more than half of our global player base and, historically, December has been a very good month for subscriber trends. We have a number of initiatives planned. We plan to be very aggressive in terms of our marketing promotions, and we’re looking forward to the end of the year.

Pitz: Great. And maybe this is a question for Thomas, as well. How should we think about the Diablo III promotional offer that’s being provided with the annual subscription option?

Tippl: From our perspective, the reception to the offer has been phenomenal. As you would expect, I think, it’s a tremendous value offer for existing and lapsed players. So we’re not surprised. And I think it’s going to continue to help broaden and deepen the engagement of the Blizzard community overall, and I think that’s particularly desirable to us because as we look into the future, I think we recognize there’s more competition heading into the MMO genre overall, because it’s a very attractive genre. And so we want to make sure we continue to offer our players, not only the best content but also the best value.

Pitz: And should we assume that’s a margin neutral event for the most part?

Morhaime: The more interest that we drive towards Diablo III, we think the more interest our players will continue helping to drive for us Diablo III.

Tippl: I think from a margin perspective, I think that it still remains to be seen. As you know, Diablo III launches with a real money auction house. So it provides an opportunity to potentially generate high margin revenues from additional Diablo players which we might not otherwise get to. But I think obviously, that’s still early days, and we’ll find out about that once we use the product in the market.

Neil Doshi – Citi

Doshi: I had a question about the Blizzard operating margins. It looks like margins have been coming down from the traditionally high 50% range to now kind of 40%. How would you think about margins going forward? And would we continue to see continued pressure on Blizzard margins? Or has most of the development been done there, and we can hope to expect margins get back in that 50% range?

Tippl: I don’t think it’s a surprise that this year the margins are down because we are developing a whole host of products within Blizzard. Effectively, we have 5 products in development, none of which has launched this year. So you got all of the development costs and none of the revenue. So next year, we are seeing at Blizzard, as Mike mentioned earlier, a minimum of 2 releases. So I think with that kind of additional leverage on the top line, I think you will see those trends reversing.

Kotick: And things like the auction house, we haven’t shared a lot of detail about what the margin strategy looks like, but obviously, it’s a very high margin component of the overall franchise.

Morhaime: Yes, I think it’s a difficult comparison this year because if you look at last year, we had 2 major launches. This year, zero.

Doshi: On the Diablo beta, what learnings have you found so far from the players’ community and how’s the auction house testing going relative to your expectations?

Morhaime: Feedback and testing have been extremely positive in the beta. Keep in mind, the amount of content that we’re exposing to players is very limited because we do want to save the vast majority of that content for the actual release. But even within that small amount of content, people are playing it over and over, experiencing with the various characters, and we’ve been reading the feedback and talking to people at BlizzCon. One of the most common questions that I got asked at BlizzCon was just, hey, they want to get their friends into the beta, how do they do that? Of course, it’s very difficult to do.

Jeetil Patel – Deutsche Bank

Patel: As you look at the Diablo, Warcraft bundling strategy, I guess, the idea behind that is to get as many users on Diablo and the real opportunity from a modernization standpoint will be auction house in terms of the transactional flow there. I’m curious how much do you think there’ll be in terms of the cannibalizations of the pre-packet offer sale through the bundling strategy? On Warcraft, 10.3 million subscribers, what’s your best guess as to where that number kind of settles in at as we look out over the next 12 months or so?

Tippl: On Diablo, I think that benefits that we see from the Diablo are really two-fold. I think one, it’s going to, because it requires a 12-month subscription to World of Warcraft, it’s going to extend the subscriber life. And as a result, it’s going to generate more revenues, more high-margin revenues at World of Warcraft. And in addition, as Mike and Bob had mentioned earlier, we also think that the larger the Diablo community is and the larger the marketplace around Diablo’s real money transaction auction house is, the greater the opportunity to also generate income and have a long tail behind Diablo. And then on the subscribers, Mike mentioned earlier, we’re not providing any subscriber forecast. We haven’t done so in the past. We’re not starting right now. I think we’re providing you a financial forecast, which includes, as always, prudent proven assumptions around all of our variables that go into our financial plan.

Patel: Maybe if you look at Auction House going backwards to the prior Diablo or maybe what you’re seeing in early testing, can you talk about how many transactions the average player typically does in a given month? Is there any way to quantify that?

Tippl: There isn’t really, because the experience that we are going to offer is going to be so much better than anything players were able to see in the past on Diablo. So where we are really looking is. I think, the general acceptance of gamers for our different types of business models existing in the past in terms of more micro-transaction base has increased substantially over time. So we are really looking more for benchmarks really outside of currently relevant micro-transaction-based games. And as you know, those trends have been very encouraging. But for us, we’ll have to see until we get into the marketplace. I mean, if we didn’t think it’s a significant opportunity, we wouldn’t be doing it.

Morhaime: So let me just add to that. It’s really impossible to extrapolate behaviors from the limited beta experience we’re offering to the more open-ended ultimate Diablo III experience. But if you look at Diablo II and even Diablo I player behaviors, there was a big need to trade items between players, and we found that a lot of our players are going to third-party sites to perform that trading. And so, the main reason that we’re doing this is to provide them a safe and secure environment to perform that trading. We think it’s going to make for a better game. We think it’s going to lead to longer engagement with the game, but in terms of the volume, I think it’s very difficult to predict.

Eric Handler – MKM Partners

Handler: Just out of curiosity, when you’ve had big patches before with World of Warcraft, what type of subscriber uplift do you typically see?

Morhaime: Well, historically, with the content updates that we’ve done, it’s really not intended to go out and drive new user acquisition, that’s a whole other strategy. But it does drive engagement with the game, and so that will impact churn, if we do it successfully and eventually will drive win back, as players tell each other about the content they’re enjoying. We’ll hopefully see a lift in our ability to win back players that may have already churned.

 

 

Recording

 

 

Slideshow Gallery