Friday, May 27, 2011

World of Warcraft (WoW) as a Social Network

As reported on Yahoo Games (PluggedIn Blog) earlier this week, Activision Blizzard shocked the gaming industry by announcing that it has seen a 5% reduction in number of subscriptions in the previous quarter for its massively multiplayer online role-playing game (MMORPG) WoW franchise . While absolute figures look astounding (a loss of 600,000 subscribers), the fact remains that WoW still has 11.4 million subscribers paying monthly fees to play the game. But this got me thinking. Are MMORPGs viable analogies to social networking sites like Facebook and Linkedln?

On paper, the similarities between MMORPGs and social networking sites are limited to games. After all, the main purpose for individuals to join a MMORPG like World of Warcraft is --as the acronym suggests-- to play games against other human players. (I know from personal experience that playing against the computer is only fun when you're a newbie). Social networking sites, on the other hand, are predominantly for the purpose of facilitating communications between individuals. There are popular games on social networking sites, like Farmville on Facebook, but playing these games is often not a strong enough incentive to join. Another major difference is that MMORPGs charge a subscription price in one form or another: some like WoW charge fixed monthly fees, while others like Guild Wars only charges an initial purchase price.

Differences between the two aside, MMORPGs and social networking sites share a very significant element. Both are built on exponential growth models, meaning that their intrinsic value (to both the owners and the subscribers) is contingent on its popularity. The more subscribers use the social network, the more valuable it is -- and the same applies for MMORPGs. Either is useless/worthless when the population of users is minuscule. For this reason, at the onset there is an immediate need to popularize the platform and thus enlist as many users as possible. Facebook did this in the fall of 2006, when it became available to everyone with a valid email address. Activision Blizzard used the strong fan base for the Warcraft series to launch WoW, which fulfilled the dreams of many die-hard gamers by offering an immersive experience in the (fictionalized) Warcraft world.

But I am going to take the analogy one step further. Eventually, social networks and MMORPGs alike will reach a point of market saturation (where their growth in subscribers will stagnate as most of the target population has signed up). The only means of increasing the growth rate would be to innovate -- offering new products that expand on the target population's needs and desires. Again using Facebook as an example, Facebook introduced the controversial "newsfeed", "like" button, and third-party applications into its platform over the past 3 years. The counterpart for WoW has been expansion sets like the "Burning Crusade". These so-called innovations serve to maintain the subscribers' interest in the platform.

The Yahoo Games article pointed out that a likely reason for Blizzard's loss of subscribers is the slow rate of development for the WoW platform. Since its release in 2004, WoW only has three expansion thus far -- the last being "Cataclysm" in the winter of 2010. The point is that, as immersive and big as the game world is, experienced players will eventually become too familiar with it to the point of wanting to sample the competition. And boy is there competition in both platforms. For WoW, there are other MMORPGs being released or in development at the moment. We have seen examples like Star Wars Galaxies and the Lord of the Rings Online. For the social network giant Facebook, there is LinkedIn (as much as I don't like them) and rumored platforms in development by Google and Apple. As a general rule of thumb, companies (especially in the technology sector) need to constantly be innovating and releasing new products to sustain growth. Otherwise the relative ease of entry means popular platforms on day one will be forgotten within a year or two. Case in point: MySpace, Myst, and Halo (to a lesser extent).

From a valuation perspective, it would make some extent to use social network and MMORPG companies as proxies for one another. Their respective business models has notable differences --such as the subscriber fees-- but similarities are more pronounced. The problem is that there are not (yet!) single-standing MMORPG companies. As profitable as World of Warcraft is for Activision Blizzard, the company offers a variety of other game series such as Call of Duty and Guitar Hero. Conversely speaking, we may even extend the comparison to incorporate content-focused companies like Yahoo! and AOL. The latter's fortunes depend on internet traffic to their subsidiaries -- and therefore are inherently indicate a popularity-dependent business model such as social networks and MMORPGs.

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