12 Months Free Subscription for 1 Free Copy of Diablo 3 Analysis

The office has been buzzing about the Blizzcon announcement of giving a free copy of Diablo 3 to anyone who signs up for a WoW Annual Pass.  Below is the link to the Kotaku coverage of it.

Kotaku Coverage of Annual Pass and Free Diablo 3

As an analyst, it is hard to resist analyzing the impact on ATVI stock and the future earnings of Blizzard.  Why would you give up a free copy of probably the best selling PC game of 2012Q1?

Lets do a simple costs benefit analysis.

First, we need to understand the current economics of WoW in the western hemisphere.

• WoW is roughly at 5-5.5M Subscribers in the West paying between 12.99-14.99 depending on your method of payment.  Lets use an average revenue of $14.00 (the actual number is actually higher by a few cents I believe).  The east uses a pay time card model and makes a LOT less revenue per month and will have a very different impact
• Let's assume for simplicity sake that WoW loses 5% of its subscribers every month starting at 5M.  For ease of calculation lets assume its 250K subs a month.  
• WoW subscribers normally drop per month until the month prior to an expansion release were they either return to close or exceed the prior expansion's high.  Their expansion release in Nov normally exactly 2 years after the last one.  That would be 9 months of decline assuming there is a bounce back of subs in October. 
• 9 Months of lost subscribers * 250K * $14 + 8 Months of lost subscription * 250K * $14 ... + 1 Month * 250K * $14 = $157M of Lost Revenue due to subscription Lapse and a drop of 2.25M subscribers by the beginning of October.
• As you know MMOs are dynamic and we will assume the launch of SW:TOR, Guild Wars 2, and other MMOs will off set the gains made by their big content patch.

Second, we need to estimate the number of subscribers who would bought Diablo 3 and kept their subscription other wise.

• Of the remaining 3.5Million subscribers, how many people are actually unique players?  As most people know many MMORPG players in general own multiple account.  Some own over 10.  Some games I have worked on had crazy ratios of subscribers to players.   For this analysis, lets be conservative and assume 1.25 accounts per player.  It is probably higher but WoW as you know is a different breed of animal as it is "casual" compared to EQ, Lineage, and others have a ratio higher than 2.0 accounts per player. That would 2.24M Unique players.
• Of these 2.24M unique players lets assume 80% would have bought D3 other wise.
• 2.24M X $59.99 * 85% to account for SRA = $114M.

Third, we need to estimate the number of  subscribers who we kept that would have purchased Diablo 3 otherwise.

• We assumed we lost 2.25M subscriptions at 1.25 accounts per player equals 1.8M Unique players
• We will assume that 70% would have bought D3 which would have been 1.8M unique players times 70% or  1.26M copies.
• 1.26M X $59.99 * 85% = $64M

Fourth, lets do the simple math!

• +$157M of Lost Revenue Regained - ($114M + $64M) of lost revenue from not selling D3 equals $21M of  loss.   This may seem bad but there are other factors that need to be considered. 

Other Factors:

• Diablo 3 AH impact:  Assuming you get 1M additional Diablo 3 Users and using traditional F2P metrics.  We will assume that 10-20% will conduct microtransactions and spend an average of $60 a year.  Lets use 10% and $60 for conservativeness.  1MM X 10% X $60 = $6M of of Revenue
• Blizzard Publishing Impact:  More Battle.net users = higher royalties and higher platform sales!  More players more money!  With Blizzard DOTA and other titles being released, blizzard is very motivated to keep their Battle.net users high.
• Stock Market Impact:  Now blizzard can count Free Diablo Downloads as D3 sales and can maintain their subscribers number for 1 year!  That makes them a attractive investment.
• Blizzard Micro Content Impact:  Blizzard sells virtual pets and other items and with changes to their game they can add even more micro-content.  Blizzard will now have kept all the wow subscribers it might have lost so that they can easily buy a pet even if they are not super active.
• Other Positives:  Marketing benefit.  Its easier to reach consumers you have not ones you lost.

Please leave your comments as I want to know your opinion.