Could social games topple World of Warcraft?

By Erin Bell |

The phenomenally successful subscription-based MMO World of Warcraft has ruled the virtual world roost for years, but its publisher Activision has said that the online game giant is at risk from competition from social networking sites.

In its 10-K Annual Report Activision revealed that 68% of its total net revenues in 2009 was generated by just three key franchises (Call of Duty, Guitar Hero and World of Warcraft). Although Activision still seems to view its major competition as traditional video game publishers and media companies including Nintendo, Sony, Microsoft, the Walt Disney Company and Time Warner, the report also identifies competition from “other forms of interactive entertainment … casual games like iPhone applications and other mobile phone games, and games developed for use by consumers on social networking sites.”

In addition to direct competition from other MMORPGs, Activision also cited concern about the emergence of new business models based on the free-to-play concept. Currently World of Warcraft players must pay a monthly subscription fee to access the game, in contrast to social games such as FarmVille, Mafia Wars and Pet Society where players play for free and revenues are generated through micro-transactions, special offers and/or ads.

“Future increased consumer acceptance and increases in the availability [of] such games or other online games, or technological advances in online game software or the Internet, could result in a decline in platform-based software and negatively impact sales of our console and hand-held products,” the report said.

“Newer technological advances in online game software may also render products such as World of Warcraft obsolete.”

Because of World of Warcraft‘s reliance on the monthly subscription to generate revenue, a drastic decrease in the game’s overall subscription base – whether due to people cancelling their subscriptions for economic reasons, dissatisfaction with the service, or switching to competing games – could have a drastic impact.

Elsewhere, the report noted: “If new technologies are developed that replace MMORPG games, consumer preferences trend away from MMORPG games or new business models emerge that offer online subscriptions for free or at a substantial discount to current MMORPG subscription fees, our revenue and profitability may decline.”

The report also described difficulties in anticipating consumer preferences, acknowledging that even the most popular online games won’t remain popular for long unless they’re regularly refreshed with new content. Social game developers like Zynga, Playdom and Playfish typically release small updates for their games on a weekly basis; by contrast, MMORPG expansion packs are released less frequently and require longer lead times and greater expense to create. If such expansion packs fail to result in sufficient sales and new subscriptions, companies like Activision may not be able to recover the development and marketing costs associated with them, the report explained.

World of Warcraft launched in Nov. 2004 in North America. The third installment of the World of Warcraft expansion pack, World of Warcraft: Cateclysm, is launching later this year.

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