Inside the World of Blizzard

Its recent merger with Activision created the biggest player in video games. But Blizzard is much more than its mega-hit World of Warcraft

"Why does Blizzard succeed where others don't?" asks Jay Wilson, a lead game designer with a shock of spiked hair and a wry disposition. "It isn't a magic trick. We work at it, and if a product isn't good enough, we cancel it."

Blizzard Entertainment, of course, is the Irvine (Calif.)-based maker of the world's most popular and profitable online game, World of Warcraft (WoW), which boasts nearly 11 million monthly subscribers around the globe. The company is also at the heart of the recent $18.9 billion merger with Activision, primarily a maker of console titles such as Guitar Hero and Call of Duty. Born in early July, the newly combined entity, Activision Blizzard (ATVI), is now the industry's biggest player, with projected annual revenues of nearly $4.5 billion.

But Activision is acquiring much more than World of Warcraft. Blizzard is behind a string of best-selling, industry-shaping PC games including the StarCraft and Diablo series, which have sold nearly 10 million and 20 million copies, respectively. The new company is also tapping into a corporate culture that champions creativity, both productive and experimental, inspiring enduring devotion from paying players.

Company Changed Hands Several Times

Blizzard began life in 1991, founded by UCLA graduates Allen Adham, Frank Pearce, and Michael Morhaime, currently the firm's CEO, as a group of coders-for-hire toiling on other companies' games. The 1994 release of Warcraft vaulted the company toward becoming one of the most admired and profitable game makers in the world. (That year, the company was purchased for $10 million by distributor Davidson & Associates and changed hands a number of times before finally coming under the control of Vivendi Universal (VIV.PA) in 1998.) Like Disney's (DIS) Pixar animation studio or electronics impresario Apple (AAPL), Blizzard has stayed ahead of competitors.

Indeed, the 250-person outfit has become one the games industry's leading innovators, creating games that players crave and profitable new businesses that rival executives envy. "[They're] essentially design geniuses, making games easy enough for casual players and deep enough to attract and hook hard-core players," says Jeff Green, editor-in-chief of online gaming magazine "Simple to learn, difficult to master is the holy grail of game design," he adds. "Blizzard does this every single time."

As Wilson suggests, Blizzard's purpose is simple: to make fun games. Sounds easy enough, but the task is complicated by the nature of modern video games, which can require development budgets rivaling those of blockbuster Hollywood releases or major corporate product rollouts. As the games industry has emerged as a serious business, Blizzard's hallmark has been its effective and persistent effort to remain in touch with players.

Learning from Criticism

It's also learned to feed on criticism. Betas of future expansions to World of Warcraft include reporting software that allows players to offer instant feedback from within the game. Employees endlessly play and replay games both on and off the clock, constantly looking to make improvements. At lunch, "strike teams" play concentrated sessions of games in development to provide feedback. "You know a game is ready when management has to send e-mails out after lunch begging people to get back to work," jokes Wilson.

Some designers even plan vacations to coincide with major release dates in order to play alongside regular consumers.

And the company has boldly canned numerous products, even nearly finished games it deemed "not fun enough." An adventure spinoff based on the Warcraft franchise was ditched in 1998 despite widespread press coverage and high consumer anticipation. Blizzard executives make a habit of listing the many games that never made it out the door, including a long-delayed StarCraft-themed game for consoles that was first announced in 2002 but put on hold indefinitely in 2006 as the company grappled with the difficulties of the different platform. New games, meanwhile, are announced with ship dates of "when it's done."

These days, Blizzard presides over an ever-expanding universe composed of not only blockbuster games but also action figures, novels, manga, board games, pen-and-paper role-playing games, apparel, and conferences. In South Korea, where competitive video gaming is a televised sport, Blizzard's decade-old game StarCraft inspires such fervent loyalty that tournaments still draw some 700,000 spectators a year, nurturing a niche industry worth $40 million annually. Legendary Pictures, the studio behind blockbuster comic book adaptations like Batman Begins and 300, is currently working on a big-budget, live-action film based on WoW slated for 2009.

Bringing Together Two Well-Oiled Machines

Unlike other mergers, aimed at bolstering sagging businesses or nabbing market share, analysts widely deem Activision Blizzard to be the rare union of two well-oiled machines. Steve Bailey, an analyst with London market research firm Screen Digest, notes that Activision's console expertise could help Blizzard make the jump to the dedicated game systems produced by Microsoft (MSFT), Nintendo (7974.T), and Sony (SNE). According to Michael Pachter, an analyst with Wedbush Morgan Securities in Los Angeles, the deal should insulate Activision from the more seasonal console market, which peaks in a parental buying frenzy at Christmas. Instead, some of WoW's profits—as much as $600 million annually—can be put toward new products.

But for all the ink spilled over the Activision-Blizzard mega-merger and the attention paid to World of Warcraft—the game has been used in Toyota (TM) truck ads and parodied by South Park—the company's biggest releases could lie ahead. Executives have committed to releasing one new WoW expansion pack every year to keep the title competitive and to keep players paying the $15 a month subscription fee. Last year, it announced StarCraft II, a sequel to the firm's science-fiction strategy game. And, in June, the company showed the first footage of Diablo III, another highly anticipated sequel in development since 2005.

Some fans howled at Diablo III's public unveiling, complaining that the art direction too closely resembled that of World of Warcraft. The flap, to which designers quickly responded with an open letter explaining their choices, is evidence that Blizzard could yet stumble. Now, the game maker must deliver on its widening roster of games while making inroads into new genres and markets—all without abandoning the methods that, to date, have made it a darling with players and executives alike.

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