Winter is Coming…

Why Blizzard's Titan is poised to ice Zenimax's Elder Scrolls Online, and what Zenimax can do to stop it

The PC and console video game industry is defined by intense competition between large development studios continually providing bigger and better products for gamers. Occasionally, two competitors square off for the attention and dollars of a particular gaming segment. One such major battle is set to take place in 2016. In 2014, Zenimax Online (Zenimax) will release a subscription-based Massively Multiplayer Online (MMO – an online video game supporting millions of simultaneous, interacting players) version of its wildly popular video game franchise Elder Scrolls. The franchise’s last game, Skyrim, sold over 10 million copies, and its next title, Elder Scrolls Online (ESO), has gamers worldwide impatiently anticipating its release. But amidst all of the excitement this new game has generated, one critical concern remains. Activision Blizzard (Blizzard), the world’s leader in MMO gaming, sits poised to rip away ESO’s user base right after the game establishes itself. Due to the $450 million investment from the world’s leading private equity firm in media and communications, Providence Equity Partners Inc., Zenimax has significant external pressure to succeed with ESO. Therefore, Zenimax must act now in order to keep ESO alive in the long-term, and generate the required return on this investment.

A Stormy Outlook

Elder Scrolls quoteOver the past decade, Blizzard has become the world’s largest and most profitable pure-play video game developer. Its World of Warcraft (WoW) franchise has been the most popular subscription-based MMO since its launch in 2004. Blizzard has also achieved immense success from its other popular franchises, Diablo and StarCraft.

In spite of its successes, Blizzard has experienced some setbacks this year with WoW and Diablo that have tarnished its otherwise stellar image. For one, the subscriber base of WoW declined by two million users this year, down to its lowest subscriber base since 2007. As a result, market analysts speculate that WoW’s profitability halved between February and September. Moreover, the company failed to anticipate a deluge of problems with the virtual online economy that it developed for Diablo 3.

Given these setbacks, Blizzard must demonstrate its resiliency to its investors. This entails a successful game launch that recoups the market share Blizzard has enjoyed in the past. To this end, Blizzard announced that it was delaying its new game, Titan, until at least 2016, in order to provide enough time to perfect the launch of its new title. These steps indicate that Blizzard is implementing a comprehensive strategy to rebuild its reputation, which poses a significant threat to Zenimax in 2016. Zenimax must protect ESO’s subscriber base from Titan, and pursue actions that ensure the long-term success of ESO.


Preparing for the Storm

One of the key differentiators of MMO gaming is that these games require an intense time commitment from its players. As such, Titan’s release will likely cause subscribers to choose whether to continue their subscription with ESO or switch to Titan. To prevent churn, Zenimax must provide its users with a large content release alongside Titan’s launch to rejuvenate interest in the Elder Scrolls franchise. Furthermore, Zenimax must anticipate whether Blizzard will forgo its standard subscription payment model for Titan, and instead implement a free-to-play (FTP) option. An FTP model would allow players free access to servers and only require micro-transactions for specific content. To compete against a free offering, it is crucial that ESO’s large content package also be released for no additional cost to the player. Considering that the average video game expansion pack is $60, or a third of the $180 that a $15 monthly subscription fee generates per year, it is clear that every user lost would require ESO to sell three copies of its new expansion. Therefore, it is smarter to release this content pack for free in order to maximize subscription revenues.

However, this shift in focus creates problems for Zenimax’s value proposition to gamers and its internal capabilities. ESO attracts two different segments of the gaming population. First, there are the gamers loyal to the Elder Scrolls brand. These players are more likely to finish the in-game content provided at launch and then stop playing until the next extensive launch of gameplay. Thus, the large content release will keep these players involved with the ESO franchise. On the other hand, many gamers will be drawn to the open-world experience virtually synonymous with MMO. Gamers in this segment tend to be more impatient with content releases. Since they play the game continuously, they seek more frequent updates and will not accept waiting for two years before any additional gameplay is made available. In order to satisfy this segment and decrease churn rates, Zenimax cannot afford to forgo monthly releases by completely shifting its focus to a larger content package. Unfortunately, Zenimax does not have the capacity to develop both streams of content internally and needs to find a way to expand its development capabilities.

Handing over the Anvil

One solution that Zenimax must adopt is utilizing user-generated content (UGC) to allow gamers to contribute to the Elder Scrolls universe. Skyrim benefited from this model as its custom creation kit allowed gamers to develop hundreds of hours of extended gameplay, including over 2,500 modifications within the first week alone. Zenimax should use this ability to produce UGC to its advantage. By providing a similar content creation kit, Zenimax can manage the resulting pipeline of UGC to add to future monthly content releases. However, Zenimax must develop a system to ensure that only the most popular UGC is published in order to maintain its reputation of high-quality gameplay.

Zenimax should also take a page from Valve Corporation – a videogame developer and the most successful online software distributor. The company’s distribution platform, Steam, utilizes a system called Greenlight, which allows users to vote on in-development games that they want to see published. Zenimax could use a similar system, where unreleased UGC is listed on the ESO website. The UGC with the highest number of votes at the end of the month would be published within a future monthly content release. By offering a single marketplace to vote on content, Zenimax provides potential developers with the opportunity to receive better recognition than just posting their modifications on their own websites.  To control quality, gamers using the development kit would have to sign a contract prohibiting the creation of inappropriate content. A penalty of being banned from ESO’s servers should be used as a deterrent. To ensure high quality UGC and promotions that are compelling enough to encourage voting, Zenimax must motivate its user developers through revenue sharing. Using a model similar to YouTube, Zenimax should provide unit revenue per vote over a specified threshold, provided that the content has been passed to launch.

By combining an incentive plan with this type of rating model, Zenimax increases its capacity to create content while ensuring it does not dilute its brand image with undesirable gameplay. However, it is unlikely that UGC would be able to sustain monthly content releases by itself. Since managing UGC and implementing gameplay onto servers would require additional resources that may not be feasible for Zenimax, the company must consider additional methods to increase its capacity.

Recruiting a Follower

Zenimax must subcontract its monthly content development to a smaller game design studio. Though most developers would be unwilling to provide external parties access to their game’s engine, the potential benefits of this partnership far outweigh the negatives. This agreement will allow Zenimax to focus on the large content release to counter Titan, while the partnering studio would control monthly releases and management of UGC. In this way, Zenimax will be able to increase its capacity to develop a multitude of services that will make ESO successful in the MMO market.

Zenimax can establish a partnership with one of the indie development studios affiliated with Sony, whose newly established rapport with Zenimax has been well documented. The Elder Scrolls franchise is so well-recognized that any one of these studios would jump at the chance of associating itself with the brand through continuing the development of ESO. After signing the appropriate confidentiality agreements, the small development company (XYZ) would receive access to ESO’s game engine ahead of launch, as well as servers for testing and developing new gameplay. Zenimax should produce the monthly releases itself for the first six months after ESO’s launch. This time period is extremely crucial as the game will be susceptible to potential decreases in consumer interest. After the six month mark, Zenimax should allow XYZ full rights to develop monthly content so that Zenimax can begin production on the larger content package set for release alongside Titan’s launch.

Ideally, Zenimax would pay XYZ $1 per subscriber per month. The pay-by-subscriber model is highly beneficial to Zenimax. It provides incentive for XYZ to develop high quality content each month to reduce ESO’s churn rates and thus continue to grow the ESO player community. XYZ’s main incremental cost in the agreement would be any additional employees required to meet project deadlines and revenue sharing targets for UGC. XYZ would monitor and integrate the UGC content pipeline into its monthly releases. Zenimax would still cover the costs of running ESO’s servers and infrastructure but it would only require a small amount of employees to work on transitioning XYZ’s monthly releases onto ESO’s servers. By subcontracting monthly content releases to a smaller studio, Zenimax will be able to prepare itself for the inevitable showdown against Titan.


The importance of preparing for Activision Blizzard’s release of Titan cannot be understated. Blizzard will be waiting in the wings for two years after ESO’s launch, indicating that Titan should be a better game than ESO in most aspects. Additionally, Blizzard will be using all of its resources to rebuild its reputation which will directly impact ESO’s sustainability. In order to defend its user base, Zenimax must focus on preparing a large content release alongside Titan’s launch, while subcontracting its monthly releases in order to expand its capacity. Through this process, ESO will be able to thrive despite the release of Titan and become a long-running MMO title. Zenimax has a bright future in the MMO market, but only if it prepares itself for the battle ahead.