Activision-Vivendi's Game-Changing Deal

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World of Warcraft's Revenues Revealed

The Vivendi-Activsion deal provides some rare insight into just how profitable a successful MMO can be. The world's most lucrative online game, World of Warcraft, debuted in late 2004 and has consistently been the best-selling PC game in the U.S. over the past two years. Tightly held details of the game's financials were revealed during the announcement, including estimates that in 2007 the title will generate revenues of $1.1 billion with operating margins of more than 40%, creating some $520 million of operating profit.

What's so enticing about MMOs is their potential to deliver much higher revenues per user than even the most popular console video games, such as Madden NFL or Halo 3, with minimal costs of delivery. MMO players generally pay $50 at retail for the game software and $10 to $15 a month for online access. Yearly expansion packs required to progress characters to higher and higher levels of game play cost $30 to $50 more.

"The power of [these] games lies not in the boxed retail sales…but in the recurring revenue stream from the monthly subscription fees players pay ongoing," says Anita Frazier, an industry analyst at NPD, in an e-mail. Lord of the Rings Online, for instance, has sold 200,000 copies and saw players create 4 million characters in the six months since its launch in April. Lego plans to launch an MMO sometime in the next year.

Getting In on the Game Can Be Risky

This model of profitability is sending developers such as Midway (MWY), NCsoft (NCSCF), Nintendo (NTDOF), Sony Entertainment (SNE) and dozens more scrambling to get a piece of the $11.8 billion in MMO sales that DFC Intelligence expects to be up for grabs worldwide by 2011, when the genre will represent about a third of the entire game software market. Established entertainment companies are also looking to become players. Warner Bros., for instance, first entered the gaming industry in 2004 when it acquired a stake in Monolith Productions, which creates such online games as The Matrix Online. And MTV Networks (VIA) began a partnership with South Korean MMO maker Nexon last year to market its titles in the U.S. via MTV.com. Nexon's popular MMO Kart Rider, a racing game, has more than 80 million players worldwide.

But like the strategy games themselves, MMOs can offer nasty surprises. They cost 10 to 15 times more to develop and maintain than traditional shrink-wrapped titles. Development budgets can soar like bloated Hollywood blockbusters, up to $100 million per title. And for each game that succeeds there are a dozen that fail. A wave of costly flops—including the Sims Online and a much-hyped follow-up to the seminal MMO Ultima Online—has proven that the MMO market, though potentially lucrative, also can have more dead ends than an old-school Pac-Man maze.

See BusinessWeek's slide show for a look at the best-selling video games of all time.

Jana is the Innovation Dept. editor for BusinessWeek. Matt Vella is a writer for BusinessWeek.com in New York.