Blizzard of Loss

Orcs, trolls, and dwarves are being handed pink slips. They don't have to like it.

Activision Blizzard's (NAS: ATVI) Blizzard Entertainment will be trimming its payroll, letting go of 600 employees as it copes with the problematic slide in World of Warcraft players.

The number of gamers participating in Blizzard's online role-playing realm peaked at 12 million a little more than a year ago. There are now just 10.2 million players. Defections have slowed. Activision Blizzard suffered a net loss of just 100,000 players of the premium fantasy game during the holiday quarter, a welcome break after shaking 800,000 diehard gamers loose a quarter earlier.

However, until the trend reverses, the smart money has to be on the franchise continuing to fade in popularity. Yesterday's layoffs announcement pretty much makes it a lock. After all, would Blizzard be wrecking morale to save some money if it was going to need warm bodies again for the eventual turnaround?

The video game giant is making it clear that the World of Warcraft development team will not be touched, and 90% of the global workforce cuts will come outside of departments directly related to general game development.

It's the right call. If Blizzard is going to drum up another marquee franchise, it's going to need the development team to remain largely intact.

Will that happen? It won't be easy. The traditional video game industry has been largely slipping for three years. Activision Blizzard's Call of Duty franchise is as popular as ever, but a lot of other properties and developers are falling by the wayside.

We can blame social gaming. Zynga (Nasadq: ZNGA) has been a thorn in the industry's side with its quick and casual diversions. Will these entries satisfy hardcore gamers? Of course not. However, it's more than enough for the masses.

Then again, maybe even that's slipping. Zynga's growing quickly but average daily active users -- an important metric that measures the Zynga faithful that are playing on a daily basis -- have fallen sequentially for three consecutive quarters.

Blizzard thought it had a friend in China. Its licensing partner there -- (NAS: NTES) -- was holding up well when World of Warcraft gamers were slipping globally. However, even NetEase conceded that players for that particular franchise slipped sequentially in its latest quarter.

Layoffs are never ideal. Dismissals create tension, and a lot of good people are lost. Investors occasionally cheer these cost-cutting initiatives, but they're missing the point. If a company is scaling back it can't be too upbeat about its near-term prospects.

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At the time thisarticle was published The Motley Fool owns shares of Activision Blizzard. The Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Activision Blizzard and, as well as creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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