QUOTE AND NEWS
Motley Fool  Dec 9  Comment 
Three video game stocks that could surge in the year ahead.
Forbes  Dec 5  Comment 
The best video game shooters of the year, from 'Call of Duty' to 'Halo' and beyond.
TheStreet.com  Dec 4  Comment 
NEW YORK (TheStreet) -- Shares of Activision Blizzard are up 1.12% to $21.72 as reviews fueled Pacific Crest analysts' optimism on the commercialization potential of its Call of Duty Online video game in China. Call of Duty Online is...
TechCrunch  Dec 2  Comment 
 Pact Coffee is on a mission to become a daily habit for Brits, with a tech-driven startup that can deliver the freshest coffee available, shipping within seven days of roasting. Pact has also gone for super-awesome customer service, going above...
Forbes  Dec 1  Comment 
Activision Blizzard's (NASDAQ: ATVI) stock showed no significant reaction despite the financially strong earnings report released by the company on November 4. The company's new successful title launches, strong performance by last year's core...
Benzinga  Nov 30  Comment 
"Destiny," the long-awaited first-person shooter from the creators of "Halo," set a new sales record when it was released earlier this year. According to Activision Blizzard, Inc. (NASDAQ: ATVI), the game enjoyed the biggest launch of any new...
Motley Fool  Nov 29  Comment 
The video game industry had a great year, and so did these three stocks.




 

Activision Blizzard (NASDAQ:ATVI) is one of the world's largest video game publishers and distributors. Along with primary competitor Electronic Arts (ERTS), ATVI develops software for the PC and video game console markets. The company is home to the popular games: Guitar Hero, DJ Hero, Call of Duty, World of Warcraft, and Starcraft. The company reported net revenue of $4.3 billion and net income of $113 million in 2009.[1]

Prior to acquiring Blizzard, Activision's focus was on console games. However, because of rampant piracy of these single-licensed games, the company had a difficult time making profits overseas in countries like China. The acquisition of the online gaming giant Blizzard allowed the company to expand its reach into countries like China because online games charge a recurring monthly fee instead of a single upfront purchase. The company's World of Warcraft game had 11.5 million active users in 2009, 1 million of which were located in China. Long term growth in the online gaming industry will be important as China's online services are growing by 30% annually, half of which is represented by online gaming.[2]

The video gaming industry has grown rapidly in the last two decades, with striking similarities to the movie business. Large publishing houses (production studios) support development studios (writers, directors, artists, etc.) through a long development cycle (filming and editing), during which a game (movie) makes no money. At the end of development, the publisher (production studio) licenses the game for distribution, promoting it in magazines, and reaping most of the revenue. However, if a game fails to sell well, the publisher will not recoup its initial investment. Mindful of this fact, dominant publishers such as Activision Blizzardand Electronic Arts (ERTS) have largely stayed to a simple formula - develop successful concepts for game franchises, and then launch a series of sequels.

Company Overview

Activision Blizzard is a developer, publisher, and distributor of video games. It sells software for a variety of gaming platforms, such as the PC, XBox, Playstation, Wii, and other portable devices.

Business Segments[3]

The company runs its business under three operating segments:

  • Activision Publishing ("Activision") (66% of net revenue) - this segment supports the company's console and PC game such as Call of Duty, Guitar Hero, and DJ Hero. This segment is best known for its action/adventure, action sports, first-person action, and music video game products. The company's leading title, Call of Duty, has generated approximately $3 billion in life-to-date revenue. The company faces difficult challenges from competitors that make games similar to theirs. For example, the Call of Duty game is challenged by Microsoft's Halo and Sony's Killzone, and Guitar Hero faces challenges from Harmonix's spin-off Rock Band.
  • Blizzard Entertainment ("Blizzard") (25% of net revenue) - this segment controls the company's online gaming products. The company's three most notable games are World of Warcraft (WoW), Starcraft, and Diablo. Over the last decade the company has spent most of its effort in developing the Warcraft series, but at the the end of the decade the company announced plans to expand its two other series.

WoW is a massive online role-playing-game in which players control an avatar and interact with other players by going on quests and fighting monsters. Since WoW's release in 2004, the game has grown into the world's largest online game and has 11.5 million active users. In order to keep the game new and challenging, Blizzard has released several expansion packs to accompany the main WoW game. In 2009, World of Warcraft sales accounted for 98% of this segment's revenue. The company also has the Warcraft III game, a real-time-strategy game.

Starcraft, which the company first released in 1998, is a real time strategy game which is still popular in countries like Korea where tournaments featuring thousands of players are held every year. After 12 years, in the summer of 2010, the company released the long anticipated Starcraft 2: Wings of Liberty.

Lastly, in 2008, the company announced that it was creating a sequel (Diablo III) to its Diablo franchise, a single-player role-playing game. Diablo II was released in 2000.

  • Activision Blizzard Distribution Segment ("Distribution") (9% of net sales) - the company distributes interactive entertainment hardware and software products in Europe through distribution subsidiaries like Centresoft and NBG.

History: Activision Acquires Vivendi's Blizzard

In 2008, Activision acquired Vivendi (EPA: VIV)'s video game division, Blizzard, in a stock deal that will result in Vivendi owning the majority of Activision shares. The addition of Blizzard, which publishes the popular World of Warcraft and Starcraft online games, created a larger company than primary competitor Electronic Arts (ERTS) and allowed Activision to be a key player in both its traditional market, console gaming, as well as the growing online space.[4] In 2009, Vivendi and its subsidiaries owned approximately 57% of Activision Blizzard's outstanding shares of common stock.[5]

Business Growth

FY 2009 (ended December 31, 2009)[1]

  • Total revenues increased 41.4% to $4.3 billion. The increase in revenue was due to a 72% increase in product sales and 28% increase in subscription and licensing revenue. Revenue for the Activision segment increased 47% due to strong performance from the company's DJ Hero and Call of Duty (however a large portion of this increase was just from restructuring). Sales also increased in all of the company's geographic regions.
  • Net income was $113 million and improvement from the net loss of $107 million in 2008.

Trends/Forces

ATVI's focus on game franchises limits the breadth of the development pipeline

Activision has historically focused on franchise hits as well as tie-in games to other entertainment media, such as the Spider-man 3 games. The company's stable financial position makes it capable of supporting these blockbusters which require funding as they are under development for long periods. However, there is more underlying market appeal from several franchises, rather than just sequels for only a few franchises. Although acquisitions are an option, they are expensive, and Activision seeks to continue creating new products on its own.

Game Consoles Wars: Xbox 360 vs. PS3 vs. Wii are a source of volatility for game publishers

Each gaming platform's software must be developed independently, and games are partially tied to platform sales, as characterized by EA's' anticipation of a PS3 victory and subsequent mismanagement of their portfolio during the Wii launch year. The underallocation of Wii games and overallocation of PS3 games was particularly poor timing given the Wii's blockbuster sales and the PS3's relative poor performance, since console sales aid in game title sales. ATVI has found itself scrambling to launch more Wii titles to match software demand, promising franchise hits on the Wii platform. This is a challenge because underlying technologies and development platforms for each are different.

Online Gaming presents a Challenge and Opportunity

As suggested by the merger discussed above with Vivendi Games, both ATVI and Vivendi (EPA: VIV) see online gaming as an area of opportunity. Online gaming typically is more social, and allows for community building and virtual relationships, wrapping end-users up in an immersing world and compelling them to spend their money. This arena offers new revenue models as well, with subscription being the norm, reminiscent of Software as a Service, although other ad-based models are also being explored. While potentially lucrative, the new segment presents its own challenges, with higher development costs. poop.

Online gaming also posses a great opportunity for company's to capture the rapid growth of the industry overseas, especially in countries like China. China's online services are growing at 30% a year, half of which is attributable to online gaming.[2] Studies are estimating that the Chinese gaming industry will grow from $2.75 billion in 2008 to $8.9 billion by 2013.[6]

Competition

  • Electronic Arts (ERTS) - the industry's largest player, with a significant portfolio of sports-related software titles that generate consistent revenue year after year.
  • Take-Two Interactive Software (TTWO) - the publisher of the Grand Theft Auto franchise.
  • Konami (KNM) - a Japanese publisher, which has published hits such as the Metal Gear franchise.
  • THQ (THQI) - Developer/Publisher which houses 16 development studios.

Both developers and publishers compete with Activision Blizzard, although they may have different target segments. Most similar in operating structure is Electronic Arts (ERTS), which has the largest portfolio of blockbuster games, including many sports titles, and other game franchises with long histories of success.

References

  1. 1.0 1.1 ATVI 2009 10-K "Consolidated Statements of Operations Data" pg. 41
  2. 2.0 2.1 Seeking Alpha "China’s Online Gaming Market Looks Attractive" 22 February 2010
  3. ATVI 2009 10-K "Operating Segments" pg. 7-12
  4. BusinessWeek "Vivendi, Activision Form Games Juggernaut" 2 December 2007
  5. ATVI 2009 10-K pg. 14
  6. Gamasutra "Study: 65 Million Online Gamers In China By Year-End" 28 August 2009
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