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.
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.
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.
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.
The company runs its business under three operating segments:
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.
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. In 2009, Vivendi and its subsidiaries owned approximately 57% of Activision Blizzard's outstanding shares of common stock.
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.
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.
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. Studies are estimating that the Chinese gaming industry will grow from $2.75 billion in 2008 to $8.9 billion by 2013.
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.