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Activision Blizzard (Nasdaq: ATVI ) reports second-quarter earnings this Thursday. The video game giant's portfolio includes best-selling video games like Guitar Hero, Call of Duty, Starcraft, and World of Warcraft. What's the biggest threat to Activision Blizzard? What's the biggest opportunity? I recently asked Motley Fool Associate Advisor Charly Travers.
Mac Greer: Charly, I know from our previous conversations that you're normally not a big fan of video-game stocks, but for Activision Blizzard, you make an exception. Why?
Charly Travers: I love games, and you're right, I don't like the stocks. This is a feast-or-famine business, and a lot of these companies will have one good year where a big title hits, people love it, and then the next year they are dry. These companies tend to not consistently make any money, including Take-Two Interactive (Nasdaq: TTWO ) and Electronic Arts (Nasdaq: ERTS ) , which may shock some of you because Electronic Arts has the well-known Madden franchise. But even Electronic Arts, after a very long and fruitful run, has fallen on hard times for about the last five years.
Activision really stands out in contrast because year in and year out, they have enough franchise titles to really rake in the money. Activision has a consistent level of profitability. In contrast to some of these other companies, Activision is focused on profitability and not just making games for games' sake.
Greer: And I know you're a big fan of their management.
Travers: Yes. This is a tough business. [Activision CEO] Bobby Kotick took the company out of bankruptcy in the early '90s, when the game industry really fell on hard times, and over the last 20 years has built a very impressive empire. I think that is a pretty commendable performance.
Greer: What is the biggest untapped opportunity for Activision Blizzard right now?
Travers: I think you can think about how Activision may disrupt the gaming industry. You can ask the question --- Is Xbox the last console you will ever buy? Bobby Kotick just kind of came out recently and said that he's not too happy with Microsoft (NYSE: MSFT ) , that he only gets a one-off sale on his Call of Duty title, while Microsoft gets to charge its members an annual fee for Xbox Live of $50. Activision feels it should have a slice of that pie, because its games are so popular.
To fire a shot across Microsoft's bow, he says he's willing to partner on a gaming PC that can play over your television, on your big screen, with companies like Hewlett-Packard (NYSE: HPQ ) and Dell (Nasdaq: DELL ) . Maybe he's just bluffing there to kind of force Microsoft to cut him in, but it's interesting that he is coming at Microsoft and Xbox now. Because just a year ago, he was firing off at Sony (NYSE: SNE ) , and saying Activision can't afford to support the PlayStation 3 anymore. So if you keep gunning at your competitors, you can't probably have too many friends left. We'll see what happens here.
Greer: So he's not afraid to kind of pick fights with the big guys.
Travers: No, absolutely not, but he's the big dog himself.
Greer: Then this all comes down to how he sees the potential for more recurring subscription-type revenue?
Travers: Right. So typically, you will sell your game for $50, and then it's gone. I think they got a taste of the recurring revenue model with World of Warcraft, and it's 11 million users paying $10-$15 a month, and that is really nice to get.
Greer: And what's the biggest threat to Activision Blizzard?
Travers: They're not immune from the need to consistently innovate and create compelling titles and franchises that they can sell over and over again. They have a number of strong franchises, but ultimately titles do tend to get long in the tooth. Sometimes it takes two years, sometimes five or 10, but they can't ever rest on these old titles and grow stale. You have to balance their profit incentive, which I admire, with creativity and creating games that people want to play.