Activision Blizzard's Next Big Play?

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.

Microsoft is a Motley Fool Inside Value pick. Take-Two Interactive Software is a Motley Fool Rule Breakers selection. Activision Blizzard and Electronic Arts are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a synthetic long position on Activision Blizzard. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Neither Mac nor Charly own any stocks mentioned in this article. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 03, 2010, at 12:07 PM, Feurbach wrote:

    I've noticed that analysts consistently undervalue / underestimate Electronic Arts, often through a failure to identify and articulate the value in EA's pipeline. EA has three major releases next year (all designed by Bioware, which was a brilliant acquisition), one of which - Star Wars the Old Republic - is a serious threat to Activision's World of Warcraft, and has the potential to not only erode ATVI's market share but also usher in a horde of new customers who otherwise wouldn't pay for a subscription service. EA's EPS is (and indeed, will likely remain) low due to their significant investment in this project - in excess of $100MM so far - which should be a strong signal to the street about their confidence in the futures revenues from this product. Instead, we often hear the same tired nonsense about EA's disappointing revenues from its Sports division. This might have passed for a valid insight a few years ago, but EA has clearly steered its strategy away from these franchsises in favor of original IP (Dragon Age and Mass Effect) and online gaming.

    In fact, this story has truly become less about Activision vs. Electronic Arts than Blizzard vs. Bioware, and for good reason - these are two top developers with a solid track record of releasing blockbuster titles, and each have a rabid fan base. No other developers - with the possible exception of Rockstar Games - are as capable of predictably producing top-selling games and creating new market space (as evidenced by their comparatively large base of female fans).

    Thus, 2010 will be the year of Blizzard, with the recent release of Star Craft 2 and the upcoming World of Warcraft Cataclysm expansion, which aims to bring a number of lost fans of the game back into the fold. 2011, however, will be a significant year for Bioware, and for holders of ERTS stock, with Dragon Age 2, Mass Effect 3 and Star Wars: TOR all promising to generate significant revenue for the business. EA's major challenge next year will be timing the release of these products so that they don't compete with one another, which is a nice problem to have.

    That said, as both company's stocks are presently undervalued, and will likely drop further this week with disappointing earnings announcements, I believe these are two very good buys which will realize significant returns within a year.

  • Report this Comment On August 03, 2010, at 12:24 PM, gaucho420 wrote:

    I recently bought ATVI due to the release of Starcraft II, the upcoming COD and even the Spiderman game looks to be promising.

    I am in for the short term though. My fear is, how will they monitize Call of Duty? The gaming community went absolutly agro recently when Pachter suggested they need to start charging monthly, so much so that the CFO of ATVI issued a statement to gaming website IGN that there is no plan to start charging for MW2. So for that game, we saw the outcry which was very loud.

    What's stopping ERTS from putting out a better game than MW2 (it'll happen at some point) and then, that preventing any monthly charge on any game due to competition? I guess what I'm saying is the barriers to entry are quite low, and now with the team from MW working at EA...how do we know the next MW will be good or better than what EA will put out?

    Gamers buy GOOD games and the day COD or MW doesn't deliver, they'll leave in droves. Gamers are NOT a stupid bunch with their money overall and they read reviews and speak greatly to each other about good & bad games. Without the team to deliver those games, is MW headed the way of Guitar Hero?

    So I guess for me, the present is good at ATVI, but the future looks more questionable with the the Infinity Ward team defecting. Gamers are not stupid and as a gamer, I can tell you I much prefer what TTWO puts out over ATVI any day of the week (I am long TTWO...that's a giant hit studio in the making, just taking way too long to get there...notice all the layoffs recently to keep costs at bay?) and as such, I beleive putting out Red Dead's, GTAIV, Mafia II, LA Noire, as hits...gives you a basket of hits rather than a paystream revenue from one game.

    Maybe I'm wrong, but ATVI beyond the short to medium terms, needs better games. WoW and Starcraft do well, but the console games will need help and they'd better deliver on MW3 or the next COD, because the gaming community loves the game, but hates the company. Any excuse to go to someone else and they will, so ATVI better deliver the goods or EA (and Respawn) will have their sights set for headshot.

    And the peanut gallery WILL be clapping.

  • Report this Comment On August 03, 2010, at 12:32 PM, gaucho420 wrote:

    Bioware and Blizzard don't compete, truly, due to the revenue streams. Mass Effect and Dragon Age are one time purchases, except for the possible DLC. Starcraft II and WoW are what they are due to the monthly subcriptions fees.

    So for me, the posters analysis is a tad off. ERTS will be ATVI when the can monetize monthly subcription fees on those games. And my apologies if they currently do, but I'm 99% sure the PC versions of those games are free of monthly charges.

  • Report this Comment On August 03, 2010, at 12:53 PM, Dannik10 wrote:

    Starcraft II has no monthly subscriptions. It's a one-time $60 hit. Though ATVI plans for 2 additional expansions in the future.

  • Report this Comment On August 03, 2010, at 2:45 PM, Feurbach wrote:

    I'm only replying to highlight a common misconception in the previous poster's comments - namely, that MMORPGs and other, more traditional games don't compete with one another because their revenue generation models differ - which has nothing to do with competition. All games compete for a finite number of players' time and investment, and whether they involve a subscription service or a single purchase is immaterial. That only makes sense if we segment the customer base into online players and non; however, that would ignore the fact that many (if not the majority of) customers would fall into both categories. In fact, it's safe to say that most games are in direct competition with other games by the same publisher, as most consumers don't really care if a game is published by Activision, Take Two Interactive, Ubisoft, etc.

  • Report this Comment On August 03, 2010, at 4:43 PM, gaucho420 wrote:

    I agree all games compete with each other, but I beleive ATVI's subscription model on certain games is what keeps the money steadily rolling in, vs. TTWO and ERTS non-subscription model. I beleive Mr. Kotick even said recently that the vast majority of cash flow at ATVI is generated by monthly pay subscriptions over the past several years. And Bioware puts out good stuff, don't get me wrong, but it appears to me that what is keeping ATVI ticking is COD & all its franchises and WoW's monthly fees. ERTS and the rest don't have that, at least yet.

    Everyone maybe playing COD and MW still, and sure enough, other games vie for the same free time from everyone, but I guarrentee that ATVI makes more money annually via WoW that with COD or MW.

    Its about monthly fees, which is why Kotick also stated recently that per their survey, 60% of XBL sucribers only pay to play COD or MW.

    Has anyone heard how well Tiger Online via the monthly fee is doing?

    Considering how Red Dead has sucked the life out of the rest of the market the past two months, I know very well that every game competes with each other, regardless of genre...that's very obvious. But outside of that first sale...how has TTWO monetized the hour online?

    My point is the subscription model can be more lucrative in the long run.

  • Report this Comment On August 03, 2010, at 4:52 PM, gaucho420 wrote:

    If I was ATVI, my plan would be to charge $50 for the next COD/MW, free with six months of online. Then for every single online month afterwards, a flat $9.99 or even $4.99. People will subscribe to it in a heartbeat and over a year or two, you will have made much more than $60.

    I'm gamer and I hate to say I'd pay for that, but I probably would and I'm not even a MW addict. But I know way too many at this point, 12 million is the last data I saw on a weekly basis, of people who just play MW or COD at least 10 hours a week online. Take my scenario and imagine how much money they would make.

    But the key is to make the consumer not feel ripped off and I beleive a lower sku price out the gate is the only way to do this. People will not like it, but people will pay for it as long as the alternatives are deemed inferior. As a sweetener, new maps out at least every 4-6 months, tournaments online, etc...

    MSFT has figured this out and is raking it in via Halo and MW/COD addicts paying for XBL month after month after month. ATVI sees that pot of gold and better figure out how to monetize it quickly. Halo is not a MSFT product and neither is COD/MW, yet they rake in moeny as if it were their products. Many XBL subscribers don't even look at the system and simply boot up on COD or MW...so truly, this is money that shoud require not much thinking.

    ERTS and the rest can keep making hits, BUT in this recessionary environment and as Red Dead as shown, one persons gain is clearly everyone else's loss. So monetize your money makers well, that's the lesson here.

  • Report this Comment On August 03, 2010, at 4:54 PM, gaucho420 wrote:

    And I know Bungie WAS owned by MSFT, so I don't need the correction in case anyone thought about posting that.

  • Report this Comment On August 03, 2010, at 5:10 PM, gaucho420 wrote:

    Last post, from another source that confirms they can indeed monetize Starcraf passed the initial $60.

    Sebastian said he expects a further boost when the game launches in China. In many countries in Asia, games like StarCraft often make money through the purchase of time-cards that allow consumers to play in public “game rooms.”

  • Report this Comment On August 03, 2010, at 5:24 PM, Feurbach wrote:

    Doubtless the pay-to-play model is preferable - it turns a hit into a cash cow. That said, after WOW's success the MMORPG space rapidly became a red ocean - but ATVI absolutely dominated share. Many companies could not convince customersto pay a subscription fee, so instead opted to either forego payment entirely (D&D) or only charge for micro-transactions.

    That said, that's why I really like ERTS right now - because Star Wars: the Old Republic is going to be the first legitimate competition WoW has had since Everquest, and (given that Bioware is the developer) will likely sport significant innovations to sustain subscriptions (story-driven vs. loot driven, space combat, etc). I recently read a rather conservative analyst's prediction that Star Wars will generate over $500MM in operating income the first year alone (and its slated for a mid-year release), which will go a substantial way towards pulling EA out of the red.

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