Activision Blizzard vs. Electronic Arts

A lot has changed in the gaming market since my grandparents bought me a Nintendo NES for Christmas when I was 5 years old. One thing that hasn't changed is how fragile a company's competitive position is as technologies and platforms change in the blink of an eye.

Recent gaming results show the old model of making games for consoles and selling them at retail operations like GameStop (NYSE: GME  ) is getting less and less value for developers. It's not good enough to make a great game anymore; it needs to provide a long-term revenue source. Let's take a look at how gaming giants Activision Blizzard's (Nasdaq: ATVI  ) and Electronic Arts' (Nasdaq: ERTS  ) strategies are playing out in this environment.

Activision moves to subscriptions
While console games for Microsoft's (Nasdaq: MSFT  ) Xbox 360, Nintento's Wii or Sony's (NYSE: SNE  ) PS3 are still a majority of revenue for both EA and Activision, Activision Blizzard has moved to a subscription model, which provided more than a third of its revenue in the most recent quarter.

The Blizzard brand has attracted online gamers willing to pay ongoing fees to play StarCraft, World of Warcraft and Diablo in a multiplayer world. The revenue model focuses less on the initial cost of the game and instead creating an interface that will bring subscribers back again and again. Even the large market of Chinese gamers pay to play, as NetEase.com (Nasdaq: NTES  ) has picked up Blizzard games. While this hasn't exactly led to blowout returns for shareholders, Activision has recorded $329 million in net income over the last year and made a profit three of the past four years, a pillar of consistency in the gaming world. This allows investors to take a more long-term view instead of counting on one blockbuster game to boost the stock.

The death of the console game
Electronic Arts has had a harder time moving past the console and as much as you may like the new Madden 11 or Need For Speed these games haven't driven returns for investors for years. Over the last two fiscal years alone EA has destroyed $898 million in stockholder's equity, not exactly the performance investors are looking for. In its most recent quarterly release, as EA talked up the performance of 2010 FIFA World Cup South Africa and Battlefield: Bad Company 2, it was still projecting a loss of up to $330 million for the year.

Take-Two Interactive (Nasdaq: TTWO  ) is suffering from the same ties to consoles and bad performance as EA. With net losses in three of the last four years it needs to start generating consistent revenue from a solid slate of titles like Grand Theft Auto.

Games still matter
As important as we've seen a revenue model be, big-name games still matter in the developers' fight for gaming eyeballs. In this arena I think Take-Two has the best content with stalwarts like Grand Theft Auto, Civilization, and the new Red Dead Redemption. Creating new innovative ways to shoot thugs and start gangs is not a problem for Take-Two.

Activision Blizzard still relies heavily on older brands but has a slight advantage over EA with solid brands including Guitar Hero, DJ Hero, Call of Duty, Starcraft, and World of Warcraft. It also recently added Halo developer Bungie, who should be able to do big things now that the Xbox shackles from Microsoft are off. Electronic Arts still relies too much on the EA Sports brand that has lacked the ability to reinvent itself for years.

Foolish bottom line
As an investor I want to see a gaming company make consistent winning titles and command consistent revenue. Consistency has never been a common trait in gaming but Activision Blizzard seems to have figured out a way. Beware of the developer hype around upcoming games; it could save you some money.

What's your take on the gaming industry? Leave your thoughts in the comments section below.

More on video games:

Fool contributor Travis Hoium has wasted years of his life playing Grand Theft Auto and does not own any company mentioned here. Microsoft is a Motley Fool Inside Value choice. NetEase.com and Take-Two Interactive Software are Motley Fool Rule Breakers recommendations. Activision Blizzard, Electronic Arts, and NINTENDO CO LTD are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a synthetic long position on Activision Blizzard. Motley Fool Options has recommended writing covered calls on GameStop. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Activision Blizzard, Microsoft, and Take-Two Interactive Software. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 17, 2010, at 12:13 PM, captaintrash wrote:

    Look past the headline numbers, and EA's made quite deep inroads in the areas of digital and online (see earnings calls for details). EA doesn't have the subscription cashcow that is World of Warcraft -- disregard that one game, and I suspect the view is quite different.

  • Report this Comment On September 17, 2010, at 12:22 PM, Krassotti wrote:

    Starcraft and Dialob are not subscription based.... this article reads like your typical college/research advice. I used to come to this site for decent advice, now it's just a push to up sell with wrong information.

  • Report this Comment On September 17, 2010, at 12:44 PM, mirecek78 wrote:

    True, Krassotti - but both these games have a potential to become subscription based. ...I wouldn't be surprised to see a Starcraft based MMORPG. Diablo is too close to WoW in my opinion. ...but with Bungee onboard and their final Halo out now, I don't rule out even a Halo universe MMORPG. And you can bet that such a game would bring in some extra cash to Bobby's pocket.

  • Report this Comment On September 17, 2010, at 1:09 PM, crave132 wrote:

    @ mirecek78 - Microsoft still owns the halo franchise, so bungie will have to start from scratch. But as a fellow gamer, I can tell you that they already have tons of ideas that they couldn't implement into halo: reach, so look to Bungie to start a new money making franchise, or even work on call of duty games. Bungie + Call of duty = $$$$$$$$$$$$$$$$$$$$

  • Report this Comment On September 17, 2010, at 2:04 PM, MutantFreak wrote:

    @Krassotti - Actually Starcraft 2 is subscription based depending on your region in the world: http://www.gamasutra.com/view/news/28433/Blizzard_Reveals_St...

    http://www.sk-gaming.com/content/29424-SC2_ships_with_subscr...

    Blizzard has also announced plans to merge World of Warcraft and Starcraft 2's experiences into a common Battle.net experience. Their idea is that you pay a single monthly fee, and get unlimited access to both WoW and Starcraft 2. They will highly likely do the same with Diablo 3 so that users could pay one monthly fee to play World of Warcraft (or maybe their new upcoming MMO), Starcraft 2, and Diablo 3.

    Please do a bit of research before you start dissing the advice and accusing the author of providing wrong information. :)

  • Report this Comment On September 17, 2010, at 2:21 PM, TMFFlushDraw wrote:

    @Krassotti

    Straight from the 10-Q.

    "Blizzard Entertainment, Inc. (“Blizzard”) is a leader in terms of subscriber base and revenues generated in the subscription-based massively multi-player online role-playing game (“MMORPG”) category."

    So subscription-based is what they call it. They also call out subscription revenue separately on the income statement.

    TMFFlushDraw

  • Report this Comment On September 17, 2010, at 8:11 PM, gaucho420 wrote:

    Thank you for clearing up the subscrition model that ATVI is pursuing goes beyond WOW. Considering that 60% of XBL subsribers pay it solely to play Modern Warfare II, I like ATVI in the long run. For the best games that could be blockbusters...TTWO is my pick. I'm long on both.

  • Report this Comment On September 17, 2010, at 11:44 PM, RickRickert4MVP wrote:

    My game playing does go beyond Scrabble and Angry Birds. Do any these company's split out mobile game revenues in their reporting?

  • Report this Comment On September 20, 2010, at 2:48 PM, TMFFlushDraw wrote:

    @RickRickert4MVP

    Mobile is so small right now that they don't. As mobile grows you may start to see more information around how it is performing for developers.

  • Report this Comment On October 21, 2010, at 4:34 AM, seanquah wrote:

    Subscription model is yet still the best model. By having large crowd following and able to interact each other is still the key for gaming industry. Technology like Wii will soon be a norm for gaming but ability to interact with other player like WoW will last longer.

    For long term investment for gaming stock, definitely ATVI will be the choice.

    I think the challenge now is how these gaming giant able to penetrate smart phone platform using the profitable subscription model. As we know pc market is getting saturated, so do console market. Tapping on the fast growing smart phone market will be the logical choice. Either make profit at the front end and monetize profit at the back end

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