Why This Huge Gaming Company Is in Trouble

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Investing in the gaming industry is a high-risk game where most investors find it hard to be consistently profitable. Just consider the case of Electronic Arts (NASDAQ: EA  ) , down 50% since 2003. Of course, potential mind-boggling returns make this industry also hard to ignore. Activision Blizzard (NASDAQ: ATVI  ) , the world's biggest video game publisher, is up an amazing 1800% in the same period. This is not surprising, considering the industry could be worth $70 billion by 2017. More and more children, youngsters and adults play video, mobile and computer games at home, on the train, after school or work and before sleeping. Gaming is changing the world.

However, after nine years of massive success, Activision Blizzard's cash cow, World of Warcraft, is losing subscribers very quickly. Furthermore, with little exposure to mobile and social gaming, the firm is losing share against smaller publishers and even outsiders, like Electronic Arts and Disney (NYSE: DIS  ) . We may be witnessing the beginning of a huge power shift in the gaming industry. How does Activision Blizzard plan to protect its leading position in the gaming industry?

Source: Activision Blizzard

A blockbuster-producing company
The gaming industry is said to be a hit-or-miss business. Activision Blizzard is an exception. It successfully managed to produce not just one, but three massive hits: Call of Duty, World of Warcraft, and Skylanders.

Each of these games has a vibrant community of gamers. World of Warcraft has been the company's main cash cow for the past eight years. Skylanders and Call of Duty were developed later.

Although World of Warcraft saw its number of subscribers decrease from 12 million to 7.7 million, Skylanders and Call of Duty have plenty of room for growth. With retail sales of more than $1.5 billion, Skylanders Giants got the first ranking in North America and Europe in the first half of 2013, while Call of Duty: Black Ops II got the second place. Not surprisingly, Call of Duty digital sales record grew by more than 100% in the latest quarter.

Activision Blizzard's main competitive advantage is its ability to deliver great games for any console. The company also excels at developing rich intellectual property. Its team of dedicated developers and designers, with more than 20 years of experience in the field, keeps innovating game play. And management isn't afraid of setting aggressive marketing campaigns to support its games.

Fierce competition
However, as management also acknowledges, it's becoming more challenging to gain new gamers and retain old ones, because the industry is more crowded and competitive. On top of this, there's an ongoing console transition, which adds uncertainty to Activision Blizzard's revenue for the next two quarters.

As the second-largest game publisher, Electronic Arts (EA) is a formidable competitor. Just like Activision Blizzard, EA is famous for building high-quality games and rich intellectual property. But there are some important differences between these two giants.

First, Electronic Arts has specialized in the sports genre, a segment where Activision Blizzard has limited presence. EA's main cash cow is its Fifa soccer game series, which does not require constructing characters from scratch. In theory, this game can be popular forever, just like soccer. By focusing on providing a unique multiplayer gaming experience, Fifa has become a must-have for soccer and gaming lovers. Its last version netted $70 million in digital revenue last quarter. EA is taking advantage of the know-how it acquired from Fifa to successfully develop and promote other sports games.

EA has also done two important innovations this year. First, it has developed Sports Ignite, a state-of-the-art game engine designed specifically for sports titles, which could bring development costs down. Second, EA is changing its business model gradually, and it is adding more mobile exposure. The new version of Fifa may hit mobile devices with a free-to-play business model. It's too early to know how these changes will reflect on revenue, but they are promising.

Activision Blizzard's Skylanders, on the other hand, faces heavy competition from Disney's Infinity video game, where the user can play with some of Disney's most popular characters, like Mr. Incredible and Jack Sparrow, in an open world. Both games belong to the action-adventure genre, and have similar concepts and features, like using collectible characters. They are clear substitutes.

However, unlike Activision Blizzard, Disney does not have to create new characters from scratch. In 85 years of history, Disney has accumulated a rich library of popular characters, which are ready for use. So far, the game seems to be selling quite well. Last month, Disney announced the game had sold almost 300,000 copies in the U.S. only in the first two weeks on sale.

The Foolish takeaway
Activision Blizzard has developed very successful game titles, including World of Warcraft, which holds the Guinness World Record for most popular multiplayer online role-play game by number of subscribers. However, the gaming landscape is constantly changing, and the company must keep innovating in order to protect its leading position. In particular, EA's recent mobile focus and advanced game engines, and Disney's Infinity video game should be watched closely.

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Read/Post Comments (16) | Recommend This Article (1)

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 October 18, 2013, at 6:27 PM, genjigem1337 wrote:

    One of the main reasons this company is losing people is not its appeal its the way the community of players interact with each other, some groups of guilds and its people have ruined servers and on top of that people expect you to be at the right ilvl for each one, i was at a ilvl of 500 before i was able to run the first raid in MoP and we still couldnt get past elegon, then people want you to have experience before you start the raid as in terms of watching videos before you start it. So ya alot of the fun and excitement has been getting drained for quite some time now. Not by the companys but by the players.

  • Report this Comment On October 18, 2013, at 6:38 PM, Mondschatten wrote:

    You said it genjigem, it started with the Cata raids where you had to know the fights, often the very week they came out, plus had to have the right ilevel (or gearscore at the time) to even get into them. It has carried over into the raids now available.

    But Blizz themselves have lost a lot of subscribers by changing things enough to make alot of people I've talked to say, "It's too easy now," or "They will never balance PVP, this class or that class is OP."

    Don't guess anyone ever figured that the economy and no jobs could have a lot to do with loss of subscribers either. I haven't had gametime since mine ended 3 weeks ago due to no money, with no jobs hiring in my area, and I know of others who are in the same boat I am. It's not that we don't want to play, it's that we can't due to financial reasons.

  • Report this Comment On October 18, 2013, at 6:59 PM, joeuser23 wrote:

    How many times are you people going to recycle this as news?... and did you just refer to EA and Disney as "outsiders" in the gaming industry?! o.O

  • Report this Comment On October 18, 2013, at 7:00 PM, metacomet099 wrote:

    I'm sorry I just can't take this article seriously. How long have analysts said "the future of gaming is in mobile"? Clearly they don't understand that just because a lot of people like playing angry birds on their phones, doesn't mean that consoles are obsolete. What's more, this "massive drop in subscribers" for this 10 year old game is NOTHING to Blizzard. The game is still so profitable and so famous that they could care less. Yes, it's not their main focus anymore, but its clearly not failing and they know that.

    Also, its laughable that you think Disney Infinity will do well overall.

  • Report this Comment On October 18, 2013, at 7:05 PM, harborgal1967 wrote:

    As a player from day one I agree with both of the above posters. General negativity and skill demands to participate in end game content have driven some away. The game has been "dumbeddown" to the point of stupidity. What used to be a challenge to get to levels can now be completed far to fast. What used to take months of work and cooperation between players can now be accomplished in hours or days. That leaves raids and instances but to get in you must meet ridiculous requirements or not get in. Part of that is because of the downturn in numbers of players. Players are to thinly spread across to many servers so it becomes hard to find enough players to form teams. There are also far to many handouts. A lot of stuff you had to earn is now handed to you again taking out challenges. Its also insulting to those who DID put in all the work to earn the abilities. Learning over time is what created great players. The handouts put people in end game without any real knowledge of the characters and abilities they would have learned with time invested. All this leads to the question of why should I invest money on a monthly basis to play a game that is no longer challenging, filled with bickering egos, and no new or fresh content. The answer is I wont. I have moved on to games with out a monthly fee that many of my fellow players have also moved on to and we now play them instead. Blizzard shot itself in the foot catering to the need of getting new players at the expense of its solid base that got fed up. And seriously Blizzard, PANDAS!

  • Report this Comment On October 18, 2013, at 7:24 PM, joeuser23 wrote:

    You don't seem to be taking into account that unlike EA, which is voted the most hated company in America year after year, Blizzard itself has a huge fan base because they make incredibly rich, well polished games. They could loose half their current subscribers and would still have ten times that of any MMO on the market. As for Disney's Infinity... their knockoffs are never cool because anything from Disney is considered childish, even by children. The only real success for the game could come from girls who don't play Skylanders, if they can get them into the game.

  • Report this Comment On October 18, 2013, at 9:10 PM, moopert wrote:

    Yes WoW has lost 4 million subscribers since it's peak... but they still have 8 million people paying 13-15 dollars a month. It's hard to take a doom and gloom mentality for a company that posts $114 million in revenue a year. Plus $40 every 1.5-2 years for the new xpac. Where's the panic supposed to be coming from?

  • Report this Comment On October 18, 2013, at 9:23 PM, Vitabrits wrote:

    Hard to take this article seriously when they refer to EA as an "outsider" company. EA is #2 in the gaming world. Yes, many gamers hate the company but it doesn't deny the fact of its size or weight in the industry.

  • Report this Comment On October 18, 2013, at 9:35 PM, polecat99 wrote:

    EA's losses make sense since they have never provided good service, continue to peddle terrible products and price gouge their customers. They have been awarded Worst Company" multiple years as can be read here:

    Activision started a similar trend by adopting many of EA's policies, which cause disgruntlement with their consumers. It doesn't take rocket science to understand that if you treat your customers poorly, price gouge them and take advantage of them, you will see your profits recoil until on the most staunch loyalists remain despite their misery.

    Funny how you wont see Valve in any of these articles. They have grown 50% year over year consistently since they went into business and take the complete opposite approach to EA, Activision and others. They work hard to provide the best service, products and value to their consumers and their growth and revenue increases even in the worst economic periods shows this. Let's hope they wont pull an "Activision" and start rolling out the EA policies/strategies!

  • Report this Comment On October 18, 2013, at 10:36 PM, stevenatorr wrote:

    I used to like World Of Warcraft. I liked CATA after i played it for a week. but since day 1 of Mist of Pandaria i can't stand the game and cancelled 2 weeks after i bought it. I kept sending msgs to Blizz that MOP sucks and is gonna kill the game for ALOT and i was right. its not just that too many kids are playing, Its that they DUMBED the game down bigtime. barely anytime to enjoy new gear before new gear arrives. I loved PVP with my hunter in CATA. get rid of MOP and they may get players back. I know ALOT of people who quit WOW due to MOP. Blizz sends me free 7 day trial once in awhile on my account and when i do play its usually dead. Xrealms is ok now due to most servers being unpopulated. WOW was fun until MOP.

  • Report this Comment On October 19, 2013, at 12:07 AM, TheBorogroves wrote:

    I personally lost respect for anything Blizzard as a developer did after they released WoW(they got cash hungry), but to count them out as a major player is sheer insanity.

    A large part of why WoW started failing is the shift of consumers from p2p games to f2p cash shop games(Aside from the fact that EQ style mmo's have only been polished and lacked much innovation since they started coming out).

    Even without looking at the other markets they are in, Blizzard has an answer to the change in MMOs with the pending release of Hearthstone. Free to play with a cash shop that is similar to Magic the Gathering. They essentially have the ability to constantly release new content that is stronger than previous versions and force people to keep buying. I've even played another online game along a similar model and the temptation to accelerate your stifled progress combined with the gambling aspect of collecting cards is a very easy way to get money from people.

  • Report this Comment On October 19, 2013, at 12:20 AM, CGRJR wrote:

    Since they deleted my gamertag I'll never buy another Blizzard product

  • Report this Comment On October 19, 2013, at 5:39 AM, theshadow1302 wrote:

    Good article.

    However not very up to date.

    How will they counter ?

    Hearthstone (launches this year and a huge money grab on both PC and iPads). In beta the Blizzard game is an extreme success already and probably good for around 400 million dollars in its launching year. F2P and based on WoW and the paper Magic the Gathering CCG. Cash grab in CCG 's is enormous and the game is pure polish.

    Blizzard All Stars announced for beta at BlizzCon. Renamed as Heroes of the Storm. A dota game with heroes from WoW, SC2 and Diablo series.

    Last but not least: Destiny. A brand new MMO/shooter science fiction game from the legendary Bungie fame.

    The first 2 are based on the huge franchizes of Blizzard with probably an adressable market of 30-40 million ex players and the last one seen as the successor of Halo...

    So next time the author should investigate somewhat more what's breeding behind the scenes.

  • Report this Comment On October 19, 2013, at 12:00 PM, speculawyer wrote:

    CoD is still king and they have destiny in the pipeline . . . but Skylanders and WoW do seem to be products in decline. ATVI needs to shore up its flagging product development pipeline . . . so will they buy TTWO or Ubisoft?

  • Report this Comment On October 21, 2013, at 11:54 AM, exwarcraftplayer wrote:

    I was more than happy to quit playing Warcraft after seven years. Blizzard completely ruined the game by the constant "dumbing down" to accommidate the casual gamer. I used to recommend the game to friends, but now I only take the extra minute to warn people not to waste their money or time with it. Blizzard repackages the same thing over and over again, never introducing any new concepts. Once you start playing, it doesn't take long for anyone with half a brain to see the repeatitive nature of this stale game.

  • Report this Comment On October 21, 2013, at 10:20 PM, Gamer4Life wrote:

    I played World of Warcraft from 2005 to 2013 and love the game and design. I will never play the game again and many family and friends quit right after I did. I was definitely planning on continuing to play but what drove me off were the childish and unprofessional GM's and the ones that handled tickets. In the early day's of WoW when you opened a ticket, the red carpet was rolled out and I was always happy with the service. Right after the release of Cataclysm, I opened tickets and every ticket from that time on, I was completely unsatisfied with the outcome. I was banned at least twice a month for whispering to another member asking if they would like to join a guild. They said it was spam since it was an unsolicited whisper! On top of that I was banned at least once a month for cursing. Someone would complain that I used the "S" word yet WoW has an explicit language filter that is turned on by default and the user would have to turn it off. They also developed the game with explicit language in the built in quests. I think their motive by banning aggressively after the Cataclysm release was to free band width and milk subscribers from money. They continued to take subscribers money while they were banned.

    There will probably be a massive class action lawsuit if that is continuing. I play Diablo III even though it is boring and repetitive and am starting to see the exact downfall there. My son was planning to Intern at Blizzard HQ but has since decided to seek a smarter company.

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