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The video game industry took in $63 billion in revenue in 2012, and it's expected to reach $78 billion by 2017 according to DFC Forecast. Hundreds of competitors -- from start-ups and independent developers to large publishers such as Electronic Arts (NASDAQ: EA ) and Activision Blizzard (NASDAQ: ATVI ) -- fight for this space, which has been called a "hit-or-miss business."
To conquer this space, companies need to be continually releasing new hits, a difficult task, considering consumers' tastes are very unpredictable. However, Activision Blizzard seems to be doing it right. The company, which generated more than $4.8 billion in revenue in 2012, has developed some of the most successful game series ever, such as World of Warcraft and Call of Duty. But how did Activision Blizzard manage to build competitive advantages in this fierce and volatile industry?
The ability to build rich intellectual property from scratch
Activision Blizzard has a track record of creating valuable franchises from scratch. Its ability to deliver top-quality content and create addictive gaming scenarios is exemplified by the World of Warcraft franchise, the most successful online role-playing game on the market. To do this, Activision Blizzard employs some of the brightest creators and software engineers in the industry.
Quality control matters
The latest game release from competitor Electronic Arts shows us the importance of quality control in the gaming industry. EA's launch of Battlefield 4 -- the latest version of its successful first-person shooter series -- may be on its way to becoming a disaster.
The game presents a variety of technical problems, as many customers have complained about poor connectivity and sudden crashes. As a result, Electronic Arts now faces several lawsuits, including one alleging that the company's executives knowingly over-promised on Battlefield 4. As a result, Electronic Arts had to put some of its operations on hold in order to solve the Battlefield situation as soon as possible. This could cause the company to lose fans. Maintaining an active community of gamers who love your brand is essential in the gaming industry.
On the other hand, the launch of the new Call of Duty -- a famous first-person shooter game and an alternative to Battlefield -- by Activision Blizzard was quite successful. It presented minimal technical problems for consumers. This has allowed the company to maintain its leading position in the video gaming segment, which is experiencing the release of a new generation of consoles, including Sony's PlayStation 4 and Microsoft's Xbox One.
Building a strong reputation
The last series of events will have long-term repercussions for both companies. On one hand, Activision Blizzard will strengthen its reputation as a developer of top-quality games. Moreover, for Activision Blizzard, the technical problems of Electronic Arts' Battlefield could become an opportunity to capture market share for its Call of Duty series, one of the company's most valuable cash cows.
On the other hand, Electronic Arts has tarnished its image, something that will probably temper enthusiasm for its next edition of Battlefield. However, this company owns plenty of rich intellectual property, such as the FIFA football video game series, which accounts for nearly 50% of all sales in the sports genre. So, a fast recovery in terms of revenue growth is also expected.
Both Electronic Arts and Activision could benefit from more exposure in mobile platforms, in a similar fashion to what Glu Mobile (NASDAQ: GLUU ) achieved earlier this year. Glu Mobile's shares jumped after the company announced record downloads of its new game title, Deer Hunter 2014. On the first day the virtual hunting game was released, Glu Mobile saw more than a million downloads. The game is expected to help Glu Mobile achieve profitability next year.
Electronic Arts is adopting a tendency toward a "freemium" pricing strategy in this area, which consists in offering free or very low-priced games first, and charging money for advanced features later.
Activision Blizzard is also benefiting from this strategy, as evidenced by its success with Skylanders. The iOS version of the game costs only 99 cents, but it features the ability to purchase several items during play. Moreover, Activision Blizzard plans to increase its mobile exposure, with the upcoming release of Hearthstone: Heroes of Warcraft, a free-to-play collectible card game.
It is possible that, due to the release of new consoles by Sony and Microsoft, consumers' attention may shift temporarily from mobile platforms to the novel technology of the PlayStation 4 and the Xbox One. Still, additional mobile exposure serves as a relevant growth tool for both Activision and EA.
Final Foolish takeaway
Bottom line: There are a number of reasons to invest in Activision Blizzard. The company maintains an advantageous position in the market over its competitors. The developer of Call of Duty and World of Warcraft also maintains a strong reputation as a top-quality game publisher.
Finally, Activision Blizzard's early success with Skylanders and the upcoming launch of Hearthstone: Heroes of Warcraft shows how the company plans to go beyond its comfort zone, increase mobile exposure, and try new monetization approaches.
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