3 Reasons Why Activision Blizzard is the King of Video Game Makers

This one time, my buddy's character got stuck in midair. Source: Author.

I'm pretty typical of the average gamer demographic. I'm in my 30's (though 40 is a lot closer than I want to admit), and I play almost every day. I played a lot of sports games in the past, but as the years have passed I've gravitated to first-person shooters and games with substantial multiplayer content. For me, gaming isn't just about playing the games -- it's also a way to interact with friends across the country. 

As an investor, I've also learned to follow Peter Lynch's advice to invest in things you know and understand. While I don't have any "insider" knowledge or expertise that gives me an edge or special insight on this industry, I do think I've come to understand what gamers want and what a successful video game maker must do to be a great investment. 

I've played games made by a lot of companies over the years, and I seem to always gravitate back to those from Activision Blizzard  (NASDAQ: ATVI  ) . I bought more shares just last week, after having played the Destiny beta and doing some research into Activision's financials. I came up with three things that show why Activision Blizzard is head and shoulders above competitors such as Electronic Arts  (NASDAQ: EA  ) and Take-Two Interactive  (NASDAQ: TTWO  ) , and even company partner Nintendo  (NASDAQOTH: NTDOF  ) . 

1: Value of its content and intellectual property 

It has to start here. Just like at a movie studio, compelling and entertaining content is a must. It doesn't matter how effectively a company can manage costs if it can't create something people will love -- and pony up for. When it comes to creating content that millions of people will spend billions of dollars annually to enjoy, Activision Blizzard has done a tremendous job:

ATVI Revenue (TTM) Chart

ATVI Revenue (TTM) data by YCharts.

As you can see in the chart, Activision Blizzard's annual sales are top tier. That is especially true when considering that a significant amount of Nintendo's revenue comes from consoles and hardware, and how insanely quickly it is shedding market share -- and relevance -- as its hardware loses any compelling edge against competitors Sony and Microsoft

Source: Take-Two Interactive

Don't get me wrong -- I'm not saying that EA, Konami (NASDAQOTH: KNMCY  ) , and Take Two-Interactive don't make great games, because they most certainly do. I'm also not saying that Activision Blizzard's games are necessarily better. The truth is, games such as Grand Theft Auto and Evolve are often more critically acclaimed than Activision products like Call of Duty: Ghosts or Skylanders, but when it comes to pure-and-simple sales figures, Activision Blizzard's record speaks for itself. 

Source: Activision Blizzard.

Every year's list of top-grossing games is almost a lock to include the latest release or expansion pack from the company's collection of titles, including SkylandersCall of DutyDiablo, StarCraft, and the still-popular World of Warcraft. The value of Activision Blizzard's content has proven to be sustainably-valuable. The sheer number of highly popular names in its stable give the company an advantage against smaller producers like Take-Two and Konami. 

2: Content acquisition and marketing costs 

Of course, Electronic Arts and Nintendo have large collections of popular, valuable products as well. The difference is in Activision Blizzard's ability to turn those properties into sustainably-profitable games that players enjoy, for a lower cost than competitors. 

Nintendo's difficulties with console relevance are well known, and frankly this hurts the value of properties such as The Legend of Zelda, Donkey Kong, and Super Mario Brothers. For Activision Blizzard, EA, and Take-Two, being platform-neutral removes that obstacle, though it does increase development costs as games must be coded for each platform, incrementally increasing production expense. 

What separates Activision from EA is that the latter does not really own its most popular titles; instead they are held via licensing agreements with partners including the National Football League and FIFA. Licensing this content significantly increases development costs for EA, as is demonstrated in its financials. 

In 2013, EA spent almost $1.2 billion on research and development and content costs, compared to $858 million in development, licenses, and royalties for Activision Blizzard. Electronic Arts also spent almost $800 million on marketing and sales, while Activision Blizzard spent just over $600 million. Add these two segments up and you get a pretty significant chunk of sales:

Activision Blizzard is measurably more efficient at both developing and marketing content than Electronic Arts -- largely because of costs related to EA's sports franchises, while Activision Blizzard owns almost all of its content. 

Take-Two is also pretty effective in this area, but the difference is the "boom and bust" nature of its game cycle. Its most financially successful titles are only released every couple years, and this lag in between -- versus Activision Blizzard's numerous franchise titles with regular releases -- makes for a bumpier ride:

ATVI Net Income (TTM) Chart

ATVI Net Income (TTM) data by YCharts.

3: Longevity of content and incremental revenue 

As a gamer, I want the $60 I drop on a game to give me months of enjoyment, and the numbers show that this is an area in which Activision Blizzard also leads. All of the company's biggest franchises tend to keep gamers engaged for significantly longer than competitive offerings. 

Titanfall is distributed by EA. Source: Respawn Entertainment.

One anecdotal example is the launch of the highly anticipated Titanfall from EAwhich I ordered for my new Xbox One. Within about a month, I found myself going back to Call of Duty: Ghosts on a regular basis, and I haven't played Titanfall since July. Whether this is typical of other gamers outside my personal sphere I can't say, but the evidence -- as reported in sales of add-ons and the still-large number of online users of the nearly 10-month-old Ghosts--indicates that it is.

Furthermore, games like Skylanders, which target a younger audience and leverage the sales of physical toys to increase engagement and interaction, will help keep future gamers plugged into Activision Blizzard's brands for years to come. 

Best at turning content into cash 

I'm sure plenty of readers will slam this article, and find the very idea of Activision Blizzard being the "best" game company a joke. The truth? Numbers don't lie, and making money doesn't make it a "sellout" company. 

While the most hard-core gamers may scoff at Activision Blizzard's products as just fodder for the masses, those masses keep video gaming relevant and viable. They're why companies invest the billions of dollars it takes to develop the amazing hardware and software that drives every game. 

When it comes to an investment, there's no doubt in my mind that Activision Blizzard is the best long-term bet in the industry to keep doing what it does better than anyone else: return that value to its shareholders. 

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Read/Post Comments (0) | Recommend This Article (4)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3080101, ~/Articles/ArticleHandler.aspx, 9/4/2015 10:50:06 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Jason Hall

Born and raised in the Deep South of Georgia, Jason now calls Southern California home. A Fool since 2006, he began contributing to in 2012. Trying to invest better? Like learning about companies with great (or really bad) stories? Jason can usually be found there, cutting through the noise and trying to get to the heart of the story.

Today's Market

updated Moments ago Sponsored by:
DOW 16,167.02 -207.74 -1.27%
S&P 500 1,930.69 -20.44 -1.05%
NASD 4,708.65 -24.85 -0.52%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 10:34 AM
ATVI $28.53 Down -0.07 -0.24%
Activision Blizzar… CAPS Rating: *****
EA $65.68 Down -0.11 -0.17%
Electronic Arts CAPS Rating: ***
KNMCY $21.10 Down +0.00 +0.00%
KONAMI Corp (ADR) CAPS Rating: No stars
NTDOF $192.41 Down -5.53 -2.79%
Nintendo Co. LTD O… CAPS Rating: No stars
TTWO $28.52 Down -0.18 -0.63%
Take-Two Interacti… CAPS Rating: ****