Ask investors or gamers to name the biggest video game publishers in America, and they'll probably mention Activision Blizzard (ATVI) and Electronic Arts (EA 1.30%). Fewer people would likely mention Time Warner's (TWX) Warner Bros. Interactive Entertainment.
Yet WB Interactive actually became the fastest growing video game publisher in America last quarter, and that growth probably won't stall out anytime soon. Let's take a closer look at what that growth means for Time Warner's future.
WB Interactive's Batman: Arkham Knight. Source: WB
How big is WB Interactive?
Last quarter, WB Interactive's revenues rose 135% annually to $727 million, which accounted for 22% of the WB division's revenues (which include TV shows and movies) and nearly 10% of Time Warner's top line.
The company attributed that robust growth to strong sales of new games like Batman: Arkham Knight and Mortal Kombat X. Arkham Knight currently holds the record for the fastest selling game of 2015. It was also briefly the second best-selling game of 2015 behind Mortal Kombat X, according to NPD Group's June numbers.
Speaking to Bloomberg, Wedbush Securities analyst Michael Pachter stated that every game from WB Interactive was "a phenomenal success". The unit has also dramatically increased its number of game releases this year to ten titles in the first half of 2015, up from just three in the first half of 2014.
By comparison, Activision's GAAP revenues climbed less than 8% annually to $1.04 billion last quarter, while EA's GAAP revenues declined by nearly 1% to $1.2 billion. Activision's top line growth was supported by a mix of new and old titles like Hearthstone, Destiny, Skylanders, and Call of Duty. EA's sales mainly came from new games from established franchises like Battlefield, Dragon Age, and Star Wars.
More "awesome" growth on the way
Looking ahead, WB Interactive will introduce Lego Dimensions, which merges "toys to life" products and Lego versions of popular TV and movie characters in virtual playsets. It's similar to Activision's Skylanders, Disney's Infinity, and Nintendo's Amiibos.
Lego Dimensions. Source: WB
Lego Dimensions will merge 14 different franchises -- including Lord of the Rings, Batman, Doctor Who, and Ghostbusters -- in a digital world. To jump on that bandwagon, rival studios are even licensing characters like the Simpsons and the dinosaurs from Jurassic World to WB Interactive.
To place them in that digital world, customers must buy collectible figures which interact with a chip-reading platform. The more figures a customer purchases, the more lively and interesting the virtual world becomes. It's a brilliant tactic which turns a video game into a foundation for hybrid physical/digital purchases. WB's starter kit, which includes three figures and a platform, costs $100. Collecting more figures could easily double or triple the final cost of the game. If Lego Dimensions is a hit, it could also serve as a promotional platform for its top franchises, including the Lego Movie and its multiple spin-offs.
Succeeding where others have failed
Time Warner's success in video games is an anomaly in the media industry. Viacom once invested in the music game Rock Band, but it took a loss of over $260 million on the franchise before selling it in 2010. Disney's Interactive unit only returned to profitability after it was downsized last year.
The growth of WB Interactive has notably offset WB's weaker performance in movies. Last quarter, WB's total revenue rose 15% annually to $3.3 billion and accounted for nearly half of Time Warner's top line. However, theatrical revenues fell 15% due to unfavorable comparisons against The Hobbit: The Desolation of Smaug in the prior year quarter.
As WB struggles to launch new movie franchises to replace multi-year cash cows like Harry Potter, The Lord of the Rings, and The Hobbit, it can fall back on strong video game sales. Based on WB Interactive's current growth trajectory, it could even overtake Activision or EA in terms of total revenues in the near future -- an incredible feat for a business that barely got any attention in previous years.
