Recent months have tested the mettle of Activision Blizzard (ATVI +0.00%) shareholders. Unfortunately, the publisher followed up a poorly received reveal for its upcoming game Diablo Immortal with two quarters of disappointing earnings and user-engagement performance and uninspiring guidance for 2019. The company has also dissolved its relationship with game-developer Bungie and will no longer be supporting the Destiny franchise.
Since October, shares have lost about 50% of their value, and are down roughly 40% over the last year. Management's comments, earnings targets, and indications that 2019 will be light on big releases suggest that shareholders are looking at something of a transition year. That raises the question of what the company is transitioning to -- and there are some early signs.
The company is ramping up for a more concentrated push into mobile, and shareholders should move ahead with the understanding that there could be more incidences of loud fan dissatisfaction similar to what was seen with Diablo Immortal.
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Activision Blizzard is going (more) mobile
Mobile already accounts for a large share of Activison Blizzard's revenue, with the company's mobile and ancillary segment accounting for 29% of the $7.5 billion in sales it recorded last year. However, most of its sales on smartphones and tablets have come from the King Digital segment that the company acquired in 2015, which generates revenue primarily from the Candy Crush Saga franchise. Big Activision and Blizzard properties like Call of Duty, Overwatch, and Starcraft have yet to see real installments on mobile, and the top development teams within those units of the company have rarely worked on new IPs for the platforms.
Management has made clear that it's making a bigger push to bring franchises from the Activision and Blizzard development wings of the company to mobile platforms. Investors should count on these moves generating some pushback from hardcore gaming enthusiasts on PC and console platforms. Mobile games tend to be less complex than those on console and PC platforms, and some dedicated fans are likely to interpret increased focus on smartphone and tablet games as a sign that their preferred experiences will be de-emphasized.
While negative headlines and social-media feedback could be on the horizon, shareholders should be largely in support of the mobile push. The company's increased focus on the platform presents certain risk factors that investors should be aware of. However, the payoffs of the mobile push shouldn't be ignored, either.
Check out the latest earnings call transcript for Activision Blizzard.
Why a mobile future looks bright for Activision Blizzard
Newzoo estimates that total games industry revenue for 2018 came in at roughly $135 billion, with mobile accounting for roughly $63 billion of the industry's total gross. By 2021, the gaming research firm estimates that the industry's total annual revenue will have risen to $174 billion and mobile will account for 52% of the overall market.
With that kind of market share and growth, and with Activision Blizzard's large stable of appealing franchises, it was only a matter of time before the company began to transition to mobile -- and the push was already in the works. It just happens that this transition is occurring at a time when the publisher is catching some flack and the overall growth outlook for the industry is being cast in a dimmer light, and that's naturally added uncertainty.
To some extent, Blizzard has already shown that it can get some of its core fans on board with mobile. Hearthstone is a digital card game based on the developer's World of Warcraft franchise that's available on PC and mobile platforms, and it's done good business and been generally well received. From Starcraft to Diablo and Warcraft, Blizzard's bread and butter has typically been PC, and it's built a sizable fan base on the platform, but it's hard to argue with the growth outlook in mobile.
The company's new direction should do a lot to open up growth in fast-growing international markets like China and India -- where mobile is by far the most dominant platform. There's already momentum on that front, even if there have been some recent roadblocks as well.
Activision is working with Tencent to bring the Call of Duty franchise to mobile in a big way. The decision to partner with big Chinese developers for its mobile properties isn't an accident. Laws in China require games from outside the country to be published with a domestic partner, so teaming up with leading Chinese developers and publishers sets Activision Blizzard up to tap into the world's largest internet market.
Roughly half of the country's population of 1.4 billion people connected to the net with their mobile phones last year, so it shouldn't come as a shock that China is expected to play a big role in the growth of the global games market. Niko Partners estimates that gaming industry revenues in China alone will total $42 billion in 2022, and mobile will account for the vast majority of sales. Recent setbacks due to China's shifting online content regulation policies have some investors spooked, but the long-term growth outlook in the country and other key emerging markets remains strong.
Different games for different gamers
Management is right to view transitioning big franchises to mobile and creating new properties for the platform as one of its key growth pillars. It's not as if Activision Blizzard is going to stop making games for console and PC platforms -- at least not anytime in the near future.
With the gaming industry increasingly transitioning to an in-game purchase, services-based sales model, a bigger focus on mobile will help the company cast a wider net and bring its big properties to more people. Investors should expect some growing pains, and instances of fan discontent will likely be part of them, but the company is heading in the right direction.
