Activision Blizzard (Nasdaq: ATVI) reported second-quarter results last night, and the mixed-message news made me think of heavy drums and lonesome harmonica wails across the Western deserts.

The good
Non-GAAP earnings came in stronger than expected, falling just 25% year over year to $0.06 per share. That's better than management's own forecast and Wall Street's estimates, and it's all thanks to strong sales of downloadable add-on packs for the Call of Duty war game series.

Also, CEO Bobby Kotick thinks that the upcoming slate of games in the fall is looking great, including Call of Duty: Black Ops "shaping up to be one of the best games Activision Publishing has ever created." The Blizzard division is doing something that hasn't happened since 1998 by releasing two games in one year. And DJ Hero 2 "gives you the ability to play with two turntables and a microphone" rather than the single turntable seen in the best-selling tent-pole game. So that's where it's at.

The bad
Strong earnings happened in spite of weak sales as consumers are turning to low-cost online games to replace the costly releases from Activision, Electronic Arts (Nasdaq: ERTS), Take-Two Interactive (Nasdaq: TTWO), and friends. Non-GAAP revenue fell 15% to $683 million.

The industry went through a casual-game feeding frenzy this quarter. Walt Disney (NYSE: DIS) picked up Sorority Life publisher Playdom, and GameStop (NYSE: GME) bought Flash game portal Kongregate. Meanwhile, Activision and EA sat on their hands -- though EA did invest $400 million in the social gaming scene last November when it bought Playfish. In short, the balance of power is shifting.

The ugly
And I don't see Activision doing much to reverse that trend. Rather than working up innovative and genuinely new games to meet the new needs of a changing customer base, the company wants to rest on its cushy old laurels. Management loves the fall pipeline because it is, quoting CFO Thomas Tippl, "our largest ever and 100% focused on proven franchises delivering exciting new content and experiences to further broaden our advance."

Combined with broad layoffs that reportedly happened earlier this year in the Guitar Hero studios RedOctane and Neversoft, this commitment to "100% proven franchises" sounds like the death knell of innovation. At a time when gaming tastes are changing so rapidly, wouldn't it make sense to double-down on brand-new ideas? Maybe take the Sony Move and Microsoft Kinect controllers and build something amazing around them?

But no, it's all about protecting the status quo -- and that's as doable as plugging leaks in the Hoover Dam with chewing gum and duct tape.

If Activision won't innovate anymore, then who will? Give us the good, the bad, and the ugly of the gaming industry in the comments below.

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Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.