Activision Blizzard (NASDAQ: ATVI) has consistently built powerful video game franchises. Its latest, Skylanders, has established itself as a formidable brand, and has been the number one video game title for the first half of 2013 in the US and Europe, even surpassing the established Call of Duty franchise. However, the company realizes that by establishing a new genre, combining games and toys that work together, the competition will be stiff. From the Q2 earnings report (bold mine for emphasis):
"...we expect the competitive landscape to be challenging for the remainder of 2013. Call of Duty : Ghosts will face a more crowded slate of titles from the same genre in its quarter of launch later this year than it has in the past and our Skylanders franchise will face more direct and substantial competition than it has before. The competitive landscape will likely require us to further increase our sales and marketing investment in our key franchises and could impact revenues."
If you're an Activision investor or thinking about taking the plunge, the question to ask is whether or not the competition, especially against Skylanders, will be too much for the company to overcome. Let's dig in and see what we can learn.
The House of Mouse moves in
Skylanders has generated more than $1.5 billion in sales for Activision in just under two years, and is a big reason that the steady decline of World of Warcraft subscribers hasn't had the negative impact on revenue and net income that many were predicting. However, Walt Disney's (NYSE:DIS) Disney Infinity is the first competitive entrant into this new category of game.
Where Disney's advantage lies is obvious. In 85 years, Disney has created some of the most memorable and popular characters in the world, both animated and live-action, that it can draw on to create interest among kids. Activision, on the other hand, is relying on new characters that it is creating specifically for the game. And while its two-year first-mover advantage--and the more than 125 million toys already sold--do give it an existing base of both brand awareness and sunk costs by parents and kids alike, Disney Infinity will likely be one of the "must have" game and toy requests this holiday season.
And Activision will pay the price?
Not necessarily. Disney isn't moving into this space so much to take business away from Activision as it is to get into a growing and lucrative new niche. It's a better bet that, especially when one factors in the additional demand that will be created by new consoles from both Sony and Microsoft (NASDAQ:MSFT), both Disney and Activision will do quite well going forward. However, the distinct advantage that Disney will have is how its other properties, such as movies, TV and even its theme parks, will drive demand for Infinity in a way that Activision just can't match today.
But with that said, Activision isn't only counting on Skylanders. It has a deep pipeline of upcoming titles, including the next release in the Call of Duty megafranchise, Ghosts, with a storyline written by Academy Award winner Stephen Gaghan of Syriana and Traffic fame. And 2014 will see the release of one of the most anticipated games in years: Destiny, from partner Bungie. Simply put, even the worst-case scenario of some sales loss via Disney's foray into Skylanders' territory shouldn't cause any serious impact to Activision.
New consoles are key
Microsoft has all sorts of things on its corporate plate. Between CEO Steve Ballmer's retirement and the search for a replacement, the acquisition of Nokia's mobile phone business and the need to quickly integrate it into the rest of its operations, and the continued decline of the PC business, the November launch of the Xbox One is central to the company's future as a "device and services" company. If Microsoft doesn't execute this launch well, there is risk of Sony's Playstation 4 taking back some of the market share that Microsoft has come to dominate.
Here's a key takeaway: The Entertainment and Services division generated 13% of revenue last year, but only 3% of the company's profits. But if the company is going to evolve in the way it's trying to, the Xbox's place as the "entertainment hub" is central to Microsoft's future. So it can't drop the ball. As to Activision, it needs both Sony and Microsoft to have successful launches. The cost to produce content for essentially four consoles is very high. Faster uptake of new consoles will defray this expense.
The video game market is primed for a rebound, and Disney's entry into Activision's territory is evidence of that. Both are great companies and solid investments; Skylanders and Disney Infinity are just small reasons why. Dig a little deeper, and there's plenty to like about them both.
Jason Hall owns shares of Activision Blizzard. The Motley Fool recommends Activision Blizzard and Walt Disney. The Motley Fool owns shares of Activision Blizzard, Microsoft, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.