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:
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.
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.
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 Skylanders, Call of Duty, Diablo, 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:
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.
One anecdotal example is the launch of the highly anticipated Titanfall from EA, which 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.