Activision Blizzard's (ATVI +0.00%) third-quarter results included a bunch of new records for the video game publisher. Revenue set an all-time high of $1.2 billion. Earnings hit a third-quarter record at $0.23 per share. And Activision pulled off a best-ever game property launch with Destiny.
But here's the fresh record that points to big profit gains ahead: digital sales for the first time passed two-thirds of all revenue.
Activision's digital revenue as a percentage of total revenue on a GAAP basis. Source: company financial filings.
How Activision did it
Activision reached that point with help from a couple wins across its portfolio in the third quarter. First, reversing the prior quarter's loss, World of Warcraft gained 600,000 subscribers, which helped push subscription revenue 16% higher. Second, paid extra content from popular games such as Hearthstone and Call of Duty contributed to the sales bounce. And third, there was this statistic that management provided in its quarterly conference call: Almost 20% of console gamers who purchased Destiny did so through a digital download.
That's a huge number, considering that full-game downloads for new AAA titles have not been available for long. And there are some other major hurdles to digital game sales. Sure, online shoppers get to skip the drive to GameStop. But we aren't talking about instant gratification here -- they still have to wait for the digital delivery. In Destiny's case the download is over 20 gigabytes in size, which can take hours even over the fastest broadband connections.
Digital shoppers also give up their ability to sell or trade in the game for credit once they've finished playing, raising the effective price. At $60 retail, that can make a big difference in a customer's budget. And yet, Activision delivered just under one-fifth of its initial Destiny sales volume through downloads despite these issues.
Why it matters
Digital sales carry a higher profit margin due to the lower costs involved, coupled with the fact that there are fewer middlemen to pay. Yes, Activision has to compensate the parties that deliver digital products. But the publisher still makes more on each sale. And purchases delivered through its proprietary PC gaming platform happen directly between the gamer and Activision, with all the profit going to to the publisher's bottom line. As Chief Financial Officer Dennis Durkin explained: "There is no sort of intermediary in between. So it's obviously very accretive to [profit] margins over time."
The good news for Activision is that digital sales could spike in popularity over the next few quarters. The next-generation consoles from Microsoft and Sony are selling well, and should add millions of devices to their installed bases this holiday season. Xbox One and PlayStation 4 buyers are an ideal demographic for testing out the digital sales channel. They are, after all, early adopters with fast broadband connections and money to spend on new, expensive hardware.
Activision investors won't have to wait long for another look at how the digital download trend is playing out for the company. In fact, Call of Duty: Advanced Warfare launched this week. In addition to the regular retailing channels, gamers have several options for full-game digital purchases of this sure-to-be blockbuster.
With its next-gen focus and broad appeal, the title could easily set a new record for the company in the fourth quarter -- but in terms of extra-profitable full-game downloads. "We expect that Advanced Warfare will go on to become the most digitally purchased game in console history," Activision Publishing CEO Eric Hirshberg recently told investors.
