The biggest video game franchise on the planet is now available in the largest gaming market on the planet. Activision Blizzard (NASDAQ:ATVI) announced last week that Call of Duty Online, a PC game built around the hit shooter franchise, just went live across China. But the title won't cost players anything close to the $60 price tag for Call of Duty: Advanced Warfare in the U.S. Instead, Call of Duty Online will be free to play and funded completely through in-game purchases.
This title isn't Activision's first dive into the micro-transaction business model. Hearthstone, for example, is already contributing to the publisher's near-record sales and earnings. But Call of Duty Online looks to be Activision's biggest, and most profitable, bet on free-to-play gaming to date.
Huge market opportunity
For one, the market size potential is massive. A recent study pegged the number of Chinese gamers at more than 500 million, or 1.6 times the entire population of the United States. The same study found that one-third of those gamers spend over an hour per day playing video games. However, these players are mostly focused on free games -- just 10% have cracked open their wallets to pay for titles, according to the study.
That explains why Activision chose free-to-play as the model and why management believes the player base for Call of Duty Online could eventually dwarf those of all its other franchises, including World of Warcraft's 10 million global subscriber base. In a recent conference call with investors, Activision Publishing CEO Eric Hirshberg put it like this, "We think Call of Duty Online is a major opportunity to expand our reach in a new region. Over time, it may become our biggest player community."
Building a huge base of gamers is just the start. Once engagement levels are up, the company should start seeing hefty profits flowing from this title. Investors can see evidence of how that process might play out in Activision's recent business results.
For the first three quarters last year, the publisher posted a 28% jump in digital revenue compared to the same period in 2013 -- the segment now represents almost two-thirds of its business. Those sales include full game downloads and subscription revenue from World of Warcraft. But the biggest driver of that gain was what management calls "monetization inside our large online communities." We're talking about downloadable content and micro-transactions within Advanced Warfare, as well as purchases in the free-to-play Hearthstone player base.
These are some of Activision's fastest-growing and most profitable sales. In November, Chief Financial Officer Dennis Durken summed up digital transactions as "very high margin, and very good drivers of engagement inside our large communities."
Activision is scheduled to post its fourth-quarter results on Feb. 5th. Wall Street expects plenty of good news, especially with two of the company's tentpole games, Call of Duty: Advanced Warfare and Skylanders: Trap Team, performing so well. But the most promising news for investors could involve the engagement, monetization, and early progress on building a gamer base for Call of Duty Online. That title has the potential to grow into a massive hit franchise for Activision in the future.