When it released Skylanders: Spyro's Adventure in 2011, Activision Blizzard (NASDAQ:ATVI) started a brand-new video-game category: the "toys-to-life" genre. Skylanders was a quick hit with kids, since it allowed them to carry their digital creations into real-world play time.
It was also a genius business move. Toys are built into the game, and so the title acts like a platform for sales of profitable figure sets. That model leads to higher average spending per gamer while making Activision a huge player in the action-figure toy market. Since its launch, the Skylanders franchise has consistently joined Call of Duty and World of Warcraft as one of Activision's top properties.
It didn't take long before competition wised up to the sales opportunity that Skylanders was creating. Disney (NYSE:DIS) launched its rival Infinity game in 2013 and then last year released a sequel, stuffed with Marvel characters. More toy giants are joining the party in 2015, including Lego. But Activision's management believes it can dominate for the fifth year in a row by expanding into the $3.3 billion toy vehicle market.
Skylanders' new opportunity
This fall's Skylanders release is called SuperChargers and will include toy cars, ships, and planes in addition to the traditional action figures. Activision estimates that the new vehicle focus could boost sales significantly. "This innovation increases the size of the pie, which will now include both action figures -- where consumers spent about $2.5 billion each year -- and vehicle toys where consumers spend about $3.3 billion each year in North America and Europe alone," CEO Eric Hirshberg told investors in a recent conference call.
Activision's confidence comes from the fact that Skylanders has done so well in the face of intense competition this past year. Disney's Infinity sequel was supposed to knock the title from its leadership position with help from a deep portfolio of extremely popular toy brands from the Pixar, Marvel, and Disney Animation universes. Not many companies can survive a toy-on-toy fight with The House of Mouse.
But Activision's game held on to its dominance over the category. In fact, it boosted user engagement levels and average revenue per player, while outselling all other action-figure lines so far this year. And Skylanders is the single highest-grossing franchise of 2015 when you include toy revenue in the sales tally.
Why couldn't a team of epic toy characters elbow Skylanders off its perch? Management thinks it boils down to gameplay: "Established characters from other mediums are not the shortcut to leading this category," Hirshberg said. "We believe we will continue to lead the category because we make the best games in the category, we consistently deliver the best innovations, and our characters are built for interactive entertainment. ... [We] have no constraints surrounding what those characters can and can't do in a video game."
That theory will be put to the test starting in just a few days, as Disney launches Infinity 3.0, which is linked with one of the biggest entertainment franchises of all time: Star Wars. Then Time Warner joins the race for the first time with Lego Dimensions, due out in September. In addition to hit Lego properties, Dimensions will include popular characters such as Batman, Homer Simpson, and The Lord of The Rings' Gandalf.
Activision executives know that the genre they created is getting more crowded by the year. But they still believe they'll come out on top in 2015 and beyond. Hirshberg summed it up like this when he was asked how Skylanders can keep its momentum going: "We think the category is going to continue to grow, and we're confident that we uniquely have the right strategy and capabilities to continue to lead it."
Demitrios Kalogeropoulos owns shares of Activision Blizzard and Walt Disney. The Motley Fool recommends Activision Blizzard and Walt Disney. The Motley Fool owns shares of Activision Blizzard 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.