Sunday, 1 December 2013

Activision Blizzard the Disney of gaming

Activision Blizzard (ATVI) is the world’s largest and most profitable independent gaming company. ATVI develops and publishes some of the most successful entertainment franchises on any medium, including Call of Duty, Skylanders, World of Warcraft, StarCraft® and Diablo.

Gaming is a bit like the movie business the hits need to keep coming but some companies are just able to keep on executing, with their track record ATVI could be described as the Disney of the gaming industry. ATVI's management track record is the best in the business they have created many $1bn+ franchises from scratch. Other competitors like Electronics Arts license brands like Star Wars and sports but ATVI actually creates and therefore owns the content which gives rise to other opportunities like licensing. Games can now gross and cost a similar amount to movies but provide even more monetisation opportunities for die hard fans like extra micro transactions (in game purchases) and on going subscription fees (World of Warcraft a major driver of profit was first released in 2004).

A new console cycle
The new consoles the PS4 and Xbox One are 10x more powerful than the previous cycle. They are also more digitally friendly with the introduction of new payment systems with similar capability to the PC like monthly billing. These devices are also able to download games incrementally so there is no need to download the entire game before you can play. As can be seen below digital allows ATVI to increase overall margins due to decreased marketing and distribution costs. Around 45% of ATVI's revenues are digital that is subscriptions, digitally distributed products and downloads.

The consoles are also more social in that they allow sharing of experiences and incorporate the second screen of mobile in many games. Past console transitions have successfully expanded the market and business opportunity for software providers but in the short term drive uncertainty as gamers hold off on purchases ahead of new releases while sales of the new console take time to ramp up.

Its all about the franchises
Blizzard is well known for its PC based titles of Warcraft inlcuding the largest online multiplayer game World of Warcraft with 7.5 million subscribers and Starcraft and Diablo. Activision is better known for its first person shooters such as Call of Duty/Cabela's hunting and the introduction 3 years ago of interactive toy figure gaming for kids Skylanders. ATVI's four largest franchises in 2012—Call of Duty, Diablo, Skylanders and World of Warcraft—accounted for approximately 83% of net revenues. Call of Duty is facing competition from Battlefield 4 and Skylanders from Disney Infinity. High hopes are placed on a new first shooter franchisee Destiny to be released next year.

China finally cracked?
China has been a struggle for developers to crack due to regulation and the difficulty of distributing games. Like most industries in China the game market is showing tremendous growth with more online gamers than the US and Japan combined. Tencent is the key to distribution in China. Tencent is a US$100 billion company with over 800 million users. Tecent is a social messaging service which is monestised mostly through free to play games that have in game purchases. Tencent and ATVI have teamed up to distribute a free to play version of Call of Duty specifically for China. This has the potential to become a billion dollar business given Tencent's current first person shooter CrossFire has arguably poorer graphics yet brings in $1 billion per year. The game is slated for release next year.

Vivendi has traditionally controlled ATVI but due to high debt levels has sold back some of its stake back to ATVI and to Tencent its China partner. Its interesting that ATVI could buy back 429 million shares for $5.8 billion just ahead of a new console transition. The newly independent ATVI will allow management to focus more on their operations and increase the company's strategic flexibility.


Disclosure: Decisive has no long position in Activision Blizzard (ATVI) stock 

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