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Activision: big fish in a shrinking pond

Activision: big fish in a shrinking pond

Thu 08 Nov 2012 8:01am GMT / 3:01am EST / 12:01am PST
BusinessPublishing

As console sales continue to decline across the market, concerns are raised for 2013 and beyond

Activision Blizzard

Headquartered in Santa Monica, California, Activision Blizzard, Inc. is a worldwide pure-play online...

activisionblizzard.c...

Activision's CEO Bobby Kotick was clearly pleased to be announcing an excellent quarter for the company, as Activision beat expectations for both revenues and profits. Revenue was up to $841 million for the quarter, compared to $741 million last year, and earnings per share rose to $0.20 from $0.13 cents. Digital revenues (in Activision Blizzard's case, mostly from World of Warcraft) represented 51 percent of the company's total net revenues.

Kotick cited the strong performance of the company's four main franchises: World of Warcraft, Call of Duty, Diablo III and Skylanders. With the pre-orders rolling in for Call of Duty: Black Ops II and Skylanders: Giants off to a good start, Activision raised its guidance for the year, looking for a record total of $4.75 billion for the year, with a 33 percent margin (also a record).

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Kotick explained the company's strategy. “We also continue to strengthen our competitive position by doing what we do best: Staying focused on driving our business by prioritizing our biggest opportunities and not getting distracted by initiatives unlikely to result in the creation of great interactive entertainment and superior shareholder returns.” In other words, not investing heavily in things like mobile, social, cloud gaming or other efforts that don't currently account for huge profits. Mobile games are not yet a significant financial contributor, according to president Eric Hirshberg.

Then, Kotick sounded a cautionary note for next year. “While we have a promising pipeline of great games based on proven franchises, as well as exciting new products like our collaboration with Bungie, we recognize that duplicating this year's success will be difficult.”

Activision president Eric Hirshberg gave details of the company's view of the industry: “The retail trends that we've seen over the past few years are continuing this year, with the top five games in North America and Europe growing 15 percent including toys and accessories. However, this growth has come at the expense of the rest of the industry. While challenging, these trends play to our strengths, given our laser focus on our largest and best franchise opportunities, and our performance this year continues to validate that strategy.”

"We recognize that duplicating this year's success will be difficult"

CEO Bobby Kotick

In other words, Activision has done well while the rest of the industry has been shrinking. That sounds good for now, but if the shrinkage of the industry continues, doesn't that mean eventually Activision's revenues will shrink?

Hirshberg gave enthusiastic details of the success of Skylanders, which was the number one best-selling retail videogame franchise across North America and Europe if you include toys and accessories, and it's also become the number one selling action figure line. “In less than one year Skylanders has become one of the world's most popular kids brands, and is on track to become another billion dollar franchise for the company,” Hirshberg noted.

Activision has seen the retail space devoted to Skylanders boom. “The game shipped with high brand awareness and a more than 50 percent larger retail presence than last year. In North America alone Skylanders Giants has over 100,000 linear feet of shelf space and more than 10,000 interactive displays worldwide. We've also signed more than 100 licensing partnerships, which were chosen both to increase the brand's presence and its stature throughout the store,” Hirshberg said.

The earnings call moved into the question phase, where analysts were mostly unsuccessful at prying information out of Activision executives. Analysts repeatedly tried to get Activision to comment on next-gen consoles, or on developing for next-gen consoles, but the standard response was “We don't comment on that.”

Notable for the lack of mention were several of Activision's titles that were showcased earlier, like the Spider-man game and the Transformers game. It would seem that, like other publishers are finding, the lower-tier titles are not generating great numbers anymore.

The earnings report was excellent, with record profits to report and the fourth quarter looking strong so far. Yet the shadows are gathering on the horizon. Activision is depending on its current hit franchises for the bulk of its revenue. World of Warcraft, Call of Duty, Diablo III and Skylanders are all top performers that are propelling the company to record sales for 2012. Why can't those titles do the same thing for 2013?

"In North America alone Skylanders Giants has over 100,000 linear feet of shelf space and more than 10,000 interactive displays worldwide"

President Eric Hirshberg

The industry is the problem for Activision, or more precisely, the console portion of the industry. The high point of console game sales was 2008, and every year since then sales have been lower. This year console game sales (collectively, at US retail stores) have been running about 25 percent lower than last year every month. Publishers have made some of that up through the sale of DLC, which is not tracked by the NPD monthly figures.

Currently the Wii U will be replacing the Wii, but it's not at all certain that Wii U sales will be equal to what Wii sales were last year. That would be difficult given that the Wii U is more than twice the price of the Wii. In any case, the installed base is going to be tiny compared to the Wii for years, even if the Wii U sells quite well. There's no firm date for the introduction of next-gen consoles from Sony and Microsoft, but usually new consoles are introduced for the holiday selling season towards the end of the year. In the best case, then, a new console from Sony and a new console from Microsoft might be introduced a year from now, and each would generate a couple months of sales.

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Two to three months of sales of next-gen consoles would not create much of an installed base before the end of 2013; perhaps a few million. Even the best-selling games on those new platforms might be only a million units or so. That sounds like a lot, but when you realize that Call of Duty: Black Ops II will probably generate 10 million unit sales before the end of this year, 1 million units isn't going to make a big financial difference.

The shape of Activision's problem for 2013 begins to emerge. Console game sales in general for 2013 are likely to be even lower than 2012, and console hardware sales will likely drop as people anticipate new consoles (or migrate to online or mobile games). New consoles, if they arrive next year, won't make a big difference to 2013 sales of game software. Therefore, exceeding 2012 sales is going to be difficult, even with a slate of releases that is similar.

The console problem hits two of Activision's four main franchises: Call of Duty and Skylanders. What about World of Warcraft and Diablo III? Both have issues to deal with. World of Warcraft is still holding on to a subscription model, as almost the entire MMO business shifts to free-to-play. The release of Mists of Pandaria has boosted subscriber numbers back above 10 million, but for how long? The tale of WoW expansions has been that each successive one seems to take less time for players to complete. After the big rush, we can expect more fall-off in subscribers if past performance is a reliable guide. While Blizzard is trying to put out expansions more swiftly, it seems unlikely that another WoW expansion will make it out in 2013. In a year's time, subscriber numbers will likely be less than 9 million if the trend lines from the past continue. Remember, Blizzard accounts for half of Activision Blizzard's profits. A drop in subscribers to WoW has large implications for Activision's financial performance.

"Activision is justifiably cautious about the financial picture for 2013, and is setting expectations for a lower revenue number"

Diablo III has sold over ten million copies, but the product doesn't seem to have created the vibrant online economy that Blizzard was hoping for. The game still has balance issues, and doesn't seem to be attracting players for long-term play once they've completed the game. While it will continue to sell, it's probably not going to be a major factor next year. Hopefully Activision can get a Diablo III expansion out in 2013, though no date has been set. As for Diablo IV, we can logically expect that sometime after 2020, unless development is sped up a bit.

As for new IP, the deal with Bungie may produce a product in 2013... or it may not. The issue is complicated by the potential introduction of a new generation of consoles with substantially greater horsepower. Does Bungie design to that level, and create a lesser version for old consoles? Perhaps, but the marketing of such disparate versions could get tricky. It's not at all clear whether new consoles will be a hit, either; many observers think that the next generation of consoles will be the last generation of consoles, and it won't sell as well as the last one. That raises serious long-term issues for Activision's console-reliant strategy.

There's also the Titan project underway at Blizzard, but again there is no guidance on when that might arrive (or even what it is, exactly). Perhaps it can replace or supplement the (likely) declining World of Warcraft revenue stream, or perhaps not. It seems logical to assume that Titan wouldn't be arriving until late in 2013 (since there has been no information released whatsoever) and thus would have slight impact for the fiscal year. More than likely, though, Titan is going to be something to look for in 2014 or even beyond, given how long Blizzard usually takes to polish a game.

All of that analysis shows why Activision is justifiably cautious about the financial picture for 2013, and is setting expectations for a lower revenue number. The picture doesn't look so good for 2013, but when you try and look ahead into 2014 it gets even murkier. If the next console generation doesn't start to produce some serious sales by then, console game revenues will be even more constrained. Tablets, smartphones, and connected TVs may become a significant revenue source for games by that timeframe. Activision is just beginning to launch its mobile game division, though. Can the company ramp up its franchises to meet the challenges of new platforms by then?

Remember, it's not just the hardware platforms that are changing; it's the business models. Shipping discs in boxes to retail stores is generating less revenue each year, overall, and that trend will continue and probably accelerate. Free-to-play games, ad-supported games, virtual goods - all of these models are increasingly important in mobile games and in online games. Activision's track record of success with new business models so far isn't very good; Activision has given up on the Call of Duty Elite subscription service after less than a year. (The service still exists, but Activision is no longer charging for it.) It's certainly possible to develop new business models, but when is Activision going to start?

"Activision is the big fish in a shrinking pond, but how fast will the pond dry up?"

One analyst asked if Skylanders would be another Guitar Hero: a franchise that rose swiftly and declined even faster. Hirshberg was quick to note that “We have a pipeline of spectacular innovation in development” for Skylanders, and express full confidence in the future of the product line. However, it's difficult to predict when consumers might fall out of love with a particular franchise. Some new IP might catch their fancy, or a mediocre product release might kill interest in future products. That's the danger of hanging your company's future on four key franchises; one could drop off at any time. Worse, more than one might fall down. That's why new IP is vitally important, as is exploring new platforms for existing IP. Those new revenue streams can add to success, or help preserve it when other properties suddenly lose their lustre.

Activision is the big fish in a shrinking pond, but how fast will the pond dry up? The company faces an interesting transition ahead. The comparison to Electronic Arts is an interesting one. EA has spent several years investing heavily in new technologies and platforms, buying companies and creating mobile and social games. This has hammered EA's profits and its share price. Meanwhile, Activision has mostly ignored new platforms and business models, and focused on optimizing its console and PC game business. Activision has piled up a string of hits and a considerable amount of cash (some $3.4 billion).

Now, though, the game industry is being forced into multiple transitions. New consoles that may or may not be successful will be arriving as the current generation of consoles sells less and less. Mobile and online games represent an increase in share of the market. Digital distribution is changing the nature of game design and the economics of the industry. Electronic Arts is arguably better positioned to thrive when new business areas boom, while Activision will need to adapt to new and unfamiliar business models.

Activision has some amazing brands and a good pile of cash to help it move into new markets, but the future doesn't necessarily arrive on a predictable timetable. Sometimes markets shift faster than expected. Sometimes an existing franchise may falter with a mediocre new game, or just a shift in consumer preferences. Activision's challenge for 2013 is to show that it can start succeeding with new business models and platforms in a substantial way. Otherwise, investors may begin to wonder where major growth opportunities are coming from if the console market continues to shrink.

12 Comments

James Prendergast
Research Chemist

735 432 0.6
Doesn't this all ultimately rest on the state of the economies of the countries in the world?
In other words, Activision has done well why the rest of the industry has been shrinking.
I mean, really, this says it all. People have limited money to spend on things and, in a recession (or multiple recessions) they have less. I don't think the market for games has shrunk but the total possible buy-in to it has. That's one reason why small, lower cost games are doing well and it's also another why people will spend on these big franchises that are proven and then not have any more money to spread around on other stuff.

Any talk about smartphones and whatnot is moot and included in the consequences and causes of above quote. Until we have healthy economies once more we have no idea how the console/PC vs mobile vs dedicated mobile will play out.

Posted:A year ago

#1

Bruce Everiss
Marketing Consultant

1,692 594 0.4


Kotick is by far the best and most successful businessman in the video game industry. He took Activision from Chapter 11 to being the biggest publisher in the industry and he continues to grow the company in a rapidly shrinking console market.
Whilst concentrating on the core franchises on the core platforms they continue to keep their options open with, for instance, their Silicon Spa music game studio still active, but in a slimmed down form and with The Blast Furnace in Leeds ramping up right now.
It is interesting to read interviews with Greg Canessa at Activision. He seems to be in charge of future proofing the company.

Posted:A year ago

#2

Daniel Hughes
Studying PhD Literary Modernism

436 496 1.1
"New consoles that may or may not be successful will be arriving as the current generation of consoles sells less and less."

This happens with every console transition. As yet, there are no solid indications that new consoles can't succeed; the rise of new mobile markets does not mean the death of consoles. We have reports of Wii U pre-orders selling out around the globe, but that's obviously a sign of early adopter enthusiasm. In 12 or 18 months, we'll be able to judge Wii U, and we should have launch data from PS4 and the next Xbox to judge the health of the console industry.

As for continuing to make money from the console business while it undergoes a generational transition, Ubisoft have the right idea. In order to lower the risks of supporting new machines, their new titles will be spread across existing HD consoles and new consoles (cross-platform) for the first two years (at least) of the next-generation. That could seem risky; if the games across different generations of consoles are the same, why should gamers invest in new consoles? This approach seemingly favours Nintendo, who have their own, high-selling stable of content to rely on and push their machine into homes globally. This approach certainly puts more pressure on Sony and Microsoft to come up with exclusive, compelling software and services that will sell their systems. I think as good as Sony's worldwide studios are, Microsoft have more power to sell systems on the strength of their own offerings. Sony could be facing a further squeezing of their games business if they can no longer (as the case is becoming with Vita) rely on big publishers to support and therefore sell their systems.

I personally don't think Ubisoft's approach is risky, and that Activision would do well to employ a similar strategy. While it's true the same games will be available across different consoles, early adopters will always appear, and it's not as if the current HD base need to migrate all at once to new systems. Customers will move at different times, depending on their own finances and level of excitement about new technology. By appealing to a large, existing user-base while serving the new consoles, Ubisoft and Activision can lessen the risks of jumping into the eighth generation, while improving their own financial performance.

It of course also has to be said, that in order to ride out generational transitions like this, mega-publishers should strengthen their mobile business and build a steady source of revenue. That way their bottom line won't be hugely impacted during such transitional periods. I don't advocate turning away from consoles at all, merely diversifying and offering a range of software and services across platforms; as publishers like Activision have done for years. By supporting mobile now, Activision strengthen their financial position and are less vulnerable to the shocks and challenges of console transition, while still being in a position to support and benefit from new consoles as their adoption speeds up.

Finally, I'd like to point out that while 2008 was the peak year for retail videogames sales (due to a number of exceptional boxed products), it is by no means the definite peak of console gaming. As the next cycle builds up steam, as it takes advantage of new business models and digital revenues (where profit margins are higher), console gaming could quite easily become an even bigger cash-cow. The pond might be shrinking now, but historical trends and a longer-term view teach us to expect that. In years to come, the pond could be a lake again, before shrinking in anticipation of the next cycle.

Edited 2 times. Last edit by Daniel Hughes on 8th November 2012 10:22am

Posted:A year ago

#3

John Bye
Senior Game Designer

480 451 0.9
I think James hit the nail on the head. The problem isn't that the console audience is shrinking so much as that gamers have less money to spend because of the recession and inflation outstripping wage rises and interest rates.

It doesn't help that publishers are still trying to charge $50-60 a pop for every game at retail, regardless of their scope, budget and brand recognition, and digital pricing is still unrealistically high in many cases - Xbox Games On Demand and Activision, I'm looking at you.

Also, retail figures obviously don't take account of digital sales, which are taking an increasingly big slice of the shrinking pie, from XBLA, PSN and Steam games to DLC. And a combination of customers watching their finances and retail stores desperately trying to stay in business means used game sales are rising too, which doesn't contribute anything to the industry's finances or NPD's headline sales figures.

If you look at recent news, big established franchises like FIFA, Madden and Assassin's Creed have all reported that their latest instalments are selling faster than ever before. Hardly a sign of a collapsing market. By contrast, a lot of well reviewed new IP and mid tier games have sunk without a trace. The top end of the market is still there, but over the last few years the mid-range games market has collapsed.

As James said, I think it's just that when you're short on cash, you don't want to risk $50+ on a game you're not sure about, you rent it or buy it second hand and save your money for the next CoD or FIFA or whatever, knowing you'll play that game for months.

Edited 3 times. Last edit by John Bye on 8th November 2012 11:15am

Posted:A year ago

#4

Jim Webb
Executive Editor/Community Director

2,265 2,399 1.1
To go along with what Daniel was saying, it's not like the console market was consistently at 2008 levels for years and then started dropping. 2008 was a peak, an outlier. If that's your measure of the console market, it's skewed all to hell. Yes, it has been dropping since 2008 but isn't that kind of how a "peak" works? The 2012 market is still very healthy compared to the 2006 market....or any year during the 6th generation.

You also have to consider that this console cycle has stretched out much longer than a normal cycle. That means the tail ends are going to be much thinner than normal too. Push a market towards saturation and of course you're going to see slower sales. Why is this news to anybody?

Hell, it's why we have new console generations. To start the business cycle anew. If we all thought it was just to give developers a new toy to be creative with, we're kidding ourselves. This is a business first.

Posted:A year ago

#5
Good comments all around,
so how is it Activision are currently king of the crop, whilst other publishers had to diversify strongly or languish

Posted:A year ago

#6

Jim Webb
Executive Editor/Community Director

2,265 2,399 1.1
Right content, right marketing, right time.

Posted:A year ago

#7

Art C. Jones
Writer / Blogger

59 90 1.5
Right place, I might add.
While EA saw social gamers drop from 100 million to 40 million, Activision simply saved a ton of money by not investing in the social games platform (facebook).

They're getting into mobile now, but note, they said they expect to earn $4.75 billion this year. In June Apple said it has paid out $5 billion since the beginning of iTunes total! (that's 4 years - 80,000 developers and over 400,000 games to split up the $5 billion)
Mobile is hard. There is lots of competition and a lot less money compared to the businesses that Activision is dominating (retail and MMO).

However, as Activision notes, things are changing, the future is murky. It may be hard for a company the size of Activision to make games on mobile at a cost that makes them a profit. If the future consoles don't provide the type of audience the previous generation did Activision may currently be at its peak.

They are smart guys though, as noted. They've made smart business moves, and I expect they'll continue to do so, even if they have a few missteps in the next few years as the new market conditions become evident.

Edited 1 times. Last edit by Art C. Jones on 8th November 2012 5:52pm

Posted:A year ago

#8
Maybe they have access to a almanac from 2000-2050 allowing for all sorts of possibilities :)

Posted:A year ago

#9

Aitor Roda
Game Designer

6 0 0.0
Very good article but they fail to mention an important title in the lineup for Activision-Blizzard next year (even though it may be released at the end of 2012) is SC2:HOTS
Perhaps it won't sell as much as SC2 or Diablo because it is an expansion, but that will still generate a nice chunk of money for ATVI.

Other than that, I agree pretty much with all that was said. It will be interesting to see how new consoles sell specially when Steam is gaining traction and proposing almost the same experience of a new gen console already with "Big Picture".

Posted:A year ago

#10
I was frankly surprised by the lack of longevity of Diablo3. Maybe the lens of nostalgia was greater for the original Diablo itself, and the short gameplay and lack of replay interest is hopefully something that can be repaired

Posted:A year ago

#11

Nick Parker
Consultant

282 149 0.5
Commentators talk about the market falling since 2008/09 but reality shows that Xbox 360 and PS3 have been selling within a 5% band of sales since 2008/2009. The console market has declined primarily to the evaporation of the mammoth that was Wii. It is only this year that Xbox 360 and PS3 seem to have started a recognisable decline from three years of flat sales.

Posted:A year ago

#12

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