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Activision's Kotick brushes aside the mobile market

Activision's Kotick brushes aside the mobile market

Thu 09 May 2013 2:27am GMT / 10:27pm EDT / 7:27pm PDT
BusinessPublishingFinancial

Activision's super confident in its console-centric approach, so why are the execs warning of dangers ahead? We analyze the company's position

Activision Blizzard

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

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Better than expected revenue and earnings gave Activision a solid first quarter - but there are troubling signs, too, as CEO Bobby Kotick admitted.

Activision raised its guidance for the full year, and projected slightly higher earnings per share and revenue (GAAP revenue is expected to be $4.22 billion). Activision's got a new Call of Duty coming out this year (Call of Duty: Ghosts); a new Skylanders (Skylanders SWAP Force); and Diablo III for the PS3 (and for the PS4 at some point). All of those titles should generate amazing revenue.

Here's the odd thing: Activision announced better-than-expected revenue and earnings for the quarter, and revised its guidance for the year upward, yet each executive on the earnings call was careful to mention lots of possible problems later in the year. Conversely, Electronic Arts, in its earnings call, announced revenues and earnings at the bottom of expectations, and lower sales for next year, yet all the executives expressed optimism for the company's prospects going forward. Even stranger, in the day after EA's earnings call its stock has risen over 17 percent to the highest point in over a year. Activision's dropped 6 percent in after-hours trading after the earnings call.

"The shift in release dates of competing products, the disappointing launch of the Wii U, uncertainties regarding next-generation hardware, and subscriber declines in our World of Warcraft business all raise concerns, as do continued challenges in the global economy"

Bobby Kotick

Not that Activision stock is doing badly; it hasn't been at this point (over $14 per share) since late in 2008, at the peak of the retail game business. Still, all the execs seemed to have been drilled on the need to mention risk factors, despite enthusiasm over the company's pipeline and its prospects. Maybe it's just an excess of the caution you're supposed to show as an executive of a publicly traded company, but it makes you wonder if there's something else going on.

Despite the carefully phrased forebodings, CEO of Activision Publishing Eric Hirshberg waxed enthusiastic about Activision's Call of Duty franchise and Skylanders, both of which will have new installments this year. Hirshberg was careful to note (apparently to undercut doubts raised by some analysts) that Call of Duty: Black Ops II had a better Q1 than the previous Modern Warfare II did, and that Call of Duty set a new Q1 high for users. Skylanders was the number-one bestselling game in dollar terms for Q1, and Hirshberg expects it will have even more shelf space this Christmas than last year.

It's clear Activision is concerned about the competition this fall; Kotick put it very clearly. "This year we expect a number of well-established game franchises and well-capitalized new entrants to compete directly for our consumers' time and attention, particularly as certain of our competitors have moved their launches into the back half of the year," said Kotick. "The competitive landscape will likely require us to further increase our sales and marketing investments for our three largest franchises, especially in the important holiday season."

Hirshberg threw down the gauntlet more specifically. "However, we will obviously see more direct competition and expect to see significant resources being spent on competitive launches," Hirshberg said. He promised continued innovation "supported by the largest sales and marketing campaign in the Skylanders franchise's history." Take that, Disney Infinity! We see your marketing campaign and raise you some marketing co-op and prime location buys. There will be blood in the aisles of the toy stores this year as both companies battle for the kids' mindshare and dollars.

"right now we just don't see anything that would suggest that changing the way we approach investing against mobile would be a good idea"

Bobby Kotick

It's not just Skylanders, though. Activision is clearly worried about Battlefield 4 taking some market share away from Call of Duty. It was not incidental that Hirshberg mentioned that Call of Duty has "an all-new engine" for this year; that's been one of the knocks against it in past years, whereas EA keeps pushing the envelope with the Frostbite engine. Expect some serious rivalry between these two titles this year.

Last but not least is the Worries of Warcraft - sorry, I mean World of Warcraft. Kotick was upfront about the fact that the franchise lost 1.3 million subscribers in the first quarter, dropping down to 8.3 million subscribers globally. There were 9.6 million subscribers at the end of last year... and that was down from over 10 million after Mists of Pandaria launched (the number was 9.1 million before Pandaria). Blizzard CEO Mike Morhaime could point to no particular reason for the decline when pressed about it by an analyst, citing the general competition in the market.

Morhaime did point out that the bulk of the decline came from the East, where the competition from free-to-play MMORPGs is fierce. "Given the more competitive market, and the length of time since the last expansion, we do expect further volatility this year," Morhaime said. Volatility is apparently a creative way of saying decline. Morhaime once again promised more content, faster, but that's been the mantra for a while. Major expansions seem to be the only thing that slows the decline, and the effects don't seem to last long.

Kotick promised to commit "substantial resources" to World of Warcraft going forward, so the company isn't giving up on the franchise by any means. Still, Activision is clearly concerned about how long the aging World of Warcraft cash cow can continue providing high-margin milk. When will we see Blizzard's new MMORPG? No idea. Certainly not this year, and probably not early next year, either.

It may be a while before Titan appears; while the project started some years ago, it probably began with the idea that Blizzard could charge a subscription for it. That appears to be increasingly less viable in today's MMO marketplace, so the game may need to become free-to-play. However, that would also mean a substantial redesign, which would take time. This is all speculation, though, and Blizzard isn't giving any hints.

"Activision is clearly concerned about how long the aging World of Warcraft cash cow can continue providing high-margin milk"

Perhaps the oddest part of the earnings call came when Kotick was cornered by analyst Doug Creutz about the company's mobile strategy. Has Activision been too cautious? Has mobile finally proven itself as a viable market, and has Activision begun to rethink its strategy towards mobile? Creutz pointed out that in the last six to nine months we've seen some games generate some sustainable revenues. (Perhaps he was referring to games like Supercell's two titles, which have brought in $179 million in the first quarter, with over $100 million of that in profit; Clash of Clans alone is now making over $2.4 million per day.)

"I think we've always said we're constantly exploring all different platforms for opportunities, but I don't think we exactly share your view that three months suggests that they're sustainable franchises," Kotick told him. "If you look at the last four or five years, you've seen changes in the top ten almost every year that are significant. Nothing that's driven any sizable amount of operating profit. While we're going to continue to look at it, and we think that over the long term there'll be opportunities, right now we just don't see anything that would suggest that changing the way we approach investing against mobile would be a good idea."

That philosophy may account for the drop in Activision's stock price. It's almost reminiscent of Nintendo CEO Iwata's dismissal of mobile games. Certainly, most mobile games aren't making a lot of money. But there are a few that are making numbers that even Activision would notice; Supercell's looking at a profit on the order of $400 to $500 million for the year, and that's real money even for Activision. Maybe it's more prudent to wait several years to see if there are a number of companies doing that kind of business... or maybe it would be good to get in before some new players have had years to consolidate market share.

Overall, Activision is going to have a good year, concerns to the contrary. Going into 2014, Bungie's Destiny will be arriving at some point, and that will likely have some significant impact. Beyond that, though, the picture becomes hazy. Much depends on the acceptance of new consoles; Activision is not heartened by the Wii U's slow uptake. With Activision betting so much on consoles, life will be good if new consoles sell like hotcakes... and not so good if they don't. Unfortunately, much of that is out of Activision's hands.

9 Comments

Sean Kauppinen Founder & CEO, IDEA

48 48 1.0
Activision didn't bite on Social and many would say they missed out, but they also didn't have to write off their investment in social as it died (like many of their competitors). I personally believe mobile is larger than social, and will last longer, however you can't slight the CEO of a company that makes $4B/year for not investing in mobile yet. Also, the suggestion of a parallel to Nintendo is far fetched. Hardware is much more expensive and IMHO insane to attempt to bring to market. Bobby is one of the most intelligent and rational business people in the games industry, regardless of anyone's opinion of him. I say - go Activision!

Posted:A year ago

#1

Bruce Everiss Marketing Consultant

1,692 594 0.4
The Blast Furnace have gone very quiet. But a quick look at Linkedin shows that they still have plenty of staff in Leeds.
Freestyle in Silicon Spa are recruiting, including for mobile: http://www.freestylegames.com/jobDetails.php?cn=PRO0000XA&1368079707

My feeling is that Activision are concentrating on making money from the reality of how the market is now. And there is no doubt that the console market has focused down to a relatively small number of blockbusters, an area where Activision have shown great expertise. Likewise they have done a fantastic job with keeping WoW going, seeing off many competitors.

It is also obvious that Activision know that they now live in a time of great upheaval and that they are covering their bets for wherever the market goes. The big thing is the portfolio of IP properties that they own. They can adapt these to whatever platforms and business models give them the most profit.

Edited 1 times. Last edit by Bruce Everiss on 9th May 2013 8:51am

Posted:A year ago

#2

Robin Clarke Producer, AppyNation Ltd

321 748 2.3
What a ridiculously misleading headline.

Posted:A year ago

#3

Matthew Hill Head of Recruitment, Specialmove

75 26 0.3
Activision's focus has been on a small number of highly successful brands; brands which they build a long term business plan around - if a brand has a short shelf life (i.e. less than 5 years) it's likely they will ignore it. If a brand "fails" (e.g. DJ Hero they will ditch it very swiftly)

In contrast the mobile and social market is driven by user data analytics; brand marketing is far less important. In addition there are a handful of mobile & social brands which have proven to be sustainable - Angry Birds being the most obvious. Ever cautious, Activision will be acutely aware that smash hits like Draw Something are often short lived phenomenon.

Until Brand Marketing becomes much more important in Mobile & Social and there is clear evidence of brands which can be sustained for 5 years+ I believe Activision will commit very limited resources to the sector. They could of course promote their own brands more aggressively but need to be careful that pricing/F2P doesn't undermine their lucrative console versions

Edited 1 times. Last edit by Matthew Hill on 9th May 2013 12:02pm

Posted:A year ago

#4

Anthony Chan Analyst, CPPIB

92 84 0.9
@Bruce - You have finally wrote something that I can agree with. A true first!
First of all, I really think that headline is a cheap trick, and a poor one at that as well. I know there are heavy negative sentiments in the community and industry towards Kotick. At the end of the day, those might be true too, since he is very much more a business man than a gamer. However, it is his business acumen and instinct that has gotten Activision to where it is today.

Kotick did not "brush aside" mobile going by what was actually quoted. He simply stated that mobile gaming does not fit in their business model as smoothly since they are focused on long term brands.

Unfortunately, 90% of mobile gaming is not brand centric (you have your staples that stick out - Angry Birds, Fruit Ninja, Draw Something, etc). However there are many more that are not so fortunate. Activision makes their money by developing IP that lasts decades, not flavor of the months like most mobile games are, and as such mobile is most definitely not a good fit. However, if (or I should say when) mobile matures into a platform where games are more than just 15 minute time wasters, I am sure Activision would barge into the market, all "guns blazin".

Edited 1 times. Last edit by Anthony Chan on 9th May 2013 5:11pm

Posted:A year ago

#5

James Berg Games User Researcher, EA Canada

170 217 1.3
C'mon GI, that's an awfully misleading headline.

Posted:A year ago

#6

Steve Peterson West Coast Editor, GamesIndustry.biz

108 73 0.7
Kotick's tone during the earnings call was very dismissive of mobile; he told Creutz that he doesn't think mobile has driven any sizable amount of operating profit, and yet that's manifestly not true in multiple cases (as I noted). Yes, Activision is smart to make sure its core franchises on consoles do well. The company has plenty of resources to make some significant bets on mobile if it wanted to, without impacting existing development. It's being very cautious, and I think it's too cautious. If Activision doesn't think it knows how to create a strong mobile title, why not buy a company that has demonstrated it does? Activision certainly has enough cash for that.

Apparently I'm not the only one who thinks Activision may not be making all the right choices; the stock is down almost 8% today despite the earnings beat for the last quarter. Investors are clearly putting more weight on the warnings than on the positive prospects.

Posted:A year ago

#7

Dominic Jakube Student

92 13 0.1
The problem with basing your whole companies fortunes on only three pillars is nothing lasts forever, and you can see the cracks starting to form at the base of these pillars.

WOW is winding down and the replacement Titan is years off and might be a flop when it arrives, monthly subscription?Not linked to an existing Blizzard IP?Or further delayed to re-tool for free to play in an over crowded ftp market.

Skylanders- Disney infinite has better charcters and cross promotionial oppotunities, they could add Marvel Super Heros or Star Wars elements on top of the Pixar and Disney properties.

Call Of Duty-Proberly will stay on the fps throne for the forseeable future, the new engine and new consoles will give it a facelift and the only real competitor is the Battlefield series wich only sell half as much if their lucky.

As for mobile I wonder who much those COD rip-off Modern Combat games by Ubi sell?

Posted:A year ago

#8
I think he just sees mobile as too risky.

He wants to be able to be quantify his costs, risks and profit and he only can do that by being more focused using brands either from movies or their own existing ones (which are slowly running out hence the warnings). That's clear from a quick look at the games they're releasing now.

Mobile requires more of a skatter-gun strategy which can end up being either very cheap with large returns or very expensive with low returns.

Again I don't disagree with him but I do wonder what happens when the well of existing IP is dry?

Posted:A year ago

#9

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