Activision Blizzard (ATVI) has performed exceedingly well during the last year. The company has benefited by the recent buyout of its Vivendi shares that has resulted in significant earnings accretion and provided Activision with a more flexible model to develop better games and compete against its peers such as Electronic Arts (EA). Activision expects to perform comprehensively better as new console sales have been above expectations this year.
A Leading Player
Activision is one of the leading console and handheld publishers in Northern America and Europe, including toys and accessories, which has assisted the company in creating strong free cash flow backed by the solid performance of its gaming franchises.
Activision’s most popular game, Call of Duty Ghosts, is the No. 1 game across all platforms and also the No. 1 next generation game on PS4 and Xbox in North America and Europe. Besides, another famous game, Skylanders, has also performed well and was a best-selling children’s franchise, including toys and accessories, sold in North America and Europe.
Apart from this, Blizzard Entertainment’s Star Craft II, Heart of the Swarm, was excellent. It was, however, Blizzard's first ever game that had record-breaking success after stunning performance of Diablo III on PC, which has come to console in more than a decade, and launched on the Xbox 360 and PS3 in 2013. Diablo III ended the year with over 15 million units sold cumulatively across all platforms, and Activision expects better results this year with the launch of the Diablo III PC expansion pack.
The Way Forward
The next-generation consoles have been consistent performers and achieved success as Sony’s PlayStation 4 and Microsoft’s Xbox One have hit nearly 10 million units in combined sales. This has set up all the third-party game publishers for a grand slam 2014 and Activision Blizzard has many tailwinds that can increase its profitability.
Activision also focuses on bringing improvement in online gaming capabilities such as same-day downloads, improved social features and new opportunities for potentially higher margin business models like the sale of virtual items and downloadable content. Therefore, it can expect more revenue in the coming year due to its eye-catching features that the new console generation brings.
As Activision moves forward, the new consoles must be catalysts for revenue growth and margin expansion. Also, the company expects better results as it anticipates rapid growth in its install base over the next few years, which will certainly give Activision a good opportunity to capitalize on a fast growing gaming population along with broader international penetration.
Some of its free-to-play games such as Hearthstone, Heroes of Warcraft, Blizzard’s Heroes of the Storm, and Call of Duty Online are designed in a way that could appeal to many players across numerous platforms and geographies. Also, these investments are expected to result in solid returns as players progress through stages and buy items.
Moreover, Activision is pushing into the freemium game segment. Blizzard recently announced that its Hearthstone: Heroes of Warcraft, its free-to-play digital card game, will be now officially out of beta. Although Hearthstone doesn’t require any upfront payment to get started, it demands small payments from users who want to speed up their progress.
Activision is planning to launch Heroes of Storm, which brings together the iconic characters from Activision’s three famous franchisees, StarCraft, Diablo, and Warcraft. The game has huge potential and resembles Riot Games’ League of Legends, which has 27 million daily active players.
Also, Activision counts heavily on “Destiny,” which is expected to be launched in September this year. Bobby Kotick, Activision’s chief executive, claimed that Destiny will be the “best-selling new video game IP in history” and will definitely hit the billion-dollar mark in sales. Destiny will compete against Electronic Arts’ Titanfall. However, since Titanfall is exclusive to the Microsoft’s platforms, Destiny already has a competitive advantage due to its cross-platform presence.
A Look at EA
However, Activision may not benefit much from this advantage for long since Electronic Arts isn’t going to keep the Titanfall sequel exclusive to Microsoft’s platform. Titanfall’s developing studio, Respawn Entertainment, had aims of developing games for the PS4 as well. So, Electronic Arts, which is the game’s publisher, will have a wider audience the next time.
Activision looks solid and is carrying good momentum helped by the new consoles and new games that will certainly increase its revenue for the current fiscal 2014. Moreover its increasing penetration with strategies like free-to-play games and more blockbuster franchisees, make it a good long-term option to benefit from the gaming industry.