Market Watch

Activision Blizzard C4Q 2010 Results and Future Strategy

February 11, 2011

Piers Harding-Rolls Piers Harding-Rolls Director – Research and Analysis Director, Games, IHS Markit
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The world's largest third party games publisher reported C4Q revenues of $2.6b, marginally up on last year's $2.5b. Highlights from the numbers were:
  • quarterly revenue beating guidance of $2.2b comfortably and in line with IHS Screen Digest's forecast of $2.5b
  • $476m from digital and online games revenues, in line with IHS Screen Digest's forecast of $473m
  • Blizzard revenues up 35 per cent year on year to $1.7b

Alongside the numbers Activision Blizzard outlined its games publishing strategy for 2011: aggressive focus on big franchises with an online component (Call of Duty, Blizzard games) and games with committed niche audiences which require low levels of development investment (Cabela series). Activision Blizzard will withdraw from the music and skateboarding genres in 2011, signifying a mothballing of the Guitar Hero, DJ Hero and Tony Hawk IPs. Though 500 job losses from headcount of just over 7000 will result, management expect to hire a similar number for growing Call of Duty and Blizzard development studios.

Activision Blizzard's focus in the next two to five years will be on

  • Blizzard titles (World of Warcraft, Starcraft 2, Diablo 3, new MMOG) and
  • Call of Duty (packaged for console and PC, DLC for console and PC, F2P online PC version for the Chinese market, new studio "Beachhead" developing online platform to support all Call of Duty online titles)
  • new Bungie title
  • smaller scale packaged games business focussing on licensed IPs (Transformers, Marvel) and niche titles with established fanbases (Cabela).  

The company is aggressively training capital expenditure on the segments which will continue driving growth in group margins. Call of Duty DLC, MMOG subscription revenues, MMOG value-added services and downloadable games and expansions sales via all drive margin growth for today's Activision. Looking ahead, future initiatives which offer further margin growth potential include Call of Duty's expansion into the Chinese market via a freemium online PC version, an online enabled title developed by Bungie which will be published by Activision and forthcoming Blizzard releases.

Additionally, every Blizzard release drives usage and engagement with the platform, including purchasing downloadable versions of its games which will yield significantly better margins at new release ASPs than via third party retailers (download or packaged). The Beachhead initiative appears to be an attempt to recreate this 'halo' effect between an online services platform and the games associated with it, though details remain scarce.

Compared with other leading third party publishers Activision Blizzard is ahead of the pack in generating digital and online revenues at scale: in C4Q the group generated 18.7 per cent of $2.6b quarterly revenue from digital and online (IHS Screen Digest predicted 19.0 per cent) gaming. When packaged games volumes fall in forthcoming quarters we expect the proportion generated by digital and online games to grow rapidly.

Although digital revenues are impressive, this income is largely derived from one property - World of Warcraft, a result of the Activision Blizzard merger. Question marks still remain over the integration and influence of Blizzard on Activision's other businesses, with Blizzard largely operating on an autonomous and un-integrated level since the merger. Much of Activision Blizzard's future growth will depend on the company's skill at aligning its Activision business processes and activities more keenly with Blizzard, seeing through the later lifecycle of World of Warcraft and developing a robust online and mobile business beyond Blizzard IPs. The shift in business processes will mean losing staff involved in traditional publishing activities and hiring staff with expertise and knowledge in digital and mobile.

It remains to be seen how the group intends to generate new IP going forward. Operators in creative industries arguably require a flow of new IP because the appeal of one's existing portfolio is likely to decrease over time as consumer tastes shift, generations grow up, competition strengthens and technology advances. Activision Blizzard's existing portfolio is industry leading, however, as Guitar Hero and Tony Hawk can testify, even the strongest IPs can eventually lose their appeal.

Given the refocusing discussed above, the traditional publishing business will concentrate on its major profitable IPs, will occasionally resurrect older mothballed IPs, such as Spyro the Dragon, will produce games based on third-party licenses but will shift away from investing in major new IPs. Overall we expect innovation and new IP to come from the growing digital parts of the business. Innovation will come from re-inventing existing franchises for new platforms, business models and distribution methods, while entirely new IP is likely to come from content for new platforms and Blizzard.

Read More > iSuppli | Screen Digest Games Intelligence

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