Activision Needs Another Video Game Franchise To Spur Sales

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Activision Blizzard (NASDAQ:ATVI) saw a 15% year-on-year drop in console revenues through the first nine months of 2012. This decline might be attributed to the prolonged product cycles of Microsoft’s (NASDAQ:MSFT) X-Box 360 and Sony’s Playstation 3, which started back in 2005. The video game industry as a whole reported a 20% decline in sales during the nine months ending September. [1] But have video games gone out of fashion or are companies just playing a waiting game?

A look at the global yearly video game charts show that sales of the top five titles in the video game industry actually increased by 15% during the same period suggesting that blockbuster video games are doing quite well. Activision’s Call Of Duty: Black Ops II was the best selling game of 2012 for both X-Box 360 and PS3. [2] The game, the latest edition in the Call of Duty franchise, actually matched the sales of its predecessor, Call of Duty: Modern Warfare 3, which was the best selling game of 2011.

See our complete analysis of Activision’s stock here

If Call Of Duty Series Is Consistently Topping The Charts, How Are The Revenues Down?

The simple answer to the question is that Activision does not have a consistent franchise apart from Call of Duty. Activision’s peer Electronic Arts (NASDAQ:EA) releases annual editions of its popular sports franchises like FIFA and Madden NFL. Activision, on the other hand, has only been able to release yearly updates to Call of Duty with some degree of success. The Guitar Hero franchise was successful for some time, but its popularity has faded.

EA has also reported a decline in revenues but that is primarily because it has been cutting down on the number of titles released per year, from 36 titles in fiscal 2011 to 22 in 2012, and it plans to release just 14 titles in 2013. Revenues from its annual franchises have remained consistent as digital revenues earned from the franchise have increased dramatically from $16 million through FIFA 09 to $144 million (by the end of the July quarter, prior to the release of FIFA 13) from FIFA 12.

Unlike EA, Activision has maintained an output of 17 to 19 titles per year but its video games lack stability. Leaving aside subscription revenues from the World of Warcraft franchise, the company is quite dependent on product sales for revenues. Call of Duty has been successful so far, and we believe the company should replicate the model and come up with another franchise with annual editions to provide some stability to its earnings.

The timing is perfect, with the new X-Box 720 and the Playstation 4 expected to be released within the next two years. Sales are expected to increase with the next generation consoles, but it is up to Activision to ensure that the increase is not just a one-time spike but a consistent and sustainable growth.

Skylanders

The Skylanders franchise, which started last year with Spyro’s Adventure, has proved to be a massive success generating life-to-date revenues of more than $500 million by the end of the third quarter of 2012. Apart from earning revenues through unit sales, the company also manufactures and sells physical models of the franchise’s characters. These models have to be bought separately and placed on the “The Portal of Power” for the user to access the character. The innovative business model led to a massive increase in PC and Other revenues, from $251 million in the first nine months of 2011 to $727 million in the first nine months of 2012.

Model sales are good for revenues, but the additional manufacturing costs will cut into margins. Activision followed up Skylanders Spyro’s Adventure with its sequel, Skylanders: Giants, this year. The game primarily targets younger audiences and is a replacement of sorts for the Guitar Hero franchise. We believe that Activision will be able to sustain revenue growth if it is able to come up with timely updates to the Skylanders franchise much like it has done for Call of Duty.

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Notes:
  1. U.S. Videogame Industry Sales Fell by Nearly a Quarter in September –NPD, 11th October, 2012 []
  2. VGChartz.com []
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