Activision Is Ready For Console Transition Despite Declining Subscribers

by Trefis Team
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Activision Blizzard’s (NASDAQ:ATVI) stock fell after its results despite the better-than-expected report for the video game developer. Although successful titles like Call of Duty: Black Ops II, Skylanders and StarCraft II: Heart of the Swarm helped a 13% year-on-year increase in revenues, investors were worried about a 14% decline in World of Warcraft subscribers. Activision announced that about 1.3 million subscribers, mainly in Asia, had left the popular online multiplayer game, World of Warcraft(WoW), during the three months ending March. The company expects a further decline in subscribers for the game through this year. World of Warcraft has long been a cash cow for Activision accounting for close to $1 billion in annual revenues.

Despite the setback, Activision has fared well through the year, fighting an industry wide decline in sales caused by console fatigue. Strong sales of the aforementioned titles have led to a 40% increase in the stock price since the turn of the year. The market price is now in line with our $15 price estimate for Activision Blizzard.

See our complete analysis of Activision’s stock here

Closing Time For Warcraft?

Warcraft was once the world’s biggest massively multiplayer online role-playing game (MMORPG) franchise which had youngsters hooked to their computers since its first came out in 2004. The franchise was successfully able to attract subscribers reaching a peak of nearly 12 million in 2010. However, the online gaming landscape has changed considerably since then. Several free-to-play online MMORPGs like Aion: Ascension, Vindictus and Allods Online have entered the fray. As a result, World of Warcraft has lost its subscriber base. At the end of the March quarter, there were only 8.3 million WoW subscribers worldwide.

Although it is still the biggest subscription based MMORPG, the fee-based model means that it will keep losing out to other free-to-play competitors in the future. However, we remain conservative in our forecast and do not expect Activision to completely shut down WoW just yet.  New expansion packs like Mists of Pandaria, which sold 2.7 million copies on the first day of its release last year will help maintain subscriber interest. We expect Activision to retain at least 5 million MMORPG subscribers by the end of our forecast period.

Activision is wary of the trend and has also entered the free-to-play domain with the release of Hearthstone: Heroes of Warcraft, an online card based game set in the WoW universe for Windows, Mac and iPad users. The free-to-play model and the pressure exerted by other MMORPGs will substantially cut into the average revenue earned by Activision per subscriber.

So What Does This Mean For Activision?

WoW’s run, like all good things, had to come to an end. Activision seems to have moved on and is no longer dependent on WoW. Other franchises like Call of Duty and the innovative Skylanders have filled the void left by declining WoW subscribers. Along with Diablo III, these franchises accounted for 83% of the company’s $4.8 billion revenues in 2012. These franchises will be crucial for Activision as it makes the transition to the eighth-generation consoles later this year. Both Microsoft (NASDAQ:MSFT) and Sony are expected to launch their eighth-generation consoles, this holiday season. [1] Although the level of first-party support, pricing and consumer purchasing intent remains uncertain, Acitivision has placed itself in a prime position to capitalize on the launch of the new consoles.

Skylanders is one of Activision’s innovations, requiring gamers to purchase physical models of the franchise’s characters that have to be placed on the “The Portal of Power” by the user to access the character. Including accessory pack and figure sales, Skylanders Giants was the best selling game in North America and Europe through the March quarter. Activision has announced that the third game in the franchise will be launched during the holiday season in 2013. However, the franchise will face stiff competition from Disney’s infinity video game, which is being developed along similar lines and will also incorporate the company’s popular characters from franchises like the Incredibles, Monsters. Inc and Pirates Of The Caribbean.

Annual editions of the Call of Duty franchise have made the list of top 10 selling games in the U.S. and Europe in each of the last five years. The latest edition of the game, Black Ops II was the second highest selling title in both North America and Europe through the first quarter of 2013.

The company had another success with Starcraft II: Heart of The Swarm, which sold 1.1 million copies in the first two days of its release in March.  Diablo III was also a big success last year, with over 12 million copies sold worldwide. The game was originally released just for personal computers and went on to become the fastest-selling PC game of all time. Both of these titles made the list of top ten PC titles in North America and Europe in the first quarter of 2013. Activision has announced that it will launch Diablo III for Playstation, later this year, hoping to replicate the success on the console platform.

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Notes:
  1. Sony Announces PlayStation 4 Videogame Console – WSJ.com, Feb 20, 2013 []
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