New Monetization Strategies Hold The Key To Activision’s $18 Value

by Trefis Team
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Activision Blizzard (NASDAQ:ATVI) is the largest video game publisher in the U.S. Its Call of Duty series has been one of the most popular games since the Call of Duty: Finest Hour released back in 2004, with over 22 million units sold worldwide in 2011. [1] Increased expenses due to an aggressive marketing campaign to promote the latest expansion in the World of Warcraft (WoW) franchise, Mists of Pandaria, have affected the company’s bottom-line so far this year leading the stock to a downward spiral. The game itself proved to be quite successful, selling 2.7 million copies on the first day of release. [2]

We believe the market is undervaluing the company. Our price estimate for Activision Blizzard is $18, around 60% above the current market price. Below are a few key trends that have influenced our valuation.

See our complete analysis of Activision’s stock here

Misty Performance

Although 2.7 million is an impressive sales figure, it is a significant decline from the record set by the previous expansion in the WoW series, Cataclysm, which sold 3.3 million units in the first 24 hours. This decline is a big disappointment for the world’s biggest massively multi-player online role-playing game (MMORPG) franchise which has had youngsters hooked on 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. It has since rapidly lost market share to Riot Game’s League of Shadows, which was launched in 2009 and has successfully accrued customers at an incredible rate of nearly 1 million per month, surpassing 30 million subscribers. [3]

Despite the loss in market share, the series is still a big bread winner for Activision as the company does not rely much on the sales of the product, but rather on longevity as it earns monthly revenues through a subscription-based model. The company has already announced the successor for the Wow series, Titan, which is scheduled for release in 2014 and will follow the same subscription model. Banking on the company’s reputation and the quality of products it has delivered so far, we maintain an optimistic outlook for the franchise, expecting it to boost sales and subscriptions on its release.

Call To Arms

Call of Duty was the most popular game of 2011, selling 12 million units on X-Box 360 and 10 million on PS3. This year too, the game is among the top-ten best selling games. Activision has done a great job of capitalizing on the franchise’s popularity by releasing a new edition each year.

In addition to unit sales, the company also earns revenues by offering premium online membership called Call of Duty Elite, at $50 per year, although the online game play is free. There are currently around 2 million subscribers with access to new maps and game modes through this membership.

The next installment of the series, Call of Duty: Black Ops 2, is scheduled for release in November and has garnered great fanfare, exceeding its predecessors pre-orders by over 30% on Amazon (NASDAQ:AMZN). [4] We believe the monetization strategy regarding this franchise and the overwhelming popularity of the game holds Activision in good stead for the next few years.

Money Falling From The Sky?

Last year, Activision launched Skylander: Spyro’s Adventure, a role playing game (RPG) targeting a younger audience. 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 an interactive platform “The Portal of Power” for the user to access the character. The model has been a huge success with the honor of being the best-selling console and handheld video game since its release and was also the biggest source of revenues for the company last quarter. [5] The next game in the franchise, Skylanders Giants, is expected to release this October and is greatly anticipated by the series’ fans.

Activision has also released the game on Amazon’s Kindle Fire HD, refer to our article Activision Targets Tablet Gaming Boom With Hit Games For The New Kindle Fire HD for more details. With innovative marketing and monetization strategies such as the one employed for Skylander, we expect steady growth in Activision’s PC and other platforms revenue.

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Notes:
  1. Global Yearly Chart, VGChartz []
  2. Mists Of Pandaria sales highlight World Of Warcraft’s decline, Digital Trends, 4th October, 2012 []
  3. With StarCraft II Declining, The World’s Top PC Game League Of Legends Sees Continued Growth, Forbes, 14th September, 2012 []
  4. Call of Duty: Black Ops 2 Pre-orders on Amazon Already Beating Black Ops, MW3, The Inquisitor, 3rd May, 2012 []
  5. SKYLANDERS SPYRO’S ADVENTURE WAS TOP SELLING CONSOLE GAME, Gaming Industry News []
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  • commented 9 years ago
  • tags: ATVI EA AMZN GME
  • This view is way, way off base from reality and ignores some very key negative influencers. There are also some bald inaccuracies offered here:

    -The "Titan" project is unannounced officially; there is no word on what financial model that franchise will bear, and the 2014 release prediction bears no relationship with any kind of reality. 2015/16 is the current "Best Bet" on a Titan release: indeed, "Titan" is simply an in-house code name for the project.

    -The non-Chinese 2.7 million sales figure on WoW's Mists expansion looks good on paper, but masks the fact that the game has lost an additional 1.9 million subscribers since the last quarterly report. The fact is that Mists of Pandaria, the expansion designed to hopefully draw subscribers back into the fold and to lure new subscriber blood into the franchise, has netted only about 700k plus-side subscribers since 1 July 2012.

    -One hidden and potentially crucial factor is the number of "Annual Pass" subscriptions which are set to expire over the next 90 days. The Annual Pass initiative was a 12-month contract initiative offered during the 4Q 2011 when subscription numbers were bleeding and there were no new content updates on the books. The offer drew in 1.2 million takers over the three-month offer period; approximately 7-900,000 of these are predicted to fall from the subscription ranks in coming weeks.

    -The CoD initiative never took off with gamers used to spending a $50-60 box fee and nothing more. The attempts to monetize this non-subscription franchise died on the vine, though the company is still trying ...

    The bald truth is that subscription-based gaming is dying a fast death. Buy-to-play is the norm now, and WoW remains one of the last sub-based holdouts. The >three million active, non-Chinese subscribers still hanging in there is evidence enough of this trend. Blizzard has taken to merging servers (via a service called "Cross-Realm Zones") in a a bald attempt to prop up the "Massively" part of the MMORPG equation, a move that has incensed a large portion of their current player base.

    Look for further decline on the Activision-Blizzard front, along with a substantial leadership reorg, in coming months. Shortselling on the COD November release may prove profitable, provided that the COD box sales offset the rapid decline expected in WoW subscription revenue during this same period.