Activision Blizzard - the video game sector's Apple?

Video game sector publicity in the last few years has been increasingly slanted towards social and online gaming and consumers are lapping it up by increasingly seeking these easily accessible and low cost entertainment thrills online. Nevertheless, traditional video game and console makers are still very attractive and are seeking new playing fields. The success rate of their transformation efforts is mixed but the potential for growth, if they get it right, is enormous. The entire video game industry is actually rapidly evolving. As the technology betters itself and new ways of playing games become available, new income streams and distribution possibilities create strong catalysts for the sector. 

Video game developers are not created equally though. Some are quite uprofitable or poorly managed and have bad strategies, while others are quite the opposite. For most companies, developing video games is extremely expensive and time consuming and for a large number of not yet released game titles, the successess are unknown ahead of time. Sometimes the games that are developed are not popular, mismarketed or just poorly built creating a huge risk for the companies behind them - both financially and in terms of reputation. Much like Apple, video game makers can earn a lot of loyalty and goodwill from making quality games.

As an example, Activision Blizzard's games are the cream of the crop of the industry. Diablo, Warcraft, Starcraft, Call of Duty are all franchises that are built on a strong following. In fact, Diablo 3 which was released in May was the fastest selling game of all time in its first week.

Cream of the crop
Activision Blizzard's games tend to be the best sellers and often compete against each other for the title. The company focuses on a few extremely strong franchises, much like Apple does. While diversification is often touted as a benefit in the video game industry, the most diversified video game makers tend to be least profitable because of the lack of focus. Instead Activision Blizzard makes a few games, but makes them right. Other companies such as Ubisoft and Electronic Arts create a slew of games but most of their profits still come from a handful of games.

Real shopping in a make believe world
The industry is now moving towards subscriptions and micro transaction revenue models to boost their earnings. This is exactly what Activision Blizzard has been doing. By using its popular franchises, the company has managed to create new revenue streams. For example concerning Diablo 3, the company has created an in-house auction system for users to buy and sell items that they have discovered in the game. The best part of this is that these items can be purchased with real money (as well as in-game gold) and Blizzard takes a 15 percent cut of these transactions. This might sound like an absurd idea to most casual gamers, but for hardcore Diablo gamers this is a pretty normal occurrence in the Diablo world. In fact this activity was so popular in the first version of Diablo that it spawned a multitude of black market sites where players could do exactly this, since it did not exist in the actual game at the time. This time the company will simply take a cut of this 'black market'. This isn't your typical video game revenue model!

Product placement and ads in games - why not?
Additionally the company is releasing a large multi-player game next year which is rumoured to incorporate advertising within the game itself to increase revenue as well as the game's authenticity. In the shorter term, the company's Q2 earnings will be released in August which will include the sales of Diablo which should give the company a partial boost. Product placement or even direct advertisements incorporated into games sounds interesting. Movies are full of them, so why not games too? But what I am looking forward to is to see what kind of popularity the in-game 'auction house' will obtain. It will not be a huge earnings driver but it will highlight the company's ability to profit from its games' popularity.

Asian franchises open new doors
Additionally the company just recently had approved its Call of Duty franchise in China which opens up a massive market for one of the company's strongest brands. For longer term investors, the company's next multi-player game released next year could make the stock a good medium-term investment. And if the quality of its game is like anything laucnhed before it should be extremely popular.

Strong financials
Sometimes strategy and culture matters, and Activision Blizzard is the best example of this. On top of this the company has no debt, along with a hefty cash balance similar to Ubisoft and Electronic Arts which provides a good buffer for investors. Although Activision Blizzard remains the most expensive company in the sector, it is by far the most profitable with incredible margins and a slew of amazingly popular brands, which simply cannot be replicated... Could anyone replicate Apple if they wanted to?

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