Activision Blizzard: Video Game Pioneer Embraces Digital Transformation
Activision Blizzard has a long history of creating lasting entertainment franchises – as the gaming industry pivots towards digitization, the company continues to innovate.
Activision Blizzard (“ATVI” or the “Company”) is one of the world’s largest video game publishers with an impressive portfolio of game franchises including Call of Duty, World of Warcraft, Starcraft, Diablo, Skylanders and Candy Crush. Activision is known historically for its console games while Blizzard is better known for PC computer games. The Company recently made an aggressive expansion into the mobile gaming world with the acquisition of King Digital, the developer behind the viral Candy Crush Saga. The gaming industry is in the midst of an important secular shift towards fully-digital gaming, and ATVI is well positioned to capitalize on this trend.
Digital Delivery
One major transformation in the gaming industry has been the shift from selling physical “boxed” software products to delivering products digitally. Faster internet speeds, increased hardware storage space and an explosion in the number of connected devices are changing consumer purchasing behavior by moving towards digitally downloading entire games. Additionally, most new games have a multi-player or social component that requires an online connection (this is particularly true for ATVI). As a result, the Company is highly focused on developing content, both new game titles and expansions or add-on features, that can be delivered via digital channels. In 2015, ATVI released additional digital content across its top game franchises that provided additional monetization opportunities, such as the “supply drops” feature in Call of Duty and various in-game purchases (“microtransactions”) within Destiny. The Company also released Call of Duty: Black Ops III Awakening, the first downloadable content expansion pack for the game. Digital revenue was 54% of total ATVI revenue in 2015 and is projected to continue to represent a larger share of the overall business.
Microtransactions
Online gameplay is creating new engagement and monetization opportunities for the gaming industry. ATVI estimates that industrywide digital gaming revenues increased by approximately 20% in 2015. One of the drivers of that growth, as mentioned above, was consumer purchases of full games through digital distribution channels, but it was also driven by increased microtransactions in existing games. ATVI is acutely focused on driving higher engagement within its active user base with the ultimate goal of driving players to spend additional money through digital transactions that enhance or expand gameplay. Currently, King Digital games employ the “freemium” pricing model. Gamers are given lives to use as they progress through the game and if a player loses they can avoid having to start over by paying a small amount of money. The Company recently introduced microtransactions to the Call of Duty franchise in the form points which can be used to gain an advantage in the online multiplayer game. The Company will need to tread carefully as they continue to expand this business, as many users have voiced concern that the practice frustrates users and ultimately degrades the quality of gameplay.
Mobile
In November of 2015, ATVI announced that it was acquiring King Digital, maker of the Candy Crush mobile game, for $5.9 billion. The Company reasoned that the acquisition would broaden the reach of its games, bringing total monthly active users (“MAU”) to more than 500 million (making ATVI the largest gaming network in the world). ATVI also recognized the important role mobile will play in the gaming industry in the years to come. Mobile phones have many advantages when compared to the traditional hardware ATVI games have historically operated on – lower cost to consumers, easier to operate, portable and ubiquitous around the globe. Additionally, the projected growth rates are staggering. In addition to game downloads and microtransactions, mobile games present an attractive opportunity for advertising. King Digital removed in-game ads in 2013 in favor of improving game play and promoting its own franchise games. However, ATVI has recently been reintroducing advertisements and believes the platform could become a major revenue contributor.
The Road Ahead
ATVI is already reaping huge rewards from its digital strategy. The Company has released a string of impressive quarterly results driven by strong engagement in its core legacy titles and corresponding monetization revenue. The Company’s stock price has doubled over the past two years. ATVI looks poised to continue capitalizing on the digital transformation of the gaming industry.
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Sources
1. Activision Blizzard – 2015 Annual Report.
http://files.shareholder.com/downloads/ACTI/3239226665x0x887600/BE853918-329D-4E90-ABDC-E669E9D097B9/Activision_Blizzard_2015_Annual_Report.pdf
2. Morgan Stanley Equity Research – The Beginning Is Now the Beginning; Initiating Coverage on the Gaming Industry. September 23, 2016
3. Reuters – Activision Blizzard buys ‘Candy Crush’ maker in mobile push.
http://www.reuters.com/article/us-king-digital-m-a-activision-idUSKCN0SS07Z20151103
4. The Wall Street Journal – Activision Blizzard Gets Hoped-For Boost From King Digital.
http://www.wsj.com/articles/activision-blizzard-gets-hoped-for-boost-from-king-digital-1462479632
5. The Motley Fool – Activision Blizzard Sales Surge on Strong Digital Content.
http://www.fool.com/investing/2016/11/04/activision-blizzard-sales-surge-on-strong-digital.aspx
Although ATVI is indeed generating large profits from a transition to digital pricing models such as freemium and micro-transactions, do you see a risk of potentially alienating the customer-base by pushing too hard on such a model? As you noted, even mainstream games such as Call of Duty have introduced microtransactions, giving an edge to players who pay more. There have certainly been instances though where developers pushed the envelope with this model – from mobile games like Clash of Clans where paying players decimate non-paying players, disincentivizing certain customers from even bothering to compete with the “rich”, to Valve’s recent release of “Evolve,” which had a paid DLC expansion that did not really add any value whatsoever to the game and came off as a cash grab. Where does a company like ATVI draw the line between customer exploitation and value-add to the game and customer? Is it possible to draw such a line?
Thanks for the thought provoking post, H! I’ve been a big fan of Blizzard products for as long as I can remember. As far as moving to mobile goes, I want to point towards the success of their digital collectible card game, Hearthstone: Heroes of Warcraft. The smartphone version launched in April 2015 and several sources estimate that the game brings in over $20 million in revenue each month (http://mashable.com/2015/08/12/hearthstone-success-20-million/#G4IIi9O4PkqI). Such impressive financial results immediately call to attention Andrew’s questions above: are consumers simply paying to win? In fact, upon running a google search for Hearthstone, one of the most popular returns reads, “Is it possible to play Hearthstone without paying money?” The “freemium” model is tricky, and one must consider the failure of companies such as Rdio before racing to the bottom of a pricing scheme in order to satisfy consumer demands.
I considered writing my post on Twitch, the Amazon-owned streaming platform that has seen healthy organic growth since its creation in June of 2011. I consider the success at Twitch to be an indicator of strength and future opportunity within the video game industry (https://www.twitch.tv/year/2015).
In addition to embracing mobile, activision blizzard should consider embracing augmented reality, much like what Pokemon Go uses to overlay Pokemon characters in the real world. Many of its games (if not all of them) are non-interactive, which limits the engagement timeframe (e.g., time per session). If they embrace an AR strategy with their game recognition, they can improve engagement.
What is ATVI doing to position itself in the realm of eSports? Through digitization, gamers can showcase their skills to a greater degree than ever before. Key digital influencers, such as PewDiePie, are able to make a healthy living from their couches via ad revenues generated during their streams [1]. Riot Games’ League of Legends just sold out the Staples Center for the Finals of their Worlds Championship. Microtransactions seem to be a corner-stone of ATVI’s current operating model. Die-hard gamers vehemently disapprove of games in which performance can be enhanced through purchased add-ons. What are ATVI’s plans to increase its presence in eSports, while promoting fair competitive play?
[1] http://www.independent.co.uk/news/people/forbes-names-pewdiepie-as-highest-earning-youtuber-with-annual-income-reaching-12m-a6695536.html