Bungie's next project is "well along in its development," but Activision's new deal with the developer isn't intended to supplant Call of Duty, says Wedbush analyst Michael Pachter.
The analyst says that Activision's ten-year exclusive deal with Bungie around the Halo creator's newest property resembles Activision's past deals with id Software, where the publisher is "funding some or all of the development and getting first dollar payback and a healthy revenue share in exchange."
The analyst says he discussed the deal with Bungie and Activision, and while details beyond the initial announcement are scant, "it’s clear that this is a publishing partnership and not a distribution arrangement."
"That means that instead of normal distribution margins of around 10 percent, the deal probably allows Activision to participate in profit upside, suggesting that their margins could end up between 15 – 20 percent if a future Bungie game sells a crazy number of units," Pachter suggests.
The analyst says Bungie has indicated plans to make its games multi-platform "where that makes sense", and confirmed that the first installment under the partnership is "well along in its development." Mentions of an "action game universe" suggest aims for a Halo-sized property with multiple sequels and offshoots.
Pachter suggests that any future Bungie game will sell "at least 10 million units, as they will appear on multiple platforms for the first time," he says. Typical Halo games sold around 10 million worldwide units on just Xbox platforms, so assuming future installments are as popular, they could sell as many as 15 units on both Xbox 360 and PlayStation 3, the analyst estimates.
Assuming a 15 percent profit from 10 million units sold, Activision could make about $65 million in profits from a successful Bungie game, the analyst models.
"Bungie is a relatively productive studio, and it is likely that we will see a game from them every two years, beginning next year," he says. "Therefore, I think it’s safe to assume that Activision will generate around 5 cents per share on average every other year from this deal."
However, the positive news is unlikely to be able to completely dismiss the cloud currently overhanging Activision -- and its shares.
"I’m not sure that this will fully offset the negative investor reaction to the ongoing Infinity Ward soap opera," says Pachter, "but at least it shows that Activision can deal with world class developers, and I actually thought that the Bungie guys sounded quite happy with their deal and with their relationship."
As for the key Call of Duty brand, it's unlikely to lose priority for Activision as a result of this deal, and will continue to be healthy, the analyst adds.
"The majority of the 20 million people who bought Call of Duty have no idea who Infinity Ward is," says Pachter. Without the involvement of the pedigreed studio, the next installment "probably won’t sell 20 million copies, but it will sell at least half that."
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Respect to my ex-co workers. I've got friends there, and I wish the best of luck to you all.
Finally I have to point out that Activision is the largest 3rd party publisher in the market place at the moment, and the only one that seems to be profitable and stable. (From a business point of view. Think of it as a critical path problem: how stable is your product pipeline if you fail to profitable titles? How does this affect your market performance?)
So in all, I am not surprised by this and can only hope for its success. And no, not JUST in profitability, but also in performance and delivery as well as studio relations. The industry went through a big contraction over the last few years, a correction that was particularly painful in the amount of layoffs and titles in development. I for one can only wish the industry well because I'm in it.
Bungie are following in the footsteps of other well established/original content studios. They are building content equity around their Studio Brand and their creative talent. This isn't too far from Blizzard who, after merging with Activision, still has control over the IP they developed.
That is a large assumption.