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Analysts: Activision To Thrive On StarCraft II, New Business Models
by Leigh Alexander [PC, Console/PC]
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May 3, 2010
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Quarterly earnings for major publishers are coming up, and analysts expect a strong turnout for Electronic Arts, THQ and Activision in general. However, it's Activision that is most squarely in analyst sights, after weeks of the Infinity Ward soap opera and the big Bungie deal.
Most analysts generally expect Activision to report revenues of $550-$600 million. Signal Hill's Todd Greenwald feels that the biggest issue for investors in Activision is not the recent headlines, but some vaguery surrounding the release of Starcraft II.
Greenwald says the game will likely release in the company's third quarter (around the fall-holiday period), rather than in the summer of this year as originally forecast. When it hits, says the analyst, the game can ship 6 million units in its first three months, drumming up $270 million in sales.
Wedbush's Michael Pachter believes that the Infinity Ward drama has been overblown in the press, creating a media climate that sees the company as "the Evil Empire, with contentious dealings between the company and employees the norm."
But, he points out, in nine years of covering the company as a financial analyst, he's never seen any other court cases between Activision and its employees: "We think that this situation has escalated well beyond what the company intended," he says.
"In our view, the company will ultimately resolve this matter, will reach a settlement with the affected employees, and will pay out retention bonuses to keep future losses at Infinity Ward to a minimum," he says.
And the $450 million per year-generating Call of Duty: Modern Warfare brand will continue to sell well, he says -- and speculates that a shift in business model is on the way, believing that "Activision intends to transform the game from a packaged product only to a subscription multiplayer game."
Even assuming royalties from subscription revenues to be paid to platform-holders, Activision would only need 2 to 5 million subscribers to keep the franchise's revenue levels up and create higher margins, says Pachter.
In fact, the analyst believes that Activision's business model transition may be part of what motivated the dispute between the publisher and fired Infinity Ward heads Jason West and Vince Zampella.
"We think that the company is on the path to subscriptions, and that West and Zampella did not wish to work on that kind of game, leading to their termination," he says.
"We think that over the next two years, Activision will introduce a subscription game, and think that annual Call of Duty revenues and profits will likely rise rather than decline," Pachter concludes. "The market reaction to the lawsuits suggests that investors have the opposite view, which, in our opinion, creates a buying opportunity."
Activision reports its fiscal first quarter results this week on Thursday, May 5.
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@Gus
There are plenty of companies including Blizzard which have subscription based title usage, and yes, they have a profitable revenue stream. The difficulty now is to determine what and how that service is utilized and what users are willing to pay for.
Over all, I suspect that building the infrastructure and network as well as getting all the details for service set up (housing, personnel, location) are all fixed costs and well known. Since setting up a 'core' department to do this takes some time, ensure that all the requirements are met, and then determining how this will integrate into title support is pretty hairy.
So at least for this calendar year which means CoD: Black Ops will probably have the non-subscription model. But after that I suspect that there will be a serious reboot from tech to concept in the franchise. Services will probably embeddable into other title of course for long term development and initially it will probably be more realistic to keep all the separate divisions on separate department segments.
Not the interesting number, in the fourth quarter of 2009, Activision/Blizzard reported revenues of 632 million US$ and still reported a loss of 286 million US$. So for me, the question is not, what revenues will they report, but will they report a loss or a profit for this quarter.
Owing to CoD costs and DLC pricing, as well as new studio acquisitions (not Bungie, these are devs acquired in 2008+) and integrating their product line and costs to develop, the gap in release is still relatively short.
So a constant revenue stream is still there, the question is cost to deliver and market that will be the real indicator. I don't think Activision will post a loss though...