netrashetty
Netra Shetty
Activision Blizzard, Inc., formerly Activision, Inc. (NASDAQ: ATVI) is the American holding company for Activision and Blizzard Entertainment. The company is majority owned by French conglomerate Vivendi SA and was created through the merger of Activision and Vivendi Games, announced on December 2, 2007[4], in a deal worth USD$18.8 billion.[5] The deal closed July 9, 2008. The company believed that the merging of the two companies would create "the world’s largest and most profitable pure-play video game publisher".[6] It believes that it is the only publisher that has "leading market positions across all categories" of the video game industry.[6]
Activision Blizzard (NASDAQ:ATVI) is one of the world's largest video game publishers and distributors. Along with primary competitor Electronic Arts (ERTS), ATVI develops software for the PC and video game console markets. The company is home to the popular games: Guitar Hero, DJ Hero, Call of Duty, World of Warcraft, and Starcraft. The company reported net revenue of $4.3 billion and net income of $113 million in 2009.[1]
Prior to acquiring Blizzard, Activision's focus was on console games. However, because of rampant piracy of these single-licensed games, the company had a difficult time making profits overseas in countries like China. The acquisition of the online gaming giant Blizzard allowed the company to expand its reach into countries like China because online games charge a recurring monthly fee instead of a single upfront purchase. The company's World of Warcraft game had 11.5 million active users in 2009, 1 million of which were located in China. Long term growth in the online gaming industry will be important as China's online services are growing by 30% annually, half of which is represented by online gaming.[2]
Contents
1 Company Overview
1.1 Business Segments[3]
1.2 History: Activision Acquires Vivendi's Blizzard
2 Business Growth
2.1 FY 2009 (ended December 31, 2009)[1]
3 Trends/Forces
3.1 ATVI's focus on game franchises limits the breadth of the development pipeline
3.2 Game Consoles Wars: Xbox 360 vs. PS3 vs. Wii are a source of volatility for game publishers
3.3 Online Gaming presents a Challenge and Opportunity
4 Competition
5 References
The video gaming industry has grown rapidly in the last two decades, with striking similarities to the movie business. Large publishing houses (production studios) support development studios (writers, directors, artists, etc.) through a long development cycle (filming and editing), during which a game (movie) makes no money. At the end of development, the publisher (production studio) licenses the game for distribution, promoting it in magazines, and reaping most of the revenue. However, if a game fails to sell well, the publisher will not recoup its initial investment. Mindful of this fact, dominant publishers such as Activision Blizzardand Electronic Arts (ERTS) have largely stayed to a simple formula - develop successful concepts for game franchises, and then launch a series of sequels.
Company Overview
Activision Blizzard is a developer, publisher, and distributor of video games. It sells software for a variety of gaming platforms, such as the PC, XBox, Playstation, Wii, and other portable devices.
Business Segments[3]
The company runs its business under three operating segments:
Activision Publishing ("Activision") (66% of net revenue) - this segment supports the company's console and PC game such as Call of Duty, Guitar Hero, and DJ Hero. This segment is best known for its action/adventure, action sports, first-person action, and music video game products. The company's leading title, Call of Duty, has generated approximately $3 billion in life-to-date revenue. The company faces difficult challenges from competitors that make games similar to theirs. For example, the Call of Duty game is challenged by Microsoft's Halo and Sony's Killzone, and Guitar Hero faces challenges from Harmonix's spin-off Rock Band.
Blizzard Entertainment ("Blizzard") (25% of net revenue) - this segment controls the company's online gaming products. The company's three most notable games are World of Warcraft (WoW), Starcraft, and Diablo. Over the last decade the company has spent most of its effort in developing the Warcraft series, but at the the end of the decade the company announced plans to expand its two other series.
WoW is a massive online role-playing-game in which players control an avatar and interact with other players by going on quests and fighting monsters. Since WoW's release in 2004, the game has grown into the world's largest online game and has 11.5 million active users. In order to keep the game new and challenging, Blizzard has released several expansion packs to accompany the main WoW game. In 2009, World of Warcraft sales accounted for 98% of this segment's revenue. The company also has the Warcraft III game, a real-time-strategy game.
Starcraft, which the company first released in 1998, is a real time strategy game which is still popular in countries like Korea where tournaments featuring thousands of players are held every year. After 12 years, in the summer of 2010, the company released the long anticipated Starcraft 2: Wings of Liberty.
Lastly, in 2008, the company announced that it was creating a sequel (Diablo III) to its Diablo franchise, a single-player role-playing game. Diablo II was released in 2000.
Activision Blizzard Distribution Segment ("Distribution") (9% of net sales) - the company distributes interactive entertainment hardware and software products in Europe through distribution subsidiaries like Centresoft and NBG.
History: Activision Acquires Vivendi's Blizzard
In 2008, Activision acquired Vivendi (EPA: VIV)'s video game division, Blizzard, in a stock deal that will result in Vivendi owning the majority of Activision shares. The addition of Blizzard, which publishes the popular World of Warcraft and Starcraft online games, created a larger company than primary competitor Electronic Arts (ERTS) and allowed Activision to be a key player in both its traditional market, console gaming, as well as the growing online space.[4] In 2009, Vivendi and its subsidiaries owned approximately 57% of Activision Blizzard's outstanding shares of common stock.[5]
Business Growth
FY 2009 (ended December 31, 2009)[1]
Total revenues increased 41.4% to $4.3 billion. The increase in revenue was due to a 72% increase in product sales and 28% increase in subscription and licensing revenue. Revenue for the Activision segment increased 47% due to strong performance from the company's DJ Hero and Call of Duty (however a large portion of this increase was just from restructuring). Sales also increased in all of the company's geographic regions.
Net income was $113 million and improvement from the net loss of $107 million in 2008.
Trends/Forces
ATVI's focus on game franchises limits the breadth of the development pipeline
Activision has historically focused on franchise hits as well as tie-in games to other entertainment media, such as the Spider-man 3 games. The company's stable financial position makes it capable of supporting these blockbusters which require funding as they are under development for long periods. However, there is more underlying market appeal from several franchises, rather than just sequels for only a few franchises. Although acquisitions are an option, they are expensive, and Activision seeks to continue creating new products on its own.
Game Consoles Wars: Xbox 360 vs. PS3 vs. Wii are a source of volatility for game publishers
Each gaming platform's software must be developed independently, and games are partially tied to platform sales, as characterized by EA's' anticipation of a PS3 victory and subsequent mismanagement of their portfolio during the Wii launch year. The underallocation of Wii games and overallocation of PS3 games was particularly poor timing given the Wii's blockbuster sales and the PS3's relative poor performance, since console sales aid in game title sales. ATVI has found itself scrambling to launch more Wii titles to match software demand, promising franchise hits on the Wii platform. This is a challenge because underlying technologies and development platforms for each are different.
Online Gaming presents a Challenge and Opportunity
As suggested by the merger discussed above with Vivendi Games, both ATVI and Vivendi (EPA: VIV) see online gaming as an area of opportunity. Online gaming typically is more social, and allows for community building and virtual relationships, wrapping end-users up in an immersing world and compelling them to spend their money. This arena offers new revenue models as well, with subscription being the norm, reminiscent of Software as a Service, although other ad-based models are also being explored. While potentially lucrative, the new segment presents its own challenges, with higher development costs.
Online gaming also posses a great opportunity for company's to capture the rapid growth of the industry overseas, especially in countries like China. China's online services are growing at 30% a year, half of which is attributable to online gaming.[2] Studies are estimating that the Chinese gaming industry will grow from $2.75 billion in 2008 to $8.9 billion by 2013.[6]
Competition
Electronic Arts (ERTS) - the industry's largest player, with a significant portfolio of sports-related software titles that generate consistent revenue year after year.
Take-Two Interactive Software (TTWO) - the publisher of the Grand Theft Auto franchise.
Konami (KNM) - a Japanese publisher, which has published hits such as the Metal Gear franchise.
THQ (THQI) - Developer/Publisher which houses 16 development studios.
Both developers and publishers compete with Activision Blizzard, although they may have different target segments. Most similar in operating structure is Electronic Arts (ERTS), which has the largest portfolio of blockbuster games, including many sports titles, and other game franchises with long histories of success.
Key investment considerations as identified by the analysts are as follows:Key Positive ArgumentsKey Negative ArgumentsActivision expects to announce major product releases at a premium price entering into a stronger console cycle.Strong franchises and long-term licensing agreements enable the company to expand its reach.As a result of the Vivendi-Activision business combination, Activision Blizzard at present has the most diversified and broadest portfolio of interactive entertainment assets in its industry, positioning the combined company to capitalize on the continued worldwide growth in interactive entertainment.The Company has a strong balance sheet with no debt.Managing gaming console and title obsolescence are the major operational risks to Activision.Rising production and marketing costs would curtail the company’s operating margin expansion.Delays in execution of projects may adversely impact Activision’s earnings.Video games are extremely seasonal, which offer limited sales window for holiday-centric products.The possibility of litigation and high stock price volatility are the other major risks to Activision.Activision Blizzard, Inc. (ATVI), based in Santa Monica, CA, is a worldwide pure-play online and console game publisher with leading market positions across all categories of the rapidly growing interactive entertainment software industry. The Company maintains operations in the U.S., Canada, United Kingdom, France, Germany, Ireland, Italy, Sweden, Spain, Norway, Denmark, the Netherlands, Romania, Australia, Chile, India, Japan, South Korea, China, and the region of Taiwan.For more information, please visit its website, www.activisionblizzard.com.Note: Effective July 9, 2008, Activision Blizzard’s fiscal year end changed from March 31 to December 31.January 5, 2011Long-Term GrowthLong-term growth ranges from 3.0% to 20.0%, with an average of 14.7%.Activision is one of the strongest companies in the videogame sector, grading well in terms of game properties, product pipeline, development talent, financial condition, and management. It is a successful publisher with a solid and growing franchise portfolio that is expected to enable the company to post strong revenue growth. Activision’s growing wholly-owned franchises and exclusive licenses are expected to help it drive sales growth and market share gains over time. Its operations have significant operating leverage potential, given opportunities for international expansion, and an expected increase in scale.According to management, the secret behind making any title a big hit is to make it compatible with the leading gaming consoles in the market. PC gaming has been left behind by console-based gaming, but it can be revived by deeper penetration of broadband, which allows multi-player features to run effectively. However, given the fast pace of technology, the trend of gaming devices becoming obsolete continues to be a threat to the software makers.Most of the analysts believe strong balance sheet provides more than enough capital to remain competitive for attractive license opportunities, as well as to develop new, wholly owned intellectual property. Activision has a strong portfolio of owned and licensed intellectual property that it can leverage against the large and still growing installed base of current generation hardware.January 5, 2011Target Price/ValuationProvided below is the summary of ratings and valuation as compiled by Zacks Research Digest:Rating DistributionPositive91.7%?Neutral8.3%?Negative0.0%Max Target Price16.00Min Target Price13.00Avg. Target Price14.55?Analysts w. Target Price/Total20/24Risks to the attainment of the price target include changes in game release timing, greater-than-expected deterioration of the average selling price (ASP) for game software, the effects of competition, options investigation impact, increasing product development costs, and lower-than-expected consumer demand for video game hardware.Recent EventsOn Novemb
Activision Blizzard (NASDAQ:ATVI) is one of the world's largest video game publishers and distributors. Along with primary competitor Electronic Arts (ERTS), ATVI develops software for the PC and video game console markets. The company is home to the popular games: Guitar Hero, DJ Hero, Call of Duty, World of Warcraft, and Starcraft. The company reported net revenue of $4.3 billion and net income of $113 million in 2009.[1]
Prior to acquiring Blizzard, Activision's focus was on console games. However, because of rampant piracy of these single-licensed games, the company had a difficult time making profits overseas in countries like China. The acquisition of the online gaming giant Blizzard allowed the company to expand its reach into countries like China because online games charge a recurring monthly fee instead of a single upfront purchase. The company's World of Warcraft game had 11.5 million active users in 2009, 1 million of which were located in China. Long term growth in the online gaming industry will be important as China's online services are growing by 30% annually, half of which is represented by online gaming.[2]
Contents
1 Company Overview
1.1 Business Segments[3]
1.2 History: Activision Acquires Vivendi's Blizzard
2 Business Growth
2.1 FY 2009 (ended December 31, 2009)[1]
3 Trends/Forces
3.1 ATVI's focus on game franchises limits the breadth of the development pipeline
3.2 Game Consoles Wars: Xbox 360 vs. PS3 vs. Wii are a source of volatility for game publishers
3.3 Online Gaming presents a Challenge and Opportunity
4 Competition
5 References
The video gaming industry has grown rapidly in the last two decades, with striking similarities to the movie business. Large publishing houses (production studios) support development studios (writers, directors, artists, etc.) through a long development cycle (filming and editing), during which a game (movie) makes no money. At the end of development, the publisher (production studio) licenses the game for distribution, promoting it in magazines, and reaping most of the revenue. However, if a game fails to sell well, the publisher will not recoup its initial investment. Mindful of this fact, dominant publishers such as Activision Blizzardand Electronic Arts (ERTS) have largely stayed to a simple formula - develop successful concepts for game franchises, and then launch a series of sequels.
Company Overview
Activision Blizzard is a developer, publisher, and distributor of video games. It sells software for a variety of gaming platforms, such as the PC, XBox, Playstation, Wii, and other portable devices.
Business Segments[3]
The company runs its business under three operating segments:
Activision Publishing ("Activision") (66% of net revenue) - this segment supports the company's console and PC game such as Call of Duty, Guitar Hero, and DJ Hero. This segment is best known for its action/adventure, action sports, first-person action, and music video game products. The company's leading title, Call of Duty, has generated approximately $3 billion in life-to-date revenue. The company faces difficult challenges from competitors that make games similar to theirs. For example, the Call of Duty game is challenged by Microsoft's Halo and Sony's Killzone, and Guitar Hero faces challenges from Harmonix's spin-off Rock Band.
Blizzard Entertainment ("Blizzard") (25% of net revenue) - this segment controls the company's online gaming products. The company's three most notable games are World of Warcraft (WoW), Starcraft, and Diablo. Over the last decade the company has spent most of its effort in developing the Warcraft series, but at the the end of the decade the company announced plans to expand its two other series.
WoW is a massive online role-playing-game in which players control an avatar and interact with other players by going on quests and fighting monsters. Since WoW's release in 2004, the game has grown into the world's largest online game and has 11.5 million active users. In order to keep the game new and challenging, Blizzard has released several expansion packs to accompany the main WoW game. In 2009, World of Warcraft sales accounted for 98% of this segment's revenue. The company also has the Warcraft III game, a real-time-strategy game.
Starcraft, which the company first released in 1998, is a real time strategy game which is still popular in countries like Korea where tournaments featuring thousands of players are held every year. After 12 years, in the summer of 2010, the company released the long anticipated Starcraft 2: Wings of Liberty.
Lastly, in 2008, the company announced that it was creating a sequel (Diablo III) to its Diablo franchise, a single-player role-playing game. Diablo II was released in 2000.
Activision Blizzard Distribution Segment ("Distribution") (9% of net sales) - the company distributes interactive entertainment hardware and software products in Europe through distribution subsidiaries like Centresoft and NBG.
History: Activision Acquires Vivendi's Blizzard
In 2008, Activision acquired Vivendi (EPA: VIV)'s video game division, Blizzard, in a stock deal that will result in Vivendi owning the majority of Activision shares. The addition of Blizzard, which publishes the popular World of Warcraft and Starcraft online games, created a larger company than primary competitor Electronic Arts (ERTS) and allowed Activision to be a key player in both its traditional market, console gaming, as well as the growing online space.[4] In 2009, Vivendi and its subsidiaries owned approximately 57% of Activision Blizzard's outstanding shares of common stock.[5]
Business Growth
FY 2009 (ended December 31, 2009)[1]
Total revenues increased 41.4% to $4.3 billion. The increase in revenue was due to a 72% increase in product sales and 28% increase in subscription and licensing revenue. Revenue for the Activision segment increased 47% due to strong performance from the company's DJ Hero and Call of Duty (however a large portion of this increase was just from restructuring). Sales also increased in all of the company's geographic regions.
Net income was $113 million and improvement from the net loss of $107 million in 2008.
Trends/Forces
ATVI's focus on game franchises limits the breadth of the development pipeline
Activision has historically focused on franchise hits as well as tie-in games to other entertainment media, such as the Spider-man 3 games. The company's stable financial position makes it capable of supporting these blockbusters which require funding as they are under development for long periods. However, there is more underlying market appeal from several franchises, rather than just sequels for only a few franchises. Although acquisitions are an option, they are expensive, and Activision seeks to continue creating new products on its own.
Game Consoles Wars: Xbox 360 vs. PS3 vs. Wii are a source of volatility for game publishers
Each gaming platform's software must be developed independently, and games are partially tied to platform sales, as characterized by EA's' anticipation of a PS3 victory and subsequent mismanagement of their portfolio during the Wii launch year. The underallocation of Wii games and overallocation of PS3 games was particularly poor timing given the Wii's blockbuster sales and the PS3's relative poor performance, since console sales aid in game title sales. ATVI has found itself scrambling to launch more Wii titles to match software demand, promising franchise hits on the Wii platform. This is a challenge because underlying technologies and development platforms for each are different.
Online Gaming presents a Challenge and Opportunity
As suggested by the merger discussed above with Vivendi Games, both ATVI and Vivendi (EPA: VIV) see online gaming as an area of opportunity. Online gaming typically is more social, and allows for community building and virtual relationships, wrapping end-users up in an immersing world and compelling them to spend their money. This arena offers new revenue models as well, with subscription being the norm, reminiscent of Software as a Service, although other ad-based models are also being explored. While potentially lucrative, the new segment presents its own challenges, with higher development costs.
Online gaming also posses a great opportunity for company's to capture the rapid growth of the industry overseas, especially in countries like China. China's online services are growing at 30% a year, half of which is attributable to online gaming.[2] Studies are estimating that the Chinese gaming industry will grow from $2.75 billion in 2008 to $8.9 billion by 2013.[6]
Competition
Electronic Arts (ERTS) - the industry's largest player, with a significant portfolio of sports-related software titles that generate consistent revenue year after year.
Take-Two Interactive Software (TTWO) - the publisher of the Grand Theft Auto franchise.
Konami (KNM) - a Japanese publisher, which has published hits such as the Metal Gear franchise.
THQ (THQI) - Developer/Publisher which houses 16 development studios.
Both developers and publishers compete with Activision Blizzard, although they may have different target segments. Most similar in operating structure is Electronic Arts (ERTS), which has the largest portfolio of blockbuster games, including many sports titles, and other game franchises with long histories of success.
Key investment considerations as identified by the analysts are as follows:Key Positive ArgumentsKey Negative ArgumentsActivision expects to announce major product releases at a premium price entering into a stronger console cycle.Strong franchises and long-term licensing agreements enable the company to expand its reach.As a result of the Vivendi-Activision business combination, Activision Blizzard at present has the most diversified and broadest portfolio of interactive entertainment assets in its industry, positioning the combined company to capitalize on the continued worldwide growth in interactive entertainment.The Company has a strong balance sheet with no debt.Managing gaming console and title obsolescence are the major operational risks to Activision.Rising production and marketing costs would curtail the company’s operating margin expansion.Delays in execution of projects may adversely impact Activision’s earnings.Video games are extremely seasonal, which offer limited sales window for holiday-centric products.The possibility of litigation and high stock price volatility are the other major risks to Activision.Activision Blizzard, Inc. (ATVI), based in Santa Monica, CA, is a worldwide pure-play online and console game publisher with leading market positions across all categories of the rapidly growing interactive entertainment software industry. The Company maintains operations in the U.S., Canada, United Kingdom, France, Germany, Ireland, Italy, Sweden, Spain, Norway, Denmark, the Netherlands, Romania, Australia, Chile, India, Japan, South Korea, China, and the region of Taiwan.For more information, please visit its website, www.activisionblizzard.com.Note: Effective July 9, 2008, Activision Blizzard’s fiscal year end changed from March 31 to December 31.January 5, 2011Long-Term GrowthLong-term growth ranges from 3.0% to 20.0%, with an average of 14.7%.Activision is one of the strongest companies in the videogame sector, grading well in terms of game properties, product pipeline, development talent, financial condition, and management. It is a successful publisher with a solid and growing franchise portfolio that is expected to enable the company to post strong revenue growth. Activision’s growing wholly-owned franchises and exclusive licenses are expected to help it drive sales growth and market share gains over time. Its operations have significant operating leverage potential, given opportunities for international expansion, and an expected increase in scale.According to management, the secret behind making any title a big hit is to make it compatible with the leading gaming consoles in the market. PC gaming has been left behind by console-based gaming, but it can be revived by deeper penetration of broadband, which allows multi-player features to run effectively. However, given the fast pace of technology, the trend of gaming devices becoming obsolete continues to be a threat to the software makers.Most of the analysts believe strong balance sheet provides more than enough capital to remain competitive for attractive license opportunities, as well as to develop new, wholly owned intellectual property. Activision has a strong portfolio of owned and licensed intellectual property that it can leverage against the large and still growing installed base of current generation hardware.January 5, 2011Target Price/ValuationProvided below is the summary of ratings and valuation as compiled by Zacks Research Digest:Rating DistributionPositive91.7%?Neutral8.3%?Negative0.0%Max Target Price16.00Min Target Price13.00Avg. Target Price14.55?Analysts w. Target Price/Total20/24Risks to the attainment of the price target include changes in game release timing, greater-than-expected deterioration of the average selling price (ASP) for game software, the effects of competition, options investigation impact, increasing product development costs, and lower-than-expected consumer demand for video game hardware.Recent EventsOn Novemb
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