Microsoft’s (MSFT) X-Box console is a major source of income for Activision Blizzard (ATVI). The seventh generation console, X-Box 360, accounted for 20% of the developer’s revenues in 2012. Unveiled in 2005, the console is now in the eighth year of a prolonged product cycle. We believe this is the primary reason for the 10% year-on-year decline in revenues from the console reported by Activision in 2012.
However, now that Sony (SNE) has announced that the Playstation 4 will be launched in the 2013 holiday season,  we expect that Microsoft will release its next generation console named by the media as X-Box 720 within the next year. The launch of the X-Box 720 will revive Activision’s revenue from Microsoft consoles. In this article, we try to quantify the impact the release might have on Activision.
The Present Scenario
Life to date sales of the X-Box 360 are around 70 million, as reported by Microsoft. This figure has been consistently increasing, from 33 million in 2009 to 44 million in 2010, to 57 million in 2011. According to our estimates, the X-Box has a market share of 24% in the global console market.
Activision currently earns around $14.50 per X-Box unit, worldwide. This is driven primarily by its hit franchise, Call of Duty. The last two editions of the franchise, Modern Warfare 2 and Black Ops 2 made the top spot in terms of sales in both the U.S. and Europe, according to data from VGChartz.
An Ideal Forecast
A majority of X-Box 720 sales will be to hardcore gamers who already own an X-Box 360. Taking into account the cannibalization effect that the X-Box 720 will face and Microsoft’s share of the console market, we conservatively estimate X-Box sales to increase to about 90 million units by 2019. Assuming that Activision’s revenue per console increases marginally to $15.5, a very possible scenario given the popularity of its franchises. We expect revenues from Microsoft consoles to increase to $1.4 billion by 2019.
Why The Transition Will Be Smooth
In its last 10-K filing, Activision reported that around 83% of its revenues are generated from just four franchises: Call of Duty, Diablo, Skylanders and World of Warcraft. Assuming an equal distribution of revenues amongst the four franchises, we can see that each contributes around $1 billion to Activision’s $4.8 billion net revenue. This seems a fair assumption, given that online subscription revenues which are earned primarily through World of Warcraft, are around $1 billion. Taking into account that X-Box revenues are around 20% of Activision’s total revenues, we see that the top four games account for nearly $3 per console each.
We expect the popularity of the Call of Duty franchise to allow for a smooth transition to the eighth generation of consoles. Activision releases a new addition of Call of Duty each year, the last five annual editions have made it to the list of the ten highest selling games in the U.S. and Europe. The franchise has generated life-to-date sales in excess of $8 billion and the last edition, Black Ops II, crossed $1 billion in retail sales in the first 15 days of its launch. We expect this popularity to continue for the X-Box 720, while providing a stable base of revenues. New games developed by the company will allow the increase in revenues per console to $15.50 that we have hinted at.
If we assume that X-Box has hit saturation and X-Box 720 will only replace X-Box 360, leaving the total number of X-Box units at 70 million while revenues per console increase slightly to $15, the Microsoft console revenues would still increase to $1 billion. Assuming that the revenues per console remain at $14.5, while X-Box achieves 90 million units worldwide, by 2019, Acitivision’s Microsoft consoles would increase to $1.3 billion.
If the revenues per console drop to around $12, the revenue stream would generate only $ 1 billion by 2019. These are just a few scenarios that we have accounted for, you can modify the interactive chart below to gauge the effect a change in forecast would have on our price estimate.
- Sony Announces PlayStation 4 Videogame Console – WSJ.com, Feb 20, 2013 [↩]
Disclosure: No positions