Seeking Alpha
Profile| Send Message|
( followers)  

Following Black Friday, Activision-Blizzard (NASDAQ:ATVI) CEO Bobby Kotick appeared on CNBC’s Squawk Box to answer questions about the company’s video game sales. He quickly found himself challenged by host Andrew Sorkin, who wanted answers about Activision’s mobile and social strategy. Noting an iPad in front of Kotick at the table, Sorkin pressed Kotick about social game maker Zynga (NASDAQ:ZNGA) and mobile technology. Inherent to the questioning was an attack on Activision’s apparent lack of a mobile and social strategy.

“You have an iPad infront of you…What is the ultimate strategy for Activision on this thing?” asked Sorkin. “I stole this from Senator Toomey,” quipped Kotick (Toomey was the previous guest on the show). Everyone laughed until they realized he was not joking. “You’re not kidding,” stated co-host Becky Quick. “It’s not mine,” said Kotick. Incredulous, Sorkin asked, “It is really not yours?” Kotick: “No, it’s not.”

Sorkin handed Kotick the perfect opportunity to educate the viewers of a key nuance of Activision’s strategy. Sorkin tried to highlight the importance of the iPad by pointing out Kotick had one. But just as Kotick had not adopted an iPad, his company was also moving slowly and carefully before expanding into mobile and social formats, such as Facebook.

The model used on Facebook generally entails providing a core game for free while charging for in-game upgrades and premium content. This lower-margin model is employed by Zynga. Kotick, however, believes the value proposition at Activision-Blizzard is stronger; the idea is that hardcore gamers are willing to pay $60 up-front for a game because of the many hours of entertainment they derive from the purchase and the quality of the content and experience.

HD Console Content Business

The Activision side of the business successfully focuses on providing content to the growing HD console space. 44 percent or $2B of Activision’s net revenue (on a trailing 12 month basis) comes from selling content (both packaged goods and digital downloads) for Sony’s (NYSE:SNE) PlayStation 3 and Microsoft’s (NASDAQ:MSFT) Xbox 360. The install base of these high-definition consoles continues to grow. Activision estimated the HD install base this year to be 92 million units, up 18 million from the previous year.

Activision is focused on console content, such as the "Call of Duty" franchise, because it delivers the customer a quality experience. Kotick pointed out that the controllers used on the consoles enhance the experience over what is possible with Apple’s (NASDAQ:AAPL) iPad and other mobile devices. He also indicated Activision had knowledge of the next-generation Microsoft console and that he was impressed with the technology.

"World of Warcraft"

At the Blizzard division, a concentration on the hardcore PC audience has led to a dominant market position in the subscription-based, online role-playing game (NYSEARCA:RPG) genre. 31 percent or $1.5B of the company’s revenue (on a trailing 12 month basis) comes from Blizzard’s RPG called "World of Warcraft." A focus on game quality and content updates has allowed "World of Warcraft" to dominate its genre for an unprecedented 7 years. While users have fluctuated over the years, a rapid drop has not been seen that compares to the declines faced by competitors, e.g. Zynga. Even though a subscription is charged, the hardcore gamers find the value proposition as positive. Like the console content business, the online RPG genre is not well suited to be experienced with mobile platforms.

What is Social?

Analysts and commentators equate the word “social” with Facebook. Activision-Blizzard’s competitors are quick to tout their Facebook user figures. From its recent inception, Zynga has focused on the social and mobile audience using Facebook as a platform. Electronic Arts (ERTS), the long established competitor of Activision, has begun to actively expand into the social and mobile arena. EA made a $300 million acquisition in 2009 to build their new Facebook games.

However, Activision already sees its business as social-based. Take the two examples from above. "Call of Duty’s" success rests with its multiplayer component, and "World of Warcraft" is inherently massively multiplayer. The level of social interaction in these games is also much richer than what occurs in the average Facebook game. This difference between the depths of interaction is often hard to understand for analysts and commentators who have not played the games.

Conclusion

Activision-Blizzard does not focus on mobile platforms because of the limits they place on the customer experience. Basically, the “joystick” and big screen TV are still in vogue with hardcore, paying gamers. The company developed a complex social strategy by placing multiplayer aspects forefront in their games. The relationships formed by the players in their games contribute to the value proposition rather than detract from it. The customer focused strategy led Activision-Blizzard to be the most profitable company in the sector and placed their games at the top of the charts.

Source: Activision's Careful Social Strategy