It is no secret that video game and entertainment company Activision Blizzard, Inc (ATVI) has been aggressively carving out a name for itself since 2004, with the release of the monster role-playing game World of Warcraft for PC. With a $15-per-month subscription, players are able to access an ever-changing online landscape. This trend has continued upward, and still does to this day. In 2008, it was announced that the World of Warcraft had over 5 million unique users, and it reached an all-time high of just over 10 million in November of 2011.
With this rapid growth and increase of revenue stream, Blizzard Entertainment began experimenting with micro transactions using the World of Warcraft at its base, as most of its subscribers are located in Asia. The free-to-play model was injected after the initial success, but it was only available for the first 30 days followed by an option to buy-and-subscribe. Upon the release of each expansion (the sale of more content and access to more content with an additional purchase), the previous version was offered for free through paid subscription. This snowball effect would push revenue for the company and the eventual merger between Blizzard and Activision in 2008.
ATVI has its biggest release in the same game style as World of Warcraft slated for May, which has been in development for years - Diablo 3. Previous Diablo titles were free to play online with the initial purchase of the game. The upcoming release Diablo 3 will be no different, however it will boast an in-game feature that cannot be found on any other game published by any other company to date. This title, Diablo 3, will feature and in-game auction house where players will be able to list content (playable items) for a flat fee - which is currently undisclosed by ATVI.
This online auction house will be hosted by a new system introduced into the new battle.net 2.0 platform called "Battle.net Balance." This system will tie into the user's current PayPal.com account enabling them to make secure real-money transactions from within the game environment in real time. With the Diablo 3:Collector's Edition ($100) already sold out Blizzard has made the standard release of the game free to current or new World of Warcraft subscribers who pre-pay for a year of game-time (valued at $180). Depending on how fast users warm up to the idea of real-money auction house revenue may excel even faster than our conservative figures. This also has inherent advantages in terms of longevity for the game and continual user activity.
Using some very conservative figures, if we assume that over the next four years Diablo 3 grows at a rate similar to World of Warcraft (WOW), we arrive at around 5 million users. Investors should be aware that we expect the growth of this new release to be substantially greater than WOW, but for this article's sake we will use conservative figures. If we presume that 25% of these users received the title free through pre-paying a year subscription to WOW we have 3.75M users who purchased this product at a minimum of $60. This means that ATVI, over these four years, will approximately earn $225M in revenues.
The greatest piece of this puzzle is that if ATVI charges a rate of only $0.50 per transaction in the auction house (we expect a rate much higher, but we are being conservative), and these 3.75M users each use the auction house a single time (more likely to be many more times than just once), ATVI will generate an additional $2M over these four years with potential of hundreds of millions. I understand that these figures don't seem to be much, but keep in mind that we are using extraordinarily conservative figures.
In conclusion, we rate ATVI a long-term buy at any prices below $12 and would recommend holding such an investment until at least 2016. We expect ATVI to generate an averaged double-digit return for the four-year period. We expect to easily double our money over this investment horizon. ATVI also has several other excellent titles to help drive earnings (a few expansions to previous games) and several other releases over the next year as well as some long-term pipeline projects. It should also be noted that ATVI has made some significant ground with its revolutionary release, Skylanders, which has seen better-than-expected growth and will be covered in the next article.
Disclosure: I am long ATVI.