Activision Needs More Games Like This One

| About: Activision Blizzard, (ATVI)

Activision (NASDAQ:ATVI) has finally embraced the freemium/micro-transaction model with its release of Skylanders Cloud Patrol on iOS devices. The game was released on April 5th and already has over 5,500 reviews and boasts a 5-star ranking. The game, as of the writing of this article, ranks 6th in the Paid Game Apps chart on iTunes.

There has been much criticism of traditional video game publishers, as their audience of hardcore gamers has been diminishing. Games like Angry Birds and Words with Friends seem to be just enough to satisfy the casual gamer. In brief, Skylanders is Activision's latest blockbuster franchise, launched in October of 2011. As of April, Skylanders has sold over 25 million toys.

Skylanders Cloud Patrol is only the first of many forthcoming games in Activision's mobile games expansion. Greg Canessa, Vice-President of Mobile at Activision Publishing had some exciting plans for Activision:

[Skylanders Cloud Patrol] is Activision's first ever freemium, microtransaction game… It is a part of a larger strategy and a significant move. You'll see more of this to come. Activision as a company is looking at this space very carefully… We are pretty excited about this… We are students of the very rapidly evolving mobile space. [from Venture Beat]

Activision's introduction to the freemium model in the market space is exciting, as Activision is the master of merchandising their product in an extremely appealing way; hardcore gamers are generally willing to pay more for Activision's products. With this new venture, Activision will be able to expand its customer base, and introduce new gamers to its various franchises.

If we take a quick look into Activision's iTunes game offering, we see about 15 games total, compared to EA's 105 games. When it comes to quantity, Activision's offerings fall short. The only other notable Activision iOS games are the Call of Duty zombie games, but they followed the outdated model of charging a pricey fee up front (around $10).

Wallstreet's view on game companies is negative, as its current forms of price modeling and game types are becoming obsolete. This is evident in the declining stocks of EA (NASDAQ:EA), GameStop (NYSE:GME), Take Two (NASDAQ:TTWO), and THQ (THQI). After all, there are easily over hundreds of thousands of freemium games available on tablets and phones that satisfy the new gamer consumer, and the consumer only has a limited amount of money and time.

This new and inexpensive portable gaming frontier, paired against traditional portable game systems, provides stiff competition to Nintendo and Sony's(NYSE:SNE) $40 game price. Surprisingly, the quality of these freemium games has not deteriorated just because they are initially cheap. Due to the popularity and high quality of these freemium games, game hardware makers are suffering; Sony's PS Vita posted record low sales in Japan, and Nintendo has a history of being the only company to profit from its hardware.

Additionally, Activision's World of Warcraft is now down to around 10 million from a peak 12 million, and EA seems to be suffering from rapid subscriber decline as well.

The theory was formerly that Star War's MMOG have taken away from WoW's subscribers, but in actuality, more worrisome trends are occurring: MMOG fatigue and limited pool of people willing to dedicate the amount of time it takes for these games. Although Activision is set to launch Diablo 3, it is not an MMOG. It does offer a very intriguing revenue generator, where items within the game can be auctioned off for real money in the game. Interestingly, the auction is powered by eBay.

As the gaming industry moves forward, the trends and needs of its gamers change. Although it has taken a crucial step forward, Activision needs to make some adjustments; it cannot depend on the former business model. Activision should follow in EA's footsteps. EA has been on the right path for a while, as they are serious about the mobile platform; this is evident with their iTunes offering and their purchase of casual game developer Popcap Games. Going mobile is only one solution to one of the many problems that the game industry is facing, with one of the most troublesome issues being the cyclic nature of video games.

March had another poor video game sales month with Sony, Nintendo, and Gamestop showing cracks of future failure. Activision needs to adapt successfully; they have a lot of competition on the mobile platform, as the iOS and Android platform is currently dominated by creative indie game developers. Activision has a lot of catching up to do, either with in-house game development or through an acquisition spree. But investors should take notice of this gaming giant seriously venturing into the mobile space.

Disclosure: I am long EA, ATVI.

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