Activision Blizzard (ATVI) has joined the rest of the game industry in a profound funk.
The profit numbers looked very good, but the outlook is grim, given that its best-selling Massive Multiplayer Online Role-Playing Game, or MMORG, World of Warcraft, continued to bleed users during the quarter.
The whole industry seems to have hit a wall at once. Sports game leader Electronic Arts (EA) is down almost 47% so far this year, while social games expert Zynga (ZNGA) is down over 71%. Given the carnage, Activision's decent financials despite declining play looks good.
A decade ago the game industry was about titles. If you had a title (think the EA Madden series of football games) with a defined audience, you could build steady results. But over the last few years the game has switched, from titles to type of game. Do people want console games, role-playing games, social games, mobile games? While some eagerly await the IPO of Angry Birds maker Rovio, others wonder if the fact of the IPO doesn't mean that franchise is about played-out.
The most frightening trend for game makers is the market's growing insistence on free games. Free to Play is replacing both upfront and hourly costs as the primary channel. As the game blog Superior Realities put it, Holy Crap!
Free to play games depend on either advertising or a "Cash Shop," where players buy digital products that make the game play easier. It works, but as Beau Hindman of Massively notes, growth slows.
And if top-line growth is slowing across the industry, is there a place to invest profitably?
Not until someone creates a new profit center.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.