Activision Blizzard

Company History and Profile Activision and Blizzard Entertainment have been longstanding brands within the gaming industry for some time. Activision started out in 1979 as the world’s first independent developer and distributor of video games for gaming consoles such as Atari, Nintendo, and Sega, in addition to developing both gaming and business applications for personal computers. One of their earliest major hit games was Pitfall, which was designed for the Atari 2600 series gaming console. This project was so successful; it resulted in the production of several clones, including stand-up arcade games. After losing a multi-million dollar judgment on damages involving a patent infringement, Activision went through Chapter 11 bankruptcy proceedings and reorganization in 1991. It was during this time when they decided to concentrate solely on a video gaming production strategy, eventually developing popular games such as Sonic, Guitar Hero and the current Call of Duty Series. From 1997 to 2007, Activision acquired multiple companies geared towards strengthening their position relative to their gaming strategy, but have also kept their foot in the door for expanding their market into other entertainment ventures. Beginning in 1998, Activision launched strategic partnerships with comic and movie producers Marvel Entertainment, Disney Interactive, and LucasArts Entertainment. In 2001, Activision acquired the rights to the Columbia Pictures’ feature film Spider-Man, and had signed a multi-year publishing agreement between DreamWorks SKG in 2003. Blizzard Entertainment began in 1991 as a company called Silicon & Synapse, also designing games for Sega-Genesis, Super Nintendo, and DOS- and Mac- compatible games for personal computers. The company established the Blizzard Entertainment label in 1994, when they became one of the most popular and well respected makers of computer games. Blizzard’s main focus is on creating well-designed, highly enjoyable entertainment experiences, and by doing so, has maintained a reputation for quality within the gaming industry. Released in 1994, Warcraft: Orcs and Humans became their first in a series of role-play strategy games to win accolades as one of the best games of that year. Multiplayer computer games were still relatively new at this time, and Blizzard began to take advantage of the opportunities that this niche had to offer. They are now the leader in the field of massively multiplayer online games (MMORPG), with more than 11. 5 million monthly subscriptions. Blizzard has additionally developed a trio of popular PC games, including the Warcraft, Starcraft, and Diablo series, creating a culture that champions both productive and experimental creativity which inspires devoted players. Jeff Green, editor-in-chief of the online gaming magazine 1Up. om notes, â€Å"[Blizzard people] are essentially design geniuses, making games easy enough for casual players and deep enough to attract and hook hard-core players. Simple to learn, difficult to master is the holy grail of game design, and Blizzard does this every single time. † In late 1998, Blizzard Entertainment became a subsidiary of the French conglomerate Vivendi, grouped into its Vivendi Universal Games division. From 2000 to 2007, Blizzard Entertainment released several games under their trilogy series, consistently exceeding sales projections and becoming the unprecedented leader within the gaming industry. On December 2, 2007, it was announced that Activision would be acquired by Vivendi, with Vivendi contributing its gaming division plus a cash investment, in exchange for a majority stake in the new group. In 2008, Vivendi Games merged with Activision, using the Blizzard brand in naming the resulting company, Activision Blizzard. SWOT Analysis Strengths Activision Blizzard’s balance sheet was initially considered to be its most valuable strength when the merger between the two companies transpired; however, this was not necessarily the case. The apparent strategy was to rely on Blizzard Entertainment as a cash cow to finance the merger. With Blizzard Entertainment having more than $3. 3 billion in cash and short term investments, and no debt at the time, it had the flexibility to obtain more intellectual property and talent, and thus further help to strengthen the new company. Reeling from a series of legal actions against them, and suffering income losses in both 2008 and 2009, Activision Blizzard has finally begun to turn around their financial status, and is beginning to gain ground relative to their balance sheet. More on this matter will be discussed in the financial section of this paper. The revenue stream should only be getting smoother with the merger of Blizzard and Activision. The combined company is not as dependent as other gaming companies on console upgrade cycles for generating the majority of its revenue and earnings. Blizzard Entertainment’s World of Warcraft, as a subscription service, helps to also keep the revenue stream smoother than normal. With a large and popular range of titles, Activision Blizzard can ask for, and receive more shelf space than competitors at retail outlets that sell their products, such as GameStop and Wal-Mart. Getting the product in front of consumers with favorable shelf placement is just as important in the gaming industry as it is in the grocery industry, and Activision Blizzard uses this strategy to their advantage. Weaknesses Activision Blizzard has had a previous history of difficult relations with developers. The recent firings and defections of product developers from Infinity Ward, producer of the hit release â€Å"Call of Duty: Modern Warfare 2† is a primary case in point. Also, legal issues have been a tremendous weakness and liability for the company. Who owns what, and what is agreed upon at times are contentious issues. The ex-Infinity Ward executives claim control of the â€Å"Modern Warfare† brand line. Additionally, the musical group No Doubt sued Activision Blizzard, claiming that their images were being used for any song in â€Å"Band Hero†, contrary to what they said had been agreed to. Opportunities At the past E3 conference for the gaming industry, current Activision-Blizzard CEO Bobby Kotick noted that â€Å"There is a $3 billion used game market that we do not participate in. The only true competition within this realm is GameStop, who would potentially suffer losing a large portion of their current market status if Activision Blizzard decided to enter this segment of the market. Activision Blizzard also has strong franchising capabilities. Even in the middle of a recession, gamers are willing to pay for the newest releases and additions related to their games. A winged horse â€Å"pet† for World of Warcraft, priced at $25, was estimated by some reports to be bringing in as much as $2. 5 Million per hour for a period last spring. Activision Blizzard has the capabilities to take advantage of this phenomenon through franchising markets. The mobile gaming medium is wide open; Activision Blizzard successfully released a mobile version of â€Å"Guitar Hero† for Apple’s iPhone. It would appear that scaled-down versions of their most popular games are on the horizon to be produced for smartphones and iPads. With Activision Blizzard’s branding, they have a tremendous repertoire of brands and licenses that can be franchised or published for various markets, including clothing, toys, collectibles, comics and books, and even syndicated movies or cartoons. Threats Mobile gaming is probably their biggest threat, due to small studios being able to reach a multitude of people through inexpensive downloads to smartphones. This will certainly create a more competitive atmosphere in the very near future. Games with long franchise lives can also be a burden on the company. A good case in point would be their â€Å"Guitar Hero† game, which is getting old, with sales beginning to drop and stall. Consumer Affairs cites a â€Å"continued decline in the music genre† as the primary reason given by the company for dropping the game. Activision Blizzard, as a quality control measure, is retiring some of their lesser grossing games to concentrate on more revenue productive and newer versions of such games as â€Å"Call of Duty†, â€Å"World of WarCraft†, and â€Å"Diablo†. SWOT Conclusion When looking at the collective elements contained within the SWOT analysis, it is apparent that Activision Blizzard began their merger rather sluggishly. This could be attributed to differences in corporate cultures or their need to address and resolve pending legal issues as quickly as possible, so that finances are readily available to fund future ventures. Opportunities abound in the realm of on-line gaming, franchising, and partnerships or joint ventures with various companies in a diverse range of markets, and it would be in their better interest to take advantage of these given opportunities in utilizing a differentiation strategy that delivers both tangible and intangible attributes. Blizzard Entertainment has been at the forefront of this type of strategy long before their merger, with such features as Battle. net forums for its customers to chat, exchange ideas and strategies, and submit feedback on given games. Each day hundreds of gamers post new ideas and petitions in Battle. net forums while there are always assigned personnel on Blizzard’s behalf to read and respond to them. By infusing a culture of having gamers as employees, coupled with the feedback it gets from its Battle. net forums, they are capable of using this data in designing or making improvements on their current games in real time as well as future games. They additionally hold several events annually for their gaming customers to interact with and launch new products. BlizzCon (in the United States) and the Blizzard Worldwide Invitational (held in various other countries) are major events that showcase their talent and customer oriented initiatives. With Activision coming on board, they have taken a major step in creating a company that is virtually one with the gaming community on both a consumer level as well as a personal level, which should be a viable recipe for success, regardless of which direction they choose to go. Five Forces Analysis Barriers to Entry †¢There are little to no barriers to entry. Popular games are being developed at a rapid pace throughout the industry. †¢Activision Blizzard posses an advantage, however, with their scale and catalog of games, in addition to third-party developer relationships. †¢Their main advantage relative to this issue lies in their manufacturing and distribution capabilities. Threat of Substitutes †¢There are currently no close substitutes for games such as â€Å"Call of Duty† and â€Å"World of WarCraft†, however, new games always have a potential of becoming popular, depending upon their format, story line, and general audience appeal. Other types of entertainment could also be classified as substitutes, such as music and movie videos, but it is unlikely that they would surpass the popularity of Activision Blizzard’s more popular games. Power of Buyers †¢With on-line distribution capabilities becoming the norm, buyer power is diminishing. †¢Activision Blizzard allows for â€Å"real time† consumer feedback through various forums, which gives them a differential advantage when developing new games due to the uniqueness of the industry. Power of Suppliers †¢Activision Blizzard relies primarily on in-house talent to design and evelop their games. †¢Supplier power is medium, primarily because developers and console game producers need Activision Blizzard as much as it needs them. Rivalry Among Sellers †¢Activi sion Blizzard is the leading MMORPG developer relative to on-line gaming, and they will continue to focus on this platform as a primary revenue stream. †¢They also lead the console gaming market, and have begun a quality control model to ensure a consistent and sustainable competitive advantage through innovation and development of quality products. Gaming is not the only business within the entertainment industry, but it serves a well-proportioned demographic, to say the least. With making a distinction between gaming and entertainment, one can see a more obvious picture developing relative to the merger between the two companies. In joining two major players with hit franchises together, Vevendi is expecting to realize a major coup within the entertainment side of this merger by taking advantage of Activision’s relationships with major motion picture production companies. And with social gaming on the rise with the launch of smart phones, there is another consideration to make within the gaming realm. With the trend towards digital distribution growing, this should continue to drive down costs, which will also open the field to potentially more on-line players. Activision Blizzard faces numerous hurdles when speaking in terms of their competitive advantage in both the gaming and entertainment industries, but to be the dominant player in both industries, one must be resourceful and innovative by nature. This is truly where both companies have dominated in the past by comparison, and will most certainly be the catalyst for a rebound performance in the future, or even a new entry into other markets as well. Key Success Factors †¢Diversified partnerships with licensing or franchising companies †¢Large inventory of product, which in turn gives them a larger portion of retail shelf space †¢New product releases (Call of Duty, World of Warcraft, Starcraft, and Diablo) †¢Leader in on-line gaming subscriptions (MMORPG) Corporate culture of gamers throughout company structure, coupled with collective talents of game designers †¢Designs and develops their own gaming platforms †¢Interactive consumer portals for input and feedback on their products (Battle. net, BlizzCon, Blizzard Worldwide Invitational) Financial Analysis Despite Activision Blizzard experiencing a couple of net losses in 2008 and 2009, the company is doing well when compared to its competitors. Its operating margin was 10. 55% in 2010, with a 5 year margin of 9%, versus its average competitor earning 9% in 2010 and average margin of 12% (according to wikiwealth. om). The 2010 net deficit in retained earnings shows that Activision Blizzard has not been profitable over its existence. While cash flow margins have been higher than its competitors at 15% over the past 5 years, versus its competitors 11% average value, there is not a large amount of cash flow for which the company can pay its operating bills, as its working capital was negative both in 2009 (at $423 million) and $1,030 million in 2010, and its liquidity ratios were less than 2. Within operations, the company has begun to manage its inventory and accounts receivable better, as its days of inventory decreased from 30 to 19 days, resulting in a better turnover from 12 in 2009 to 19 in 2010; along with the average collection period going from 63 days in 2009 to 52. 5 days in 2010. Blizzard Entertainment, one of the three segments within the company, earned approximately 35% of its total net revenues, but yielded over 60% of operating income from operations, making it the most profitable segment of the company. Keeping that in mind, it would be beneficial for them to concentrate on increased sales within this given department (on-line subscriptions) to facilitate a greater increase in revenues. As a side note, a lot is riding on Activision Blizzard’s release of their new Call of Duty console game for the holiday season. With last year’s Black Ops having sold a record $360 million in its first day, this new release could make or break their holiday season revenues. If sales do well for this holiday season, the company has the potential to enter the new year having a much greater advantage over their competition, by far. Analysis of Competitive Position Although the merger of Activision Blizzard got off to a slow start, things now appear to be on track for the current year, and their outlook seems to be in a much better financial and competitive positioning than for their three previous years. The ability to generate a sustainable and consistent revenue stream, while also keeping costs down, is one of their greatest strengths, and should continue, considering their rapidly diversifying portfolio of partners and strategic alliances. Given Activision’s partnerships and alliances prior to their merger with companies such as Marvel, Disney Interactive, LucasArts, and Dreamworks; coupled with Blizzard’s partnerships with various vendors in the apparel, toy, and collectible markets, Activision Blizzard has built a strong foundation through their broad differentiation strategy, which affords them a greater advantage of maintaining their number one position within not only the gaming industry, but opens the doors to other venues as well through licensing and franchising opportunities. The company’s diversity is a critical advantage, because it allows them room for expansion and cross-selling opportunities across various platforms or markets. Additionally, Activision Blizzard is beginning to increase their presence in China, partnering with Netease, which is considered to be one of the best eastern on-line gaming companies to date. This opportunity will allow them to distribute their StarCraft, World of WarCraft, and Call of Duty series games to an eagerly-awaiting population within that country. Activision Blizzard’s new release of Call of Duty: Modern Warfare 3 this past week resulted in the biggest launch of any console game ever, and is seen as crucial to their strategy of releasing fewer, better quality game titles each year. CEO Bobby Kotick commented that within the first 24 hours of release, 6. 5 million units were sold within North America and the U. K. , for a total of $400 million dollars. He is noted as saying, â€Å"We believe the launch of Call of Duty: Modern Warfare 3 is the biggest entertainment launch of all time in any medium, and we achieved this record with sales from only two territories†. This surpassed last month’s release of Electronic Arts’ five million units of Battlefield 3 by 1. 5 million units, which is their closest competitor to date in the console gaming industry. The above noted quality control strategy is just another addition to their value chain activities, in conjunction with the previously mentioned Battle. net and BlizzCon forums, which affords them a real-time advantage when designing and launching games or addressing consumer issues and concerns. By doing so, Activision Blizzard maintains a proficiency in performing their core competencies, and continues to build and evolve their competitive advantage in this area. This is one of the primary reasons that Activision Blizzard has consistently held the top ranking, in addition to their model MMORPG platform that grows in subscriptions monthly. Activision Blizzard’s portfolio of digital and console games usually attracts more hardcore gamers than casual gamers. This is a decisive advantage in an economic downturn particularly, because Activision Blizzard’s sales are not as profoundly affected when there is a decrease in consumer spending. When potential customers have limited disposable income, they need to be assured of the quality of what they are spending their hard-earned dollars on. The Activision Blizzard brand is quite often strong enough to convince a repeat customer of the quality of a new game. Additionally, with upgrades in digital distribution, the ability for companies to offer their products and services in digital form is becoming a necessity. Activision Blizzard is well aware of this occurrence, and has continuously been moving towards this higher-margin business model for quite some time. In fact, they already derive a good portion of their income as a percentage of revenues from this model, which is a great advantage over their competitors. They continue to broaden their subscription model, with an emphasis on direct distribution of its products to consumers. This also reduces income loss through having to pay out royalties to retailers and on-line gaming hosts. Project Beachhead, a new group formed within Activision Blizzard, will be bringing their hit series Call of Duty franchise into a subscription-based service in which consumers will pay Activision Blizzard directly to use a premium content that is included. Activision Blizzard is in a leading position to take advantage of this business model, considering that they have some of the most popular franchises in the world. As a point of reference, World of WarCraft currently has 11. 5 million subscribers paying fifteen dollars a month to play. Add to that the 7 million daily Call of Duty users, and one should be able to derive their true profit-making potential in this forum. Over the past twelve months, Activision Blizzard has generated just under $4. 8 billion in revenue and $800 million in operating profit, for an operating margin of almost 17% (according to Gurufocus. om), but this is actually an understatement of just how much money they are currently generating. Their growth through acquisitions and partnerships is likely to continue well into the future, where they continue to buy key franchises. As part of these acquisitions, they place a value on intangible assets (such as brands) that they purchase. They then expense these intangib les, which have no basis in accounting circles, but most certainly impact their cash flow. After adjusting for these â€Å"non-cash† expenses and other write-offs, Activision Blizzard has actually earned $1. 4 billion in operating profit, for an operating margin just under 30%. Relative to disadvantages, Activision Blizzard stands to lose some market ground due to new â€Å"casual† and social games coming out, such as Angry Birds and Farmville, but it is actually the ease of distribution from tablet devices such as the iPad (digitized games) that could cause their competitive advantage to erode somewhat. This is particularly why they are concentrating on their current business model. Recommendations Activision Blizzard’s marketing strategy is more a model for the industry, as they have partnered extensively, but selectively, with various companies and brands to diversify and expand their exposure and profitability. They have a proven track record with their on-line (MMORPG) gaming capabilities, and generate a large percentage of revenue from such. As a result, they should actively pursue this growing segment of the gaming industry, to which they are already the leading model. They should also continue their broad differentiation strategy relative to partnerships and strategic alliances, as this has proven to be quite successful for them since even before their merger. Our group recommends stepping out of their â€Å"comfort zone†, so to speak, and to begin looking at new ways to expand their brands and licenses. With this in mind, we recommend that they explore what we consider to be a â€Å"natural† transition for their gaming brands in particular, that of producing animated movies and syndicated cartoons. This actually aligns with a comment made by CEO Bobby Kotick not too long ago, in that he noted the potential of there being a StarCraft movie in the near future, which is based on one of their more popular MMORPG games. As of 11 November, their parent company (Vivendi SA) purchased EMI music group for $1. 9 billion dollars. Already owning a 26 percent market share of the music industry with Universal Music Group, Vivendi now owns an additional 9 percent, not to mention the rights to songs by such groups as the Beatles, Beach Boys, Rolling Stones, David Bowie, Coldplay, Lady Gaga and Katy Perry. Not only is this considered a coup within the music industry, but it could also play out relative to our recommendation, as it now gives them a solid foundation in choosing a select grouping of soundtracks for movie productions that can be targeted for various demographics ranging in ages from Baby Boomers to Gen X’ers. Our research indicates that to produce a movie, it would take an investment of approximately $200 million in revenue to do so (Negative Cost = Development Cost + Pre-Production Cost + Production Cost + Post-Production Cost). This is generally an accepted estimate of the total production cost, from the planning and development phase, to pre-production, into production or filming, and then to post-production (which includes marketing and advertising). Naturally, this estimate varies, according to several factors such as where the movie is filmed and produced, who stars in it, distribution, etc. Not only does Activision Blizzard maintain such a potential to take on a project such as this, their parent company (Vivendi) as well as several alliances and partnerships would be more than willing to share such a project cost with them, much like their current gaming model. Keeping that in mind, it would be another transition (still) to follow such companies as Pixar, Amblin, LucasFilms, and Dreamworks, which all began as production companies from one or two major film hits. Whether StarCraft would be a box office smash is anybody’s guess, but if it were, the residual revenue alone from merchandising and franchising toys, clothing, and other products sold could potentially offset the initial cost considerably, not to mention the interest it would draw from a new generation of gamers. In developing their own production company, Activision Blizzard is ensuring that their brands stay marketable well into their more mature phases, while also maintaining control of production costs and opening the door once again for profitable partnerships in future endeavors within one more market niche of the entertainment industry. References Blizzard Entertainment Inc (2010) http://blizzard. com/us/inblizz/profile. html Cavelli, Earnest (December 23, 2008). â€Å"World of Warcraft Hits 11. 5 Million Users† http://www. ired. com/gamelife/2008/12/world-of-warc-1 Coleman, Freddie (2010). Why Blizzard is a Renowned Game Developer. http://ezinarticles. com/? Why-Blizzard-is-a-Renowned-Game-Developer&id=3584114 Consumer Affairs (2 Feb 2011) The Tour is Over for â€Å"Guitar Hero† Fans. www. consumeraffairs. com/news04/2011/02/the-tour-is-over-for-guitat-hero-fans. html Morris, Chris (2008). â€Å"Blizzards Perfect Storm† http://www. forbes. com/2008/06/30/videogame s-blizzard-morris-tech-personal-cx Moser, Jason (2011). Activision Blizzard’s Edge May Be Smaller Than You Think† http://www. fool. com/investing/general/2011/01/31/activision-blizzards-edge-may-be-smaller-than-you-. aspx The Motley Fool- Activision Blizzard: Strengths, Weaknesses, Opportunities, Threats http://www. fool. com/investing/general/2010/06/15/activision-blizzard-strengths-weaknesses-opportuni. aspx The Cost of Making a Hollywood Movie (2010) www. anomalousmaterial. com/movies/2010/03/the-cost-of-making-a-movie Vivendi Will Buy EMI Recorded Music Unit for $1. Billion (Bloomberg Businessweek 11 November 2011) http://news. businessweek. com/article. asp Magic Formula Stock of the Week: Activision Blizzard (10 October 2011) http://www. gurufocus. com Universal’s $1. 9 B EMI Deal: In a Digital World, Market Share Counts for Less (Reuters. com 13 November 2011) http://www. reuters. com â€Å"Call of Duty’ Sales Hit $400 Million (The Wall Street Jour nal- Jarzemsky and Rubin, 12 November 2011) http://online. wsj. com