Strategic analysis by fredi fernandez This report is a basic study on Activision Blizzard s strategy, with focus on Blizzard Entertainment. By fredi fernandez fredi@alphaorigins.com 1
Blizzard s mission and values are very clear and focused on delivering the best experiences to gamers in the industry and all over the world. Those values are clearly reflected in the company s capabilities when launching games with high quality standards. Those games resonate with existing users at a high level, creating long lasting bonds and engagement. This engagement offers the opportunity to expand product cycles and continue adding value to the franchise by investing in more high quality games. A consumer-centric philosophy helps Blizzard offering new and enhanced experiences that allow at the same time diminishing the negative impact that piracy has had on the industry. This adaptability and leading position offers a great opportunity to the company when facing new challenges. New business models have been brought by the exponential growth of mobile devices and digital distribution channels. Freemium models with in-app purchases and subscriptions can be a great opportunity to Blizzard, given its existing membership network and technological resources. Although PC and console platforms are not dying, sales are slowing while mobile devices and tablets are booming [graph1] even capturing regions where PC and consoles had lower penetration, there are good examples in regions from Africa. Mobile phone gamers [graph2] are expected to grow around 130% in the next five years from 144.1 million to 191.3 in 2017. Graph 1 - Units Shipped per Year (Log scale) Source: Harro Research By fredi fernandez fredi@alphaorigins.com 2
GAAP Net Rev by Rev (in Millions) Graph 2- Number of mobile phone gamers in US (in millions)- Source: statista There are also opportunities in growing markets and segments. Asia Pacific has been a stable region, during the period from Q4-2011 to Q3-2014 averaging 8.76% of total net sales of the group (ATVI) while North America and Europe account for 50.60% and 40.64% respectively. In those regions sales are showing a slight decrease which may indicate stronger competition and products entering into maturing phase. Targeting new demographics may also offer new opportunities. The average gamer used to be a Caucasian teen male. Now the gender ratio is more balanced, allowing females to enjoy video games as much as males. Furthermore, range of age now is wider as past generations continue engaged to Blizzard Universes while new games continue capturing the interest from the younger generations. Graph 3 - Blizzard Quarterly Revenue by Regions during Q4-2011 to Q3-2014 1.000 900 800 700 600 500 400 300 200 100-0 2 4 6 8 10 12 14 North America Europe Asia Pacific Lineal (North America) Lineal (Europe) Lineal (Asia Pacific) Quaterly period from Q42011 to Q32014 By fredi fernandez fredi@alphaorigins.com 3
ENVIRONMENTAL ANALYSIS DEMOGRAPHICS Blizzard gamers are likely to Be male The average age for a video game player is mid to late 20s. SOCIO-CULTURAL INFLUENCES Currently the largest entertainment industry for children is gaming. Number of gamers are increasing as people who were children playing the first arcade, console and home computer games continue playing now on current systems. Gender distribution is reaching equilibrium, according to a 2011 study showing that 58% of gamers are male and 42%female. ESA reported 71% of people in the US played video games, with 55% of gamers playing on their phones or mobile devices. There are 191.3 million mobile phone gamers projected for 2017. Commited PC gamers generally not interested in pure content consumption platforms. They are power users and pay thousands for the ability to play games at very high settings. MACROECONOMIC IMPACTS We are still in a slow global economic recovery since the strong recession of 2008. Demand may fluctuate heavily given the relatively price elasticity curve of the product and new entrants in the industry. POLITICAL-LEGAL PRESSURES Piracy has big negative impact to video game developers. However more games requiring online verification to make full use of cotent mitigate the effects. TECHNOLOGICAL DEVELOPMENTS Mobile is clearly affecting business models within the video games industry. With in-app purchases and ad revenue sources. Digital distribution platforms lower barriers of entry to new competitors. 3D vision integration is not yet mainstream but as the technology improves it might be key to enhance experiences to gamers. GLOBAL TRADE ISSUES It might be harder to expand ops to emerging markets where strong currency devaluations versus dollar may occur. Nevertheless digital distribution can offset the impact of currency fluctuations By fredi fernandez fredi@alphaorigins.com 4
5 FORCES ANALYSIS By fredi fernandez fredi@alphaorigins.com 5
COMPETITORS ANALYSIS As mentioned above, competitors nowadays have lower barriers of entry in the video games industry. Digital distribution and better access to computational power and development platforms allow smaller teams to produce and develop games with potential global engagement. However, the strategy followed by each player differs based on size and resources. Taking in account the competitive scope and competitive advantage, a company like Blizzard will compete to differentiate its products, while an indie developer will stay focused on the low cost strategy. Below are shown different strategies to follow by category. Revenue sources may evolve as mobile and freemium models are changing the rules of the industry to more in-app purchases, customized experiences and subscriptions. Despite the high competitive industry Blizzard shows a strong leadership position. By comparing the financial performance with different public companies in the period of 2013 we can observe a performance above average in profit margins, return on equity and assets. Blizzard s profit margin offsets the effect caused by having a lower assets turnover. Financial leverage falls within a normal range of 2.12. [graph.4] Nevertheless, there s a noticeable downward slope in the profit margin curve during the last 6 Quarters. That is caused by the decrease of net sales since the peak in Q3-2013. The reason might be the maturity of existing products and effect of new competitors [graph.5] By fredi fernandez fredi@alphaorigins.com 6
60,00% Graph 4 Financial Performancein 2013 -VS- Competitors Financial Performance 50,00% 40,00% 30,00% 20,00% 10,00% 0,00% Profit Margin Assets Turnover ROA ROE Activision Blizzard Electronic Arts Take Two Majesco entertainment Graph 5 Quarterly Financial performance during 2012-2014 period Activision Blizzard Financial Performance Profit Margin Assets Turnover ROA ROE 35,9% 35,9% 35,5% 34,2% 36,5% 37,2% 21,6% 18,5% 19,9% 9,2% 7,7% 8,2% 30,1% 27,3% 23,7% 24,4% 24,6% 10,2% 10,6% 11,4% 9,8% 7,7% 6,7% 7,1% 8,1% 8,9% 10,1% 7,4% 7,2% 6,3% 5,4% 4,7% 32,7% 32,3% 32,1% 31,4% 22,0% 15,3% 19,4% 12,2% 16,9% 14,9% 10,1% 9,3% By fredi fernandez fredi@alphaorigins.com 7
CONCLUSIONS The video game industry is indeed changing. New digital distribution channels and platforms are shaping a new map where new entrants are capable of achieving global engagement with fewer resources. Nevertheless, a company in a leading position like Activision Blizzard, it s more than prepared to adapt to the circunstances. There s still room to experiment with new revenue models while keep competing in the differentiation segment for the top players in the industry. While keeping its centric-user philosophy, there are opportunities for Activision Blizzard to grow in Asia and go for a wider range of demographics to expand its business. Mobile it s becoming a key concept to develop engaging experiences that might delight users in new ways. Aligning new models based on low cost with higher quality of standards to enter in Mobile successfully might be challenging. Nevertheless, the gaming market for PCs and consoles are far from dead and still very profitable for high-end developers like Activision- Blizzard. By fredi fernandez fredi@alphaorigins.com 8
Appendix 1.1 References http://www.statista.com/statistics/278181/video-games-revenue-worldwide-from-2012-to-2015-by-source/ http://www.statista.com/statistics/237187/global-video-games-revenue/ http://blog.harro.com/2012/01/24/the-rise-and-fall-of-the-pc/ http://en.wikipedia.org/wiki/video_game_culture http://www.forbes.com/sites/marcochiappetta/2014/07/14/the-console-war-is-over-the-pc-already-won/ http://albertmorgenstern.com/1/post/2013/12/porters-5-forces-analysis-on-the-video-game-industry.html http://files.shareholder.com/downloads/erts/3738143737x0x671716/b89eee77-bfbd-446d-ac7d- 8D98F64C5BAE/510163_002_Electronic_Arts_BMK.PDF http://files.shareholder.com/downloads/acti/3727563815x0x746096/2205b72d-1007-4dcb-a5f1-2d121d8ec95c/activision_blizzard_2013_ar.1.pdf By fredi fernandez fredi@alphaorigins.com 9
1.2. Financial Performance figures. Focal Firm Sales T.Assets Liabilities Equity Net profit/loss Profit Margin Assets Turnover ROA ROE Financial Leverage Observations Activision Blizzard 4583 14012 7390 6622 1010 22,04% 32,71% 7,21% 15,25% 2,12 mill USD Electronic Arts 2738 5070 2803 2267 98 3,58% 54,00% 1,93% 4,32% 2,24 mill USD Take Two 1214 1278 690 588-29 6,33% 46,59% 2,95% 5,03% 1,71 mill USD Majesco entertainment 47 38 18 20-12 0,84% 29,65% 0,25% 0,62% 2,48 mill USD Blizzard Activision Q1CY12 Q2CY12 Q3CY12 Q4CY12 Q1CY13 Q2CY13 Q3CY13 Q4CY13 Q1CY14 Q2CY14 Q3CY14 Sales 4479 4408 4495 4856 5008 4983 4833 4583 4370 4290 4352 T.Assets 12482 12269 12661 14200 13725 13411 16060 14012 13528 13360 13855 Liabilities 1996 1705 1778 2883 2190 1476 3921 7390 6604 6189 6863 equity 10486 10564 10883 11317 11535 11935 12139 6622 6924 7171 6992 Net profit/loss 966 816 894 1149 1221 1360 1190 1010 847 727 648 Profit Margin 21,6% 18,5% 19,9% 23,7% 24,4% 27,3% 24,6% 22,0% 19,4% 16,9% 14,9% Assets Turnover 35,9% 35,9% 35,5% 34,2% 36,5% 37,2% 30,1% 32,7% 32,3% 32,1% 31,4% ROA 7,7% 6,7% 7,1% 8,1% 8,9% 10,1% 7,4% 7,2% 6,3% 5,4% 4,7% ROE 9,2% 7,7% 8,2% 10,2% 10,6% 11,4% 9,8% 15,3% 12,2% 10,1% 9,3% Financial Leverage 1,19 1,16 1,16 1,25 1,19 1,12 1,32 2,12 1,95 1,86 1,98 By fredi fernandez fredi@alphaorigins.com 10