Activision Looks To Pump Growth With 'Starcraft II' As videogame fans, retailers and industry analysts converged on Los Angeles last month for the industry's largest annual gathering, one of the most notable stories in the business was taking place an hour to the south in sunny Orange County.
At the headquarters of Blizzard Entertainment, developers were putting the finishing touches on "Starcraft II," a futuristic science-fiction strategy game built for the PC that was first released to the public 12 years ago. It has had gamers waiting in heavy anticipation for the next release, currently slated for the end of this month.
Expectations are high. Analysts believe "Starcraft II" will figure heavily in the bottom line performance for Blizzard's parent company, Activision Blizzard (ATVI), for this year, selling several million units globally.
"There is no shortage of consumers for 'Starcraft'," Activision CEO Bobby Kotick said in an interview at the E3 Electronic Entertainment Expo in Los Angeles last month. "For a game that is more than 10 years old, there's millions of people still playing it. I think Starcraft will definitely be one of the most desired games of the year."
"Starcraft II" goes on sale July 27. The game and its predecessor are set around a battle between three species in the 26th century. The first "Starcraft" has been one of the best-selling game titles for the PC platform, having moved more than 11 million units since its first release.
Blizzard President Mike Morhaime said player excitement has remained high leading up to the launch. The company may also be able to migrate some fans of its blockbuster "World of Warcraft" franchise to the game."
"We've brought in a lot of new players in the beta testing who've been playing 'Word of Warcraft' but have never tried Starcraft," he said in an interview at the company's headquarters in Irvine, Calif.
Analysts also expect strong success from "Starcraft II," given the continued popularity of its predecessor.
"Starcraft has a lot of brand equity. For a lot of gamers, this got them introduced to interactive gaming," said Jesse Divnich, lead analyst for Electronic Entertainment Design and Research, a videogame market research firm also known as EEDAR.
Divnich added that, even 12 years after its release, Starcraft is still considered "by far the best strategy game" in the business.
"If anything, the wait time increases the anticipation," he said.
Growth Outside Game Consoles
The release of "Starcraft II" plays into a larger trend by Activision and other game makers to seek growth outside the traditional console-based, retail games business, where momentum has been slowing of late.
For the first five months of this year, sales of game software in the U.S. fell more than 6% compared to the same period in 2009, according to data from the NPD Group, which tracks sales of game products though traditional and online retail channels.
Results for June are slated to come out Thursday afternoon, and analysts are expecting another month of declines.
But analysts point out that NPD does not cover other channels in the game market, most notably games that are sold in digital formats over online services such as Xbox Live and the PlayStation Network. And such channels are becoming increasingly important to the sector. Activision's March quarter was driven in large part by online play of its blockbuster "Call of Duty: Modern Warfare 2" and the downloadable expansion pack called "Stimulus Package."
Game publishers have been pushing to build out their digital businesses, but Activision has a big leg up on the competition through Blizzard. The "Warcraft" MMO [massively multi-player online] franchise brings in a steady stream of monthly subscription revenues.
While "Starcraft II" won't use a subscription model in the U.S., other markets such as Korea will follow this model, and PC games also offer larger profit margins, as revenues do not need to be shared with console manufacturers.
"Where most companies are still trying to figure out how to make money in software publishing, we think that Activision Blizzard looks poised to leverage its core franchises through DLC [downloadable content], subscriptions and MMOs globally, placing the company well ahead of its peers in migrating away from console software publishing," wrote Jeetil Patel of Deutsche Bank in a note to clients last month.
A New 'Pillar'
Among game publishers, Activision is the most favored in the business. All but one of the 28 brokers covering the stock maintain buy ratings on the shares.
Though Activision shares are relatively flat for the year to date, the stock has outperformed those of other game publishing rivals. Analysts expect "Starcraft II" to be a major driver of earnings for the year, alongside planned releases from the company's stable of other lucrative properties such as "Call of Duty" and "World of Warcraft."
"Activision this year is 'Starcraft,' 'World of Warcraft' and 'Call of Duty'," said Eric Handler of MKM Partners. "The robustness of the company's earnings power is going to come from those three games."
The inclusion of "Starcraft II" in that mix may come as a surprise to some. "Warcraft" and "Call of Duty" have been hot-selling franchises for the past couple of years. Last year's "Call of Duty: Modern Warfare 2" was the industry's best-selling title for 2009, according to data from the NPD Group.
"Warcraft" has remained hot since its first release in 2004, with two expansions released since then and the next -- called "Cataclysm" -- slated for later this year.
Michael Pachter of Wedbush Morgan expects the PC game segment to offset declines in the console game business this year -- thanks mostly to the "Starcraft II" release and up-coming "Warcraft" expansion.
At a meeting of analysts last month, CEO Kotick outlined seven "pillars of opportunity" that he expects to drive future growth for Activision. Three of those were Blizzard titles "World of Warcraft," "Starcraft" and "Diablo." He said each pillar has the potential to deliver between $500 million and $1 billion of operating profit over its life span.
Handler of MKM said Activision is taking a very targeted approach in growing its business, focusing on franchise that not only have the potential for strong retail sales, but the most opportunities for additional revenue streams from digital initiatives like downloadable content and micro-transactions.
"I think it's a very sound strategy for them," he said.
