Activision Blizzard's was founded in 1979 by Atari developers.   It is the largest US-listed video game developer today with a US$50 billion market value.

The business was brought back to life in 1991 by current CEO Bobby Kotick.  The annual report always highlights the performance of the company since 1991.

The book value has increased by an annualised 30% since Kotick took over.  The 2019 annual report also states that:

If you had invested $1,000 in our company 20 years ago, your investment would have been worth $51,620 at the end of 2019, 16 times more than the S&P 500’s $3,242 over the same period.

After a record 2018, Activision Blizzard (ATVI) saw revenue and profit decline 2019.  The company's guidance is for a marginal decline in revenue in 2020.

Against this backdrop, is Activision Blizzard and the video gaming industry worth the candle?  The free-to-play model is challenging for blockbuster game developers.

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Call of Duty versus Fortnite

Activision Blizzard offers a unique insight into how the video gaming industry is changing.

The company owns the first-person-shooter Call of Duty, which is one of the most successful gaming franchises.  But it is now up against the popular free-to-play game Fortnite, which was launched in 2017.

Fortnite's most successful format is Battle Royale, in which the last person left alive wins.  Players parachute onto an island and then battle it out.

Fornite's has been popularised in part through prominent gamers like Ninja.  It also has a strong social element to the game that has helped attract school children.

With Fortnite free-to-play it may be harder for alternative blockbuster games to generate revenue.  Call of Duty has traditionally been driven by an annual release.

To fight back, Call of Duty now has a free-to-play Battle Royale version along with a mobile version.  The latest pay-up-front version of the game was released 25 October 2019.

Call of Duty's latest versions

Source: Activision Blizzard

Activision Blizzard's first quarter results

Activision Blizzard announced first quarter results on 5 May.  Revenue was 9% ahead of its prior guidance but still came in 2% down on a year ago.  Non-GAAP EPS was down 2% on a year ago.

The quarterly dividend was increased by 11% on a year ago.  The share price was almost 5% higher in after hours trading.  With regard to Call of Duty Modern Warfare the company stated that:

Life-to-date, Modern Warfare has sold through more units and has more players than any prior Call of Duty title at this point after its release.

Activision's guidance is now for net revenue of US$6.8 billion in 2020.  This is a 5.4% increase from the February guidance for US$6.45 billion revenue this year.

Activision Blizzard Q1 results 2020

Source: Activision Blizzard

Activision Blizzard's place in gaming history

Activision was the first third-party video game developer.  Atari had developed the first home console and also developed its own games.  This changed when some Atari developers left to start Activision in 1979.

Gaming industry history

Source: VanEck

2020 will be an interesting year

The current year will see the release of new consoles from both Sony and Microsoft.  We will also see how successful Activision Blizzard is at fighting back.

One risk is that the group's free-to-play version of Call of Duty cannibalises the pay upfront version.

Activision Blizzard has also seen waning active users for its other key franchises: World of Warcraft and Candy Crush.  But Call of Duty remains the jewel in the crown.

Video gaming is forecast to grow

The overall backdrop for the video gaming sector remains positive.  But disruptive competition may lower returns for established players.

Mobile gaming is the main area of growth and the key beneficiaries are Apple and Google.  They both charge 30% for any games sold within their App Stores.

Spending on video gaming was US$146 billion in 2018 and is expected to hit US$ 216 billion in 2023.  This represents a 48% increase over five years or an 8% annualized increase.

This is a reasonable pace of growth.

Global Video Game Market

Source: Take-Two Interactive

Summary

Activision Blizzard provides a litmus test for the video gaming industry.  The group has launched a free-to-play Battle Royale version of its most popular franchise.

There is also a free-to-play mobile version of Call of Duty.  Whether they can be as profitable as the traditional pay-up-front version remains to be seen.

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