But connecting with these gamers consistently — through the current wave of games consoles such as Sony’s Playstation 3 (PS3), Microsoft’s Xbox 360 and Nintendo’s Wii, or through online and mobile gaming — now requires companies to operate on a very different scale.
The importance of scale wasn’t lost on dealmakers at Activision and Vivendi. It certainly made sense to investors — ahead of a late August stock split, Activision Blizzard’s share price was about $37 in mid-July, compared with Activision’s standalone price of $22 when the deal was announced last December.
Activision was no slouch on its own though. Founded in 1979, it was the first independent games developer. Following an ill-judged move into business-application software in the 1980s that saw the company file for Chapter 11, it refocused on games in the early 1990s. Acquisitions have helped the company expand and successful long-running titles encouraged steady sales. During the last fiscal year to April 2008, the company nearly doubled its revenue to $3 billion and achieved an operating margin of 16.5%.
For Tippl, Activision’s CFO since 2005, it’s by design, not accident, that the company is reaping the rewards of its current strategy. “There’s this concept that this is a hit-driven business where you throw a lot of things on the wall and hopefully something sticks,” says the 41-year-old Austrian, a 14-year veteran of Procter & Gamble. “That’s not how we run the business. Our job and our strategy have always been to make sure we have a plan in place that grows our existing franchises every year.”
Easier said than done these days. It was once fairly straightforward to hit growth targets with frequent product updates to tried-and-tested franchises, such as Call of Duty and a series involving celebrity skateboarder Tony Hawk. But just as the gamer profile has changed, so have the types of games that become hits. Traditional console titles helped make Activision an industry leader, but now newer markets are showing the biggest growth prospects. This requires lightning-fast strategy shifts.
Why Casual Is Smart
One of the new markets involves subscription-based online offerings. The beauty of these games for CFOs is that they help to smooth the industry’s notorious sales peaks and troughs around the lifecycles of traditional consoles. “This has been a super-cyclical industry, and the thing CFOs want the most is predictability,” says Jason Mauricio, an analyst at Arete Research in London. “They don’t want surprises, they want smooth earnings. Some of the newer developments coming up in the video game industry are allowing that to be more of a reality.” For its part, Activision Blizzard generates more than $1 billion in revenue and more than $500m in profit from subscription businesses, thanks largely to its ownership of the Blizzard-developed World of Warcraft, an online game with some 9m monthly subscribers. EA, meanwhile, also sees this as a growth area, and expects online revenue to rise by some 50%, to more than $285m, in the year to April 2009.