Activision's Kotick brushes aside the mobile market

Better than expected revenue and earnings gave Activision a solid first quarter - but there are troubling signs, too, as CEO Bobby Kotick admitted.

Activision raised its guidance for the full year, and projected slightly higher earnings per share and revenue (GAAP revenue is expected to be $4.22 billion). Activision's got a new Call of Duty coming out this year (Call of Duty: Ghosts); a new Skylanders (Skylanders SWAP Force); and Diablo III for the PS3 (and for the PS4 at some point). All of those titles should generate amazing revenue.

Here's the odd thing: Activision announced better-than-expected revenue and earnings for the quarter, and revised its guidance for the year upward, yet each executive on the earnings call was careful to mention lots of possible problems later in the year. Conversely, Electronic Arts, in its earnings call, announced revenues and earnings at the bottom of expectations, and lower sales for next year, yet all the executives expressed optimism for the company's prospects going forward. Even stranger, in the day after EA's earnings call its stock has risen over 17 percent to the highest point in over a year. Activision's dropped 6 percent in after-hours trading after the earnings call.

"The shift in release dates of competing products, the disappointing launch of the Wii U, uncertainties regarding next-generation hardware, and subscriber declines in our World of Warcraft business all raise concerns, as do continued challenges in the global economy"

Bobby Kotick

Not that Activision stock is doing badly; it hasn't been at this point (over $14 per share) since late in 2008, at the peak of the retail game business. Still, all the execs seemed to have been drilled on the need to mention risk factors, despite enthusiasm over the company's pipeline and its prospects. Maybe it's just an excess of the caution you're supposed to show as an executive of a publicly traded company, but it makes you wonder if there's something else going on.

Despite the carefully phrased forebodings, CEO of Activision Publishing Eric Hirshberg waxed enthusiastic about Activision's Call of Duty franchise and Skylanders, both of which will have new installments this year. Hirshberg was careful to note (apparently to undercut doubts raised by some analysts) that Call of Duty: Black Ops II had a better Q1 than the previous Modern Warfare II did, and that Call of Duty set a new Q1 high for users. Skylanders was the number-one bestselling game in dollar terms for Q1, and Hirshberg expects it will have even more shelf space this Christmas than last year.

It's clear Activision is concerned about the competition this fall; Kotick put it very clearly. "This year we expect a number of well-established game franchises and well-capitalized new entrants to compete directly for our consumers' time and attention, particularly as certain of our competitors have moved their launches into the back half of the year," said Kotick. "The competitive landscape will likely require us to further increase our sales and marketing investments for our three largest franchises, especially in the important holiday season."

Hirshberg threw down the gauntlet more specifically. "However, we will obviously see more direct competition and expect to see significant resources being spent on competitive launches," Hirshberg said. He promised continued innovation "supported by the largest sales and marketing campaign in the Skylanders franchise's history." Take that, Disney Infinity! We see your marketing campaign and raise you some marketing co-op and prime location buys. There will be blood in the aisles of the toy stores this year as both companies battle for the kids' mindshare and dollars.

"right now we just don't see anything that would suggest that changing the way we approach investing against mobile would be a good idea"

Bobby Kotick

It's not just Skylanders, though. Activision is clearly worried about Battlefield 4 taking some market share away from Call of Duty. It was not incidental that Hirshberg mentioned that Call of Duty has "an all-new engine" for this year; that's been one of the knocks against it in past years, whereas EA keeps pushing the envelope with the Frostbite engine. Expect some serious rivalry between these two titles this year.

Last but not least is the Worries of Warcraft - sorry, I mean World of Warcraft. Kotick was upfront about the fact that the franchise lost 1.3 million subscribers in the first quarter, dropping down to 8.3 million subscribers globally. There were 9.6 million subscribers at the end of last year... and that was down from over 10 million after Mists of Pandaria launched (the number was 9.1 million before Pandaria). Blizzard CEO Mike Morhaime could point to no particular reason for the decline when pressed about it by an analyst, citing the general competition in the market.

Morhaime did point out that the bulk of the decline came from the East, where the competition from free-to-play MMORPGs is fierce. "Given the more competitive market, and the length of time since the last expansion, we do expect further volatility this year," Morhaime said. Volatility is apparently a creative way of saying decline. Morhaime once again promised more content, faster, but that's been the mantra for a while. Major expansions seem to be the only thing that slows the decline, and the effects don't seem to last long.

Kotick promised to commit "substantial resources" to World of Warcraft going forward, so the company isn't giving up on the franchise by any means. Still, Activision is clearly concerned about how long the aging World of Warcraft cash cow can continue providing high-margin milk. When will we see Blizzard's new MMORPG? No idea. Certainly not this year, and probably not early next year, either.

It may be a while before Titan appears; while the project started some years ago, it probably began with the idea that Blizzard could charge a subscription for it. That appears to be increasingly less viable in today's MMO marketplace, so the game may need to become free-to-play. However, that would also mean a substantial redesign, which would take time. This is all speculation, though, and Blizzard isn't giving any hints.

"Activision is clearly concerned about how long the aging World of Warcraft cash cow can continue providing high-margin milk"

Perhaps the oddest part of the earnings call came when Kotick was cornered by analyst Doug Creutz about the company's mobile strategy. Has Activision been too cautious? Has mobile finally proven itself as a viable market, and has Activision begun to rethink its strategy towards mobile? Creutz pointed out that in the last six to nine months we've seen some games generate some sustainable revenues. (Perhaps he was referring to games like Supercell's two titles, which have brought in $179 million in the first quarter, with over $100 million of that in profit; Clash of Clans alone is now making over $2.4 million per day.)

"I think we've always said we're constantly exploring all different platforms for opportunities, but I don't think we exactly share your view that three months suggests that they're sustainable franchises," Kotick told him. "If you look at the last four or five years, you've seen changes in the top ten almost every year that are significant. Nothing that's driven any sizable amount of operating profit. While we're going to continue to look at it, and we think that over the long term there'll be opportunities, right now we just don't see anything that would suggest that changing the way we approach investing against mobile would be a good idea."

That philosophy may account for the drop in Activision's stock price. It's almost reminiscent of Nintendo CEO Iwata's dismissal of mobile games. Certainly, most mobile games aren't making a lot of money. But there are a few that are making numbers that even Activision would notice; Supercell's looking at a profit on the order of $400 to $500 million for the year, and that's real money even for Activision. Maybe it's more prudent to wait several years to see if there are a number of companies doing that kind of business... or maybe it would be good to get in before some new players have had years to consolidate market share.

Overall, Activision is going to have a good year, concerns to the contrary. Going into 2014, Bungie's Destiny will be arriving at some point, and that will likely have some significant impact. Beyond that, though, the picture becomes hazy. Much depends on the acceptance of new consoles; Activision is not heartened by the Wii U's slow uptake. With Activision betting so much on consoles, life will be good if new consoles sell like hotcakes... and not so good if they don't. Unfortunately, much of that is out of Activision's hands.