Activision Blizzard: Mobile and Free-to-Play Growth Opportunity

We first discussed Activision Blizzard in last month’s commentary. You can read it here.

“Gaming connects people more deeply than any other form of media, and video games are redefining what it means to interact socially”

—Robert A. Kotick, Activision Blizzard CEO

Activision Blizzard (“Activision”) is a leading global developer and publisher of video gaming content and services that operates three divisions: Activision Publishing, Blizzard Entertainment, and King Digital Entertainment. Activision operates esports leagues based on its video games titles and provides brands digital advertising opportunities within its content. Activision put up record-setting numbers in 2020, with full-year revenues growing 25% and operating profits growing 70%. These results were driven by strength in core franchises, including Call of Duty, World of Warcraft, and Candy Crush, as well as the contribution of higher gross margins from the shift to more recurring and digital revenue streams.

Activision had approximately 400 million monthly active players across its portfolio of fully-owned intellectual property in 2020. We often discuss how video games are increasingly becoming social networks as they enable players to connect and socialize with their friends while playing the same game, and help with building new relationships with players from across the world. The social element is translating into higher in-game spending (and higher profit margins) across Activision’s core franchises. For example, Call of Duty players who play with friends spend over 3x more hours in the game, but most interestingly, they spend 3x more dollars on in-game content.

Activision has a goal to reach 1 billion players over the next five years. But how does it expect to grow the monthly user base by 150%?

The answer is by executing a three-pillared premium, mobile, and free-to-play strategy.

The Call of Duty Playbook: Premium, Free-to-Play, and Mobile

Activision plans to apply the same playbook that is currently being executed against the Call of Duty franchise to other wholly-owned franchises like World of Warcraft and Diablo. The Call of Duty playbook consists of a franchise bringing its console and PC intellectual property to mobile and free-to-play to add to the existing premium title that you could buy either in digital or hard copy. The Call of Duty mobile and free-to-play versions have proven successful to date, helping grow the franchise’s reach, engagement, and in-game monetization through microtransactions and digital advertising.

Premium: Activision’s premium title, Call of Duty: Black Ops Cold War launched in November 2020. Black Ops Cold War became the top-selling video game of 2020. Call of Duty premium unit sales grew over 40% in 2020, with a strong shift to digital downloads. The next premium release of Call of Duty will launch in the fourth quarter of 2021.

Free-to-Play: Activision launched Call of Duty: Warzone, a free-to-play battle royale game in March 2020. Warzone attracts a new consumer segment by removing the $60 premium price-point that proved to be a barrier in the past. Initially, there were concerns that Warzone would cannibalize premium title sales, but Activision is seeing the complete opposite. Warzone provides franchise continuity (extends a player’s lifetime value), deepens engagement across the franchise, and serves as a player-acquisition funnel to drive premium sales.

Mobile: Activision launched Call of Duty: Mobile in October 2019. The mobile game has generated revenue of ~$480 million in its first year, with over 300 million downloads since its launch. In China, Call of Duty: Mobile launched during December 2020, with ~13 million cumulative downloads through January 25, 2021 (not including the 70 million pre-registrations). We believe China will become a significant contributor to not only Call of Duty franchise revenues, but to other Activision franchises as well, considering it’s the largest video game and mobile market in the world.

The monetization strategy and in-game economic structure of mobile gaming is highly profitable. For example, if Call of Duty: Mobile in China generates ~$1 million of gross bookings per day, Credit Suisse estimates annualized gross bookings of ~$330 million, which nets Activision an additional ~$70 million in 100% incremental margin revenue and net profits of ~$56 million (or $0.07 earnings per share). In other words, for every net revenue dollar made from Call of Duty: Mobile in China, Activision collects ~80 cents in profit. In our view, this is very attractive.

Activision is furthest along among its peer group in applying this framework with mobile and free-to-play versions of premium content. It enjoys favorable positioning in mobile due to the popularity of its intellectual property and its genre mix of shooters, role-playing games or RPGs, and strategy games that are generally the best mobile genres to monetize. We expect Activision to apply this theme to Diablo, as they will soon release a mobile/free-to-play version of the franchise.

Diablo Immortal: Market Opportunity

Diablo is one of Blizzard’s longest-running franchises, with a significant opportunity ahead of it in the free-to-play mobile market. Diablo Immortal is Blizzard’s upcoming free-to-play mobile title that is set to release in late 2021. We see a number of tailwinds for Diablo Immortal’s launch given the popularity of RPGs in the mobile market, and the success of mobile game adaptions of high-grossing console and PC intellectual property.

Credit Suisse research indicates that the global mobile RPG market is large enough at ~$17.5 billion that if Diablo Immortal places in the top 10 in global markets (which is possible given the popularity of Blizzard’s intellectual property and Diablo in particular) that it would become a solid contributor to the Blizzard segment and overall net revenues and profits. If it were to become the #1 title in each of the global markets, Diablo Immortal could generate an estimated ~$2 billion in net revenues on an annualized basis. If it were to place at #10 globally, Diablo Immortal could generate net revenues of ~$300 million. The chart below illustrates high-end (blue sky) and low-end (grey sky) estimates for the mobile free-to-play game.