Merger Case Analysis

Date: To:
May 3, 2011 Professor Keifer Dr. Kiger Professor Martel Dr. Tucker
From:
Team # Student 1 Student 2 Student 3 Student 4 Student 5
Subject: Analysis of Activision Blizzard, Inc.
As requested by the senior partners of Copeland Cluster and Associates on April 11, 2011, our team has performed an analysis of Activision Blizzard, Inc. and prepared a report. Our report contains details of the effectiveness of Activision Blizzard, Inc.s current strategy. Through our analysis of the effectiveness of its current strategy, we were able to identify the key strategic issues Activision Blizzard, Inc. is facing and pose specific recommendations to add economic value in the future. This report was created with consideration of the following criteria: The current strategy of the company The competitive dimensions Key strategic issues Recommendations Our research showed Activision Blizzard, Inc.s current strategy, has in many ways, been immensely successful. Research further indicates that although successful, Activisions current strategy might be setting the company up for a potentially dangerous future. Our team would especially like to thank Catherine Penrod for all of her assistance in the making and editing of this report. We would be pleased to discuss our report and recommendations with you upon request. Please feel free to call or email our team member Student 4 at XXX-XXX-XXXX or sf000000@ohio.edu. She is available at any day after 12 p.m. Our team would like to thank you for your faith in selecting us to prepare this company analysis.
THE ACTIVE VISION: THE DEMAND TO EXPAND

Prepared for: Professor Keifer Dr. Kiger Professor Martel Dr. Tucker
Prepared by: Team # Student 1 Student 2 Student 3 Student 4 Student 5
May 3, 2011
E xe c u t ive S u m m a r y
Activision Blizzard, Inc. is one of the leading companies in the entertainment and game software industry in the world. Since its creation in 1979, Activision has been able to keep up with the ever changing aspects to the industry to be sure that it is still producing exceptional products for the video game market. If not for its adaptability, Activision would not be consistently making a profit when other companies are taking losses. Through the analysis of Activisions current strategy, this report points out the key issues Activision is facing as a company today and recommendations on how to improve upon and benefit financially from these issues. Activisions current strategy within the video game industry has put it as one of the most profitable companies with certain competitive advantages. Activisions mission is to focus on the development and production of proven game franchises that show high consumer appeal. Activision produces and sells Call of Duty and World of Warcraft, which are the two best-selling games in their genres. It has a major presence in the growing world of digital distribution with content available on resources such as Steam and Battle.net. Activisions marketing strategy is successful, with its return on marketing investments being at 4.48 in 2010. Also, Activision makes most of its games compatible with many platforms; in fact, 20 of at least 26 games released in 2010 can be played on multiple platforms. There are still some key issues Activision faces in the video game industry. For example, there is not much diversification in its products. In 2010, Call of Duty and World of Warcraft accounted for over 62% of the net revenues for the company. Another issue is the lack of presence in the casual and social gaming market, which is expected to expand 30% in 2011, making over $1 billion for the industry. Project Beachhead is another issue because, if it is not developed correctly, it could cost the company more than it would make. Given these key issues, there are two recommendations for improving profitability. One recommendation is to expand and buy the company Take-Two Interactive Inc. and make a strategic alliance with social gaming company Zynga. Take-Two has games like Grand Theft Auto and the whole 2K Sports department that have had many top selling games. Grand Theft Auto V is estimated to make over $750 million with its release and Activision has no game that can compete with it. 2K Sports makes sports games that compete in the sports genre, which makes up 19.6% of overall revenues in the industry. Activision does not make any competitive sports games. Making a strategic alliance with Zynga will give Activision a presence in the social gaming field. The second recommendation is to make Beachhead profitable and capable of being the best digital distribution website in the industry. With these recommendations, it is estimated Activision would start to make a 20% increase in net revenues for the next five years. Given the research, these recommendations will position Activision as the number one video game company in the world.
Ta b l e o f C o n t e n t s
Introduction .................................................................................................................................................. 1 Current Strategy ........................................................................................................................................... 2 Overview ................................................................................................................................................... 2 Game Genres............................................................................................................................................. 3 Overview ............................................................................................................................................... 3 Activision Blizzard, Inc. .......................................................................................................................... 4 THQ ....................................................................................................................................................... 5 Electronic Arts ....................................................................................................................................... 5 Take-Two Interactive ............................................................................................................................ 5 Seasonality ................................................................................................................................................ 6 Activision Blizzard, Inc. .......................................................................................................................... 6 Electronic Arts ....................................................................................................................................... 7 Take-Two Interactive ............................................................................................................................ 7 THQ ....................................................................................................................................................... 7 Digital Distribution .................................................................................................................................... 8 Activision Blizzard, Inc. .......................................................................................................................... 8 Call of Duty ............................................................................................................................................ 9 Electronic Arts ..................................................................................................................................... 10 Take-Two Interactive .......................................................................................................................... 11 THQ ..................................................................................................................................................... 11 Marketing Strategies ............................................................................................................................... 12 Activision Blizzard, Inc. ........................................................................................................................ 12 Electronic Arts ..................................................................................................................................... 13 Take-Two Interactive .......................................................................................................................... 13 THQ ..................................................................................................................................................... 13 Brand Name Recognition .................................................................................................................... 14 Platform Compatibility ............................................................................................................................ 16
Key Issues.................................................................................................................................................... 20 Overview ................................................................................................................................................. 20 Franchise Diversification ......................................................................................................................... 21 Casual and Social Gaming ....................................................................................................................... 24 Cost of Project Beachhead ...................................................................................................................... 25 Recommendations ..................................................................................................................................... 26 Overview ................................................................................................................................................. 26 Expansion: Take-Two.............................................................................................................................. 27 Impact of Take-Two Merger.................................................................................................................... 30 Expansion: Zynga Alliance ....................................................................................................................... 32 Impact of Zynga Alliance ......................................................................................................................... 33 Subscription Fees for Beachhead ............................................................................................................ 34 Impact of Fees for Beachhead ................................................................................................................ 35 Conclusion .................................................................................................................................................. 37 Appendix A: Net Revenues by Quarter...................................................................................................... 39 Appendix B: Primary Research Survey....................................................................................................... 41 Appendix C: GAAP Net Revenue Growth by Platforms............................................................................. 44 Appendix D: Forecasted Income Statements ............................................................................................ 46 Appendix E: Forecasted Balance Sheet...................................................................................................... 50 Appendix F: Ratios ...................................................................................................................................... 56 References .................................................................................................................................................. 58
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
The objective of this report is to develop strategic recommendations Activision Blizzard, Inc. can use to improve its market value and distinguish its competitive advantage in the interactive entertainment software industry. Since its inception on July 9, 2008, the Activision Blizzard Incorporation merger, known as the Business Combination, has made the company an industry leader in the development and publishing of interactive entertainment software (Activision Blizzard, Inc., 2011). This $18 billion deal, although shown to be a profitable investment, has created a potentially dangerous environment for Activision Blizzard, Inc. in the future. As of May 2, 2011, ATVI stock was closed at $11.43, up 240 basis points from 2010. This indicates that in the past year, the investors future perception of the company is positive. An analysis of Activisions current strategy, financial position, and competitive dimensions was conducted in order to develop possible recommendations for Activision Blizzard, Inc. to remain competitive.
O b j e c t ive
To continue to be one of the largest, most profitable, and well respected interactive entertainment software companies of the world (Activision , 2011). --Activision Blizzard, Inc.
ATVI TTWO ERTS
THQI
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Derived from its annual report, Activisions strategy is to focus on the development and publishing activities of proven franchises, or content that has the potential to become franchised with sustainable mass consumer appeal and recognition (Activision Blizzard, Inc., 2011). Its main focus areas include the Call of Duty franchise, Project Beachhead, downloadable content, new entertainment franchises, licensed properties, and development of Bungies next big hit (Activision Blizzard, Inc., 2011). Research indicates its game genres, marketing strategies, platform compatibility, seasonality of releases, and digital distribution to be the competitive dimensions facing Activision Blizzard, Inc. Competitive Dimensions Key Issues
Recommendations
Game Genres
Franchise Diversification Expansion Lacking Presence in Casual and Social Games Development Cost of Project Beachhead Profitability of Beachhead
Seasonality
O ve r v i e w
Digital Distribution Marketing Strategy Platform Compatibility
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
There are different types of video games produced today with the goal that everyone can find a game to suit their entertainment needs. Since the start of the industry, the number of genres have grown to accommodate the market. The genres currently offered are: action, adventure, educational, racing / driving, role-playing (RPG), simulation, sports, and strategy. Underneath these basic genres, there are many sub-genres offered to meet specific needs (Arsenault, 2009). Of the genres and sub-genres, the best-selling ones are action, family entertainment, shooting, and sports games. Since 2007, these four groups have consistently sold more units than any of the other types of games made. In 2009, action games made up 19.5%, sports games made up 19.6%, family entertainment games made up 15.3%, and shooter games made up 12.2% of the video game market. All together that makes ups 66.6% of the units sold during 2009, leaving just 33.4% of the rest of the market for the other game genres. (Entertainment Software Association, 2010) From 2007 -2009, the action, shooter, sports, and family entertainment genres have consistently had the top selling titles. The action genre has decreased 280 basis points in sales since 2007, which means the action based games have started to decline in consumer appeal. The shooter genre has increased 10 basis points and has always been right around the same percentage, meaning it is a very consistent genre in the industry. Sports games have increased 550 basis points since 2007, making sports games a very profitable solution when making a game. The family entertainment games have decreased 230 basis points since 2007, which possibly means a drop in appeal towards the gaming market. (Entertainment Software Association, 2010)
Game Genres
Best Selling Video Game Genres by Units Sold, 2009 Best Selling Video Game Genres by Units Sold, 2007
Other Genres 34% Action Games 22% Other Genres 33% Sports Games 20%
Action Games 20%
Family Entertainment Shooter Games 18% 12% Shooter Sports Games Games 14% 12% (Entertainment Software Association, 2010)
Family Entertainment 15%
(Entertainment Software Association, 2010)
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Activision develops products in the genres of first person action, action/adventure, role-playing, simulation and strategy (Activision Blizzard Inc., 2011). Of these, the best seller has to be in the first person action area with the Call of Duty franchise. Call of Duty has consistently been a top performer for Activision since its release in 2003. Life-to-date, Call of Duty has earned over $4.2 billion worth of revenue, with the newest installment, Call of Duty: Black Ops, making over $650 million in the first five days of sales (Activision Blizzard Inc., 2011).
(Lafferty, 2010)
Game Genres
(Wallpaperez, n.d.)
Blizzard Entertainments focus is on the MMORPG genre of video games. It is the leader in this field making three of the most popular games to date, World of Warcraft Diablo, and Starcraft. World of Warcraft is one of the most widely played games in the world, with over 12 million online players having a subscription to the software (Activision Blizzard Inc., 2011). The most recent expansion, World of Warcraft: Cataclysm, by January 10, 2011, sold over 4.7 million copies worldwide setting the record for computer game sales. The first day sales of Cataclysm also set a record in making over $3.3 million in revenue. This shows Blizzards stronghold on the MMORPG genre in the gaming industry.
4
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
THQ
THQ Inc. has a main focus on the fighting, racing, action, shooting and strategy genres of video gaming. The most popular games THQ has published in the past have been in the fighting genre. The two biggest fighting games developed are based off of Ultimate Fighting Championship (UFC) and World Wrestling Entertainment (WWE) (THQ Inc., 2009). Currently, these are two of the most popular fighting games on the market, giving THQ a firm grasp on that genre of gaming.
Game Genres
(Shane, 2011)
(THQ UFC Undisputed 2010 for Xbox 360, 2011)
Electronic Arts
Electronic Arts Inc. has a wide variety of genres it produces such as action/adventure, casual, sports, family, fantasy, racing, music, massively-multiplayer online role-playing, simulation and strategy. The biggest money maker for EA is in the EASports division, where it makes games like Madden and FIFA and other sports games. Net revenue for fiscal year 2010 was driven by FIFA 10, Madden NFL 10 and The Sims 3 (Electronic Arts Inc., 2010). If not for these titles, EAs net revenues would have been greatly lower than they already have been. EA has seen a decrease in net revenues over the past years due to competition with other competitors in the same fields EA used to dominate.
(Rodda, 2010)
(Madden 2011 to Hit iPads, 2010)
Take-Two Interactive
Take-Two Interactive is another game publisher that specializes in genres including action, adventure, racing, role-playing, sports and strategy. It publishes games under Rockstar Games and 2K, which focus on action and sports games. Rockstar Games makes the Grand Theft Auto franchise, which is one of the most popular games ever made. 2K makes sports games like NBA 2K11, which are very popular and played among many age groups in the world (Take-Two Interactive Software, Inc., 2010).
(Noe, 2009)
(Srisavasdi, 2010)
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Research indicates strong comparisons between revenue and the seasonality of video game releases. Company reports suggest the highest sale periods occur during the fourth quarter of the year. This is primarily driven by consumer heterogeneity of holiday season purchases.
Net Sales Growth Rate Comparing third & fourth quarter sales
167%
2010
200% 2009
219% 2008
Seasonality
50
100
150
200
250
Percentage of Growth Rate Research shows Activision Blizzard, Inc.s strategic releasing of top titles during this time frame to have had extreme market success. Last year it released six titles of its most popular franchises on five different platforms; DJ Hero 2, Tony Hawk: SHRED, James Bond 007: Blood Stone, Call of Duty: Black Ops, Bakugan: Defenders of the Core, and World of Warcraft: Cataclysm (Activision Blizzard, Inc., 2011). According to its internal estimates, Call of Duty: Black Ops set a new record in interactive entertainment retail sales of over $650 million during its first five days and has grossed over $1 billion year to date (Activision Blizzard, Inc., 2011). The company also set records on December 7, 2010, with its release of World of Warcraft: Cataclysm selling 3.3 million copies worldwideduring its first 24 hours, making it the fastest-selling PC game of all time (Activision Blizzard, Inc., 2011, p. 41). Seasonal releases have increased Activisions net sales growth rate 219%, 200%, and 167% basis points from third quarter to fourth quarter sales of 2008, 2009, and 2010 respectively (refer to appendix A for revenues in dollars). (Activision Blizzard, Inc. , 2010) (Activision Blizzard, Inc. , 2009). 6
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Electronic Arts
Electronic Arts released over 23 game titles on 11 different platforms of its most popular franchises (Electronic Arts, Inc. ). Like Activision, Electronic Arts sales also experienced seasonality in its net growth of sales. However, EA showed less significant growth rates of 85%, 58%, and 67% from third quarter to fourth quarter sales of 2008, 2009, and 2010 respectively (refer to appendix A for revenues in dollars). (Electronic Arts, 2010) (Electronic Arts, Inc., 2009) (Electronic Arts, Inc., 2008)
2010 2009 2008 58% 85% 67%
Seasonality
50 Percentage of Growth Rate
100
In the fourth quarter of 2010, Take-Two Interactive released eight game titles on nine different platforms, which helped generate $334 million in revenue (Take-Two Interactive, 2010). It showed 2009 fourth quarter revenue to be around $360 million, a 612% increase in net revenues from third quarter sales. This percentage is offset by low third quarter sales and the market success of its two major franchise titles during the fourth quarter, NBA 2K and Grand Theft Auto (refer to appendix A for revenues in dollars). (Take-Two Interactive, 2010) (Take-Two Interactive, 2009) (Take-Two Interactive, 2008)
2010 2009 2008 -41% -50 150 350 550 72% 612%
Percentage of Growth Rate
THQ
In 2010, THQ Inc, released 20 game titles on a total of nine different platforms, including Nintendo Wiis uDraw (THQ Inc., 2011). Comparisons between net revenue growth of its past three years show that THQ has increased 19,100 basis points from 2008 to 2010 (refer to appendix A for revenues in dollars). (THQ Inc., 2010) (THQ Inc., 2009) (THQ Inc., 2008)
2010
2009
2008 117% 252% 308%
100 200 300 Percentage of Growth Rate
400
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Activision Blizzard, Inc. is positioning itself for the digital distribution shift. The company utilizes digital distribution through Steam and through Blizzard Entertainments gaming service, Battle.net. Blizzard is also looking to create digital extensions for StarCraft II and World of Warcraft. Activisions two largest franchises are World of Warcraft and Call of Duty, both of which are seeing digital growth. Activision is currently in the development stages of a new studio division, Beachhead. Project Beachhead is designed to create and lead the production of the popular Call of Duty franchise for online content. Each of these elements is positioning the company for a successful shift to the digital platform.
Project Beachhead
Digital Distribution
Steam
Digital Distributor
Blizzard
Activision began its move towards digital by using distributors such as Steam. Activision has a large catalogue available through the Steam webpage. Currently, Activision has 32 games, 25 videos, and 60 posts on the Steam site. Activision also remains ahead of its competitors in transitioning its business towards digital, largely due to its crown jewel, the multiplayer online strategy game World of Warcraft, which subscribers pay $14.99 a month to play. World of Warcraft can be played on Battle.net, Blizzard Entertainments online gaming service. Blizzard Entertainment is positioning for digital delivery in its games such as Star Craft II. The company plans to launch digital extensions of the game and time-based access models. We expect a long tail of revenues from this title, with the initial revenue ramp led by packaged SW and longer term skew towards online/subscription revenues (Deutsche Bank, 2011). Blizzard had also taken the initiative to expand World of Warcraft (WoW). Referring to WoWs contribution to the growth and profitability of Blizzard, Deutsche Bank states, Additionally, the company is introducing new value added services such as paid mobile access and new virtual goods/digital extensions, which should add incremental revenues and drive engagement levels (Deutsche Bank, 2011).
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
(Activision, 2011)
In February 2011, Activision announced its newest division, Beachhead. Beachhead is Activision s new digital platform for the Call of Duty community. The studio will focus on the digital delivery of new and innovative Call of Duty content. As quoted from Activision Publishing CEO Eric Hirshberg, the plan of Beachhead is to bring the online experience and console play together for the first time through a platform [that has been] in development for over a year" (Alexander, 2011, p. 1). Activision is currently planning downloadable content for Call of Duty that has more commercial potential than most console games. Another feature of Beachhead will be the ability to track individuals scores and statistics regardless of the platform Call of Duty was played on. We enter 2011 a leaner, more focused organization, Hirshberg said, asserting that the company would only invest in those areas where it believed it had a true competitive advantage (Alexander, 2011, p. 1). This digital division of Activision positions the company for a high-profit opportunity and access to the growth of digital distribution.
Activision Blizzard Inc. Q4 Earnings Preview 2010 Three days prior to the earnings report and initial announcement of Project Beachhead
(Stock Wizard, 2011)
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Electronic Arts
The digital strategy of Electronic Arts is to reign supreme in the casual and social networking games platform. In November 2009, Electronic Arts bought out Playfish, an independent studio and leading creator of social network games. Then in October of 2010 EA acquired Chillingo, a leading independent game publisher recognized for innovative games and software for various platforms. Chillingo is the leading publisher for Apple applications.
Increased EAs intangibles by $6 million (16 percent)
Playfish
Decreased acquisition-related contingent consideration by $25 million Decreased cash used in investing activities by $464 million primarily due to a $262 million decrease in the acquisitions of subsidiaries
Chillingo
Contributed to decrease in net deferred income tax asset position Increased market leadership on the Apple platform and strengthened position as the world's leading wireless entertainment publisher for EA Mobile (TM)
One, one, and two
Mass Effect 2
Electronic Arts, Inc. Sports President Peter Moore stated in his 2011 M16 keynote address, Companies that refuse to keep up with changes in consumer behavior are bound to fail. Our competitors scoffed when we invested in social gaming, by buying Playfish, they scoffed at our directto-consumer models. But we are number one in mobile games, number one in casual games and number two in social games (Brightman, 2011). Currently Zynga, known for hits such as FarmVille, CityVille, and FrontierVille, holds the number one position in social gaming.
Electronic Arts is working on transforming Mass Effect 2 (first person shooter game) as a potential digital game. Without divulging a specific figure, EA CEO John Riccitiello stated, The digital version would up accounting for a double-digit percentage of total sales. The EA executive also said that a broader digital distribution program on the PlayStation Network as well as Microsofts Xbox Live might be vulnerable by what he termed a channel conflict between the companies digital networks and physical goods business units (MESA, 2011).
10
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Take-Two Interactive is no stranger to digital distribution. They are the leading publisher and developer of interactive entertainment software and have published hits such as Grand Theft Auto, Liberty City Stories and the Red Dead Redemption expansion. At the moment, digital distribution represents less than 15% of Take-Two revenues. These numbers come from Strauss Zelnick, CEO of Take-Two, in an interview with Bloomberg. Even though digital distribution of profits are rising, Zelnick believes that there are technological barriers that prevent the acquisition of digital products (Gadget Ground, 2011). Take-Two is cautious that if games become strictly digital, then it will alienate too many customers. Take-Two distributes its online games through Steam. Take-Two has also touched on cloud-gaming services, such as OnLive. Take-Two has distributed games such as BioShock and Borderlands through OnLives streaming service. Overall, the company focuses primarily on the PS3, Xbox 360 and Wii consoles since they allow Take-Two to push the game to their technical limitations. Take-Two predicts the tablet PCs will account for 50% of all consumers of entertainment and information devices in the years to come (Hill, 2010).
Grand Theft Auto
Sid Meiers Civiliztion
Homefront
Warhammer
BioShock
Borderlands
Metro 2033
Homefront
*The third tier games are based on Top Sellers from the Stream and Onlive game sites. THQ and Take Two Interactive distribution is not limited to these games
THQ
THQ is beginning to focus on the digital delivery of games and content as a main revenue driver for the company moving forward. In an interview with Forbes, Farrell talked up the reduced-price model the company is debuting with the upcoming MX vs. ATV Alive, which will release at a lowered price of $40 in the hopes of attracting a larger user base to purchase over 100 pieces of downloadable content (Orland, 2011). Digital game distribution has been an advantage for THQ because of lower overall distribution fees and because it eliminates the need to maintain costly inventory. THQ CEO Brain Farrell explains, If we deliver an experience that the gamer values and wants more of, we build on that with digitally delivered downloadable content, which has the effect of increasing the average revenue per user,"(Orland, 2011). THQ streams games through the cloud-computing service, OnLive, as well as 28 games through the online distributor, Steam. 11
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Although very hard to determine, the Mergent Online database (2011) confirms Activision Blizzards success amongst competitors for its return on marketing investments in the last three years. From its return on marketing investment ratio, it is evident that Activision Blizzard, Inc. has had success in customer value and satisfaction, customer attraction and retention, customer lifetime values and customer equity better than its competitors (Armstrong & Kotler, 2011).
Activision Blizzard, Inc. ROI

5 Return on Marketing Investment 4 3 2 1 0 -1 -2 -3 2010 2009 2008
4.48
-0.23
-2.05
M a r ke t i n g S t ra t e g i e s
(Mergent Online, 2011) Activision offers double experience points for online play during a certain time period after releasing new downloadable content. By offering the double experience weekends, it entices consumers to buy it as soon as it comes out. Allowing players take advantage of these special weekends. Comparatively, when Call of Duty: World at Wars first map pack came out it sold 1 million copies its first weekend. (Santos, 2009) While First Strike, Black Ops first map pack sold 1.4 million copies in 24 hours. (Haas, 2011) Blizzard Entertainment, the producers of World of Warcraft and two other MMORPG games, has had great success through marketing efforts and commands 62% of the market share for MMORPG. (MMORPGREALM, 2010, para. 11?) Blizzard has taken several different approaches throughout the years to market World of Warcraft and their other products. Mr. T, William Shatner, Ozzy Osbourne & others endorsed World of Warcraft in commercials in between late 2007 and early 2008 and were spread worldwide through the use of YouTube.com. (Medievaldragon, 2007) Blizzard Entertainment is holding a video contest, for its 20 year anniversary, in which gamers are asked to unleash your creativity and capture your favorite Blizzard game-related memory on video. (Blizzard Entertainment, n.d.) Blizzard saw an increase in 2009 in ROI, which is partially due to the celebrity endorsements. The increase of ROI for 2010 can also be partially explained by the sales of downloadable content (DLC) with the double experience points incentives. The outcome for 2011 is looking to grow as well with 1.4 million sales of First Strike (DLC) and the video contest that Blizzard has created for its 20 year anniversary. 12
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
This survey gave insight to a game publishers ability to generate brand awareness for its products. An overwhelming number of people choose Electronic Arts as the producer of both Madden NFL and 2K NBA. Unfortunately, Electronic Arts only publishes Madden NFL. Our survey showed that only three of our ten games had a margin of greater than 10% over the 2nd most votes, and one of those was for 2K NBA. Activision performed well in the survey, its two biggest games each received at least 37%. Activision Blizzard, Inc. has a good brand awareness for World of Warcraft and Call of Duty. However, World of Warcraft had the second highest margin, 44%, over the next closest producer. Since Call of Duty is based on the titles correctly correlated to its game publisher, the survey indicated a margin of 9% over the next closest publisher. It showed that many people associate sports games with Electronic Arts and first-person shooters with Activision Blizzard, Inc. It was also evident, by the portion of the graph below, that there are some game titles that people associate with a certain game publisher, which is an issue that those publishers would need to overcome. In the case of Activision Blizzard, Inc., which was not correctly associated as the producer of Guitar Hero by a narrow margin of 2%, it has taken the necessary steps and has closed the doors on its music-based games division.
M a r ke t i n g S t r a t e g i e s
Brand Name Recognition in Video Game Industry

80%
36%
34% 31%
38%
31%
40%
20%
0%
Guitar Hero
Home Front
Grand Theft Auto Game Titles THQ Take-Two Interactive
Battlefield
WWE
Activision Blizzard Electronic Arts
* Game titles with percentages in orange were correctly associated with its producer.
Refer to Appendix B for the Statistical Data of this survey. Such as the sample size (n=100), range (6-74), etc. 15
Percentage of Votes
60%
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
An analysis of the industry shows the most popular platforms being utilized by todays gamers are consoles, computers, hand-held devices and mobile gaming. Activision Publishing, Inc. is a leading international publisher of interactive software products and downloadable content. Activision develops and publishes games on the various platforms through internally developed franchises and license agreements (Activision Blizzard, Inc, 2011 p. 3).
Activision 2010 Game Releases by Platforms (single or multiple)
Single Platforms 23% Multiple Platforms 77%
Platform Compatibility
(Activision Blizzard Inc., 2011) Activision Blizzard is always concerned about producing products that are compatible with popular platforms. At the same time, it wants to ensure that its product is compatible on various platforms as well. According to Activisions website, it produced at least 26 different games during 2010, 20 of which have the ability to be played on multiple platforms (Activision Blizzard Inc., 2011). Activision currently makes 20 games compatible with multiple platforms in order to increase sales by extending its business to different market segments. Call of Duty: Black Ops is its most platform varied product that it published in 2010 (Call of Duty: Black Ops, 2010).
PC
Nintendo DS
PS3 Call of Duty: Black Ops
Wii
Xbox 360
(Call of Duty: Black Ops, 2010) 16
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Activision has suffered net losses in certain divisions that were losing consumer appeal within the video game market. Activision is restructuring its company by discontinuing all music-based games and closing the doors on those business units. The company plans on letting go 500 employees, which were in the music-based games division. It is predicting between $35 and $50 million in net pre-tax charges due to this restructure. Whether you consider the net losses in revenue due to musicbased games or Activision being sued because of implications with these games, both negatively contribute to this particular business unit of Activision Blizzard, Inc. (Activision Blizzard Inc., 2011)
Employees
Net Pre-Tax Charges

(Haywook, 2006)
500 Employees $35$50
million Lawsuits against Activision is not something new, nor is going to stop in the near future. As is evident by the current issue that is facing Activision and its two former employees Jason West and Vince Zampella, which started when Activision terminated West and Zampellas employment on March 1st 2010. Following the termination, both employees filed a complaint two days later against Activision. (Activision Blizzard Inc., 2011)
A California judge has ruled that the lawsuit filed by Activision against former Infinity Ward studio heads Vince Zampella and Jason West can move forward. EA originally filed to dismiss the case after Activision claimed that its rival colluded with West and Zampella while they were still under contract, but California Superior Court Judge Elihu Berle decided today that there was enough evidence for the case to go on towards trial. (Schramm, 2011) 18
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Also, Activision currently makes games for console systems that are quickly becoming obsolete. Looking through Activisions reports, it is clear that Sonys Playstation 2 console is no longer wielding the revenue that it once did. Revenues for this console platform saw a net loss of $139 million from 2009 to 2010, or an 80% decrease. Activision has started to take action in response to the obsolete technology of the Playstation 2, which can be used to explain part of that decrease in revenue. It has started to weed out games for this system by only releasing 3 games for it in 2010, which also had an impact on the decline from the previous year. In 2009, Activision released 13 games for the Playstation 2 console. Although creating games for obsolete platforms has been an issue Activision is already overcoming, there are still more issues that face the company.
2010 Releases
GAAP Net Revenues: $174
(VGChartz, n.d, pgs. 2-5)
80% Decrease
2010 Releases
GAAP Net Revenues: $35
(VGChartz, n.d, p. 1) (GameSpot, n.d.)
19
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
There are many issues that face Activision Blizzard, Inc. in todays interactive entertainment software market. The key strategic issues that will be discussed are what research deems the most important. Due to the fact its main focus areas include the Call of Duty franchise, Project Beachhead, and downloadable content, Activision Blizzard, Inc. shows an immense lack of portfolio diversification in its products and software (Activision Blizzard, Inc., 2011). Research connects Activisions problem of franchise diversification with its lack of presence in casual and social games, which in turn denotes the companys other issue in charging for online game play (Brightman, 2010). Activision has consistently insisted on never charging its customers for online game play; however, with the development costs of Project Beachhead, research indicates Activision may no longer have free game play.
Competitive Dimensions
Key Issues
Recommendations
Game Genres
Franchise Diversification Expansion Lacking Presence in Casual and Social Games Development Cost of Project Beachhead Subscription Fees of Beachhead
O ve r v i e w
Seasonality
20
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
% of Activision Revenue 2010
Other 38% CoD and WoW 62% (Activision Blizzard Inc., 2011)
Activision has a history of generating its primary revenue off of a small number of franchises with proven popularity. One outrageous example is how Call of Duty (CoD) and World of Warcraft (WoW) accounted for approximately 62% of the consolidated revenues in 2010, with both contributing even more to the operating income (Activision Blizzard Inc., 2011). If in 2010 one of these games had failed to make as much money as it did, Activision would not have had as high of a net income for the year. Of the at least 26 games Activision made, only 2 made over half of the sales revenue.
F r a n c h i s e D ive r s i f i c a t i o n
This problem is not only affecting Activision, but it is also affecting the whole industry. According to The NPD Group, the top 10 titles accounted for 23% of the sales in the U.S. video game industry in 2010, as compared to 21% in 2009 (Activision Blizzard Inc., 2011). The amount of revenue created from the top ten titles is continuously increasing, showing that the same genres and games are making the most profit year in and year out. The only games Activision has in the top games are Call of Duty and World of Warcraft.
Top 10 Titles % of Industry Sales

24% 23% 22% 21% 20% 2009 2010
(Activision Blizzard Inc., 2011).
21
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Another problem with making a majority of the revenue off the same titles year after year is the possibility of them not being popular. Activision recently ran into this problem with Guitar Hero, which was once the top selling title for Activision. It was shut down in early 2011 because there was not enough revenue coming from the game (Activision Blizzard Inc., 2011). What if Call of Duty went the same way as Guitar Hero? DFC Intelligence analyst David Cole says there is a very real danger of milking a franchise and causing quality to decline, which can result in turning consumers off (Senior, 2011). This is exactly what happened to Guitar Hero, by making too many games too fast, the market died with the game.
Call of Duty has been proven to be a very well performing game franchise over the years, but another problem in focusing on just one main franchise would be the competition. If Activision makes a bad Call of Duty game, people could move to a similar game that is better. There is no shortage of competition either- EAs Battlefield series and THQs Homefront are easy substitutes (Senior, 2011). The susceptibility to poor performance and competition is a big problem with focusing most efforts into only a few games.
Activision: Call of Duty

Substitutable Games: First-Person Shooters
(Haywook, 2006)
THQ: Homefront
EA: Battlefield
22
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Based on this research, it is evident that Activision Blizzard, Inc. does well at managing the release dates of its profitable franchises; however, research also indicates that it focuses on fewer game titles and fewer platforms in comparison to its major competitors. Although this strategy has been successful for the company in the past, Activisions lack of product and platform diversification could be an issue for its performance in the future. As previously stated, only two of Activision Blizzard, Inc. franchises made up 62% of its companys total revenue (Activision Blizzard, Inc., 2011). If its current market of consumers loses interest in these popular franchised games, Activision will have trouble diluting profit losses.
(Werewolf News, 2009)
(Windows 7 Themes.net, 2011)
23
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
The biggest area of growth in the coming years is likely to be games for tablets and smartphones. In that market, EA has a huge position, while Activision Blizzard, Inc. isnt a player (Takahashi, 2011). It is evident that Activision is lacking presence in the causal and social gaming category. Although Activision is looking to derive a majority of its revenue from digital sales, the company does not feel the pressure to invest in social gaming like its competitors have done. Activision CEO Robert Kotick dismissed social gaming during an earnings call with analysts in 2010, calling the category "characterized by unproven business models and a lot of clutter (Oran, 2010). According to gaming experts at the Tuck School of Businesss third annual Media, Sports and Entertainment Symposium, Approximately 50 million monthly gamers generate annual revenues of over a billion dollars for the industryThe social gaming industry is projected to expand 30 percent this year and social gaming companies will need to find ways to convert such growth into increasing profits (The Dartmouth Staff, 2011). Games on social networks became a billion dollar business is 2010, enabling the markets big developers to secure significant investments and pursue sizable exits. Now that Zynga has clearly established itself as the 800 pound gorilla, EA/Playfish are bringing more IP to the market (Smith, 2011).
Casual and Social Gaming
(Parks Associates, 2011)
According to the research firm Parks Associates, social gaming is on track to become a $5 billion industry in the next five years.
Activisions leading competitor Electronic Arts is currently dominating the casual gaming and mobile gaming platform. They hold the number one position in casual and mobile gaming and second in social gaming, right behind Zynga. The global social gaming market is expected to grow from $1 billion in 2009 ($600 million from the US) to just over $3 billion in 2012, representing a compounded annual growth rate (CAGR) of 45% (Zacks Investment Research, 2011).
24
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Activision Blizzard, Inc. is introducing a new segment to the company dedicated to expanding the Call of Duty franchise by creating online content. "We have long believed that Activision would begin to offer a premium multiplayer experience for its Call of Duty brand, beginning early in 2011. With the company's recent announcement of Project Beachhead, it acknowledged that such a premium service is in the works, but details about pricing were not provided (Pachter, 2011). Currently, Activision insiders are the only individuals with any detailed information on this wholly owned studio. Activision Blizzard, Inc. Chief Financial Officer Thomas Tippl stated during the 2010 results conference call, We're not yet ready to talk about the details of Beachhead, but when we are, we are going to present in detail what the content is, what the services are, et cetera. So you just have to stay tuned on that"(GoNintendo, 2011). Activision is taking a risk with investing a majority of its time and efforts into a single franchise.
Cost of Project Beachhead
(Activision , 2011)
According to Activision Blizzard, Inc.s Fourth Quarter Corporate Citizenship presentation the top four out of seven main focuses for the company in the year 2011 are all Call of Duty related (Activision , 2011). If for any reason the franchise should collapse or a new hit-driven game hits the market, the company would face major tribulations. It appears Activision may be setting up Beachhead to be a loss leader. Providing the service for free *will+ create a more formidable barrier to entry by its competitors; we [Wedbush Morgan Securities] think it is possible that Project Beachhead will incorporate must have features that will serve to drive ever increasing sales of each Call of Duty installment (Pachter, 2011). Historically, the company has promised never to charge users to play multiplayer. Activision believes it can sustain sales of Call of Duty at the 20 million-unit level annually. As of right now, there is also no information about which platforms it is going to support. With the uncertainty of Project Beachhead, the key issue is how Activision is going to make the new development studio profitable and how this is going to affect the company and industry as a whole.
25
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Based on Activision Blizzard, Inc.s franchise diversification, lack of presence in casual and social games, and increasing development costs of Project Beachhead, the two recommendations we posed are for the company to expand and charge customers for Beachhead. We believe that there are two companies that will act as positive reinforcements to Activisions lack of franchise diversification and presence in casual and social games. Recommendations for Activision Blizzard, Inc. in 2011 to purchase Take-Two Interactive Games, and in 2012 develop a strategic alliance with social gaming company, Zynga. As for recommendations for improving the profitability of Project Beachhead, through much research, we recommend for Activision Blizzard, Inc. to start charging its customers a subscription fee.
Key Issues
Recommendations
Game Genres
Franchise Diversification
Seasonality
O ve r v i e w
Expansion
Lacking Presence in Casual and Social Games Development Cost of Project Beachhead Subscription Fees for Beachhead
26
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
One of the problems with how Activision currently operates is how few games it has in different genres and how few top selling games it creates. The way to get around this problem is to purchase or buyout Take-Two Interactive. Take-Two has made many high profit games over the years with the top being the Grand Theft Auto franchise and the sports games made by 2K. (Sinclair, 2011). With the addition of these successful games, Activision would be entering into fields that have never been a great success for the company. This will increase Activisions level of competition with industry competitors who have made similar games that cannot be replicated well enough. Purchasing Take-Two Interactive would make it easier for Activision to acquire already successful franchises, rather then spend more money to open themselves up to this market of gamers.
E x p a n s i o n : Ta ke - Two
Activision Blizzard, Inc.
Video Game Powerhouse

Take-Two Interactive Software, Inc.
27
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Grand Theft Auto is in a class of its own when it comes to game genres. Since its creation in 1997, Grand Theft Auto has been one of the best-selling titles ever created. When Grand Theft Auto VI came out in 2008, the first day sales totaled over 3.6 million copies, making over $310 million globally for Take-Two, breaking the record for first day selling numbers at that time. The game had sold more than Halo 3 and even movies such as Pirates of the Caribbean and Spiderman (Vella, 2008). The game that took over Grand Theft Auto VIs record for first day sales was Call of Duty: Modern Warfare 2, showing what a profitable combination Activision would have if it was able to purchase Take-Two (Activision Blizzard Inc., 2011). The next installment to the franchise, Grand Theft Auto V, is expected to make over $750 million when it releases in 2012 (Pakinkis, 2010).
Call of Duty
Grand Theft Auto
Two huge successful franchises
Activision has had troubles in the past few years trying to make a game that is comparable to Grand Theft Auto. Activisions recent attempt was with its True Crime series, which was announced to be discontinued earlier in 2011. CEO of Activision Publishing, Eric Hirshberg said, True Crimes development was not going to lead to a title at or near the top of the competitive open-world genre. To be blunt, it just was not good enough (Gilbert, 2011). It was a fact; True Crime was never going to be able to compete against the major titles in the industry already. If Activision purchases Take-Two and starts publishing Grand Theft Auto, there would be no need to make anything new because they would have the best title in the genre to date.
Grand Theft Autos profitability
True Crimes profitability

28
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Another facet to Take-Two that would help Activision make more money would be 2K Sports. 2K Sports is a brand within Take-Two that makes games such as NBA 2K11, MLB 2K11, NHL 2K11, and Top Spin Golf. As of 2008, the NBA 2K franchise had sold over 6 million units, the MLB 2K franchise had sold over 5.5 million units, and the NHL 2K franchise had sold over 2.5 million units (Androvich, 2008). Since then, 2K has come out with a title each year, but none have been more successful than NBA 2K11. NBA 2K11 had sold over 4 million units by February of 2011 when it was released in October of 2010. This performance has been the fastest selling title for both the franchise and the publisher (Magrino, 2011). With the continuing growth and popularity of the 2K Sports titles, it is possible that it could eventually over take EA Sports for the best sports games.
NBA 2K
MLB 2K
2K Sports Games
NHL 2K
Top Spin Golf

The growing success of 2K Sports is another reason for Activision to buy TakeTwo. Activision has never released any kind of sports genre games since it was created. This is bad seeing as sports games make up such a large portion of the profitable market today. Since sports games made up 19.6% of the revenues in 2009, not being involved in this section is out of the question (Entertainment Software Association, 2010). With opportunities in 2K Sports to make games in basketball, baseball, and hockey, it would be easy to make these games compete with EA and its sports division.
29
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Activision should purchase Take-Two Interactive for $1.8 billion in an all cash deal. The acquisition will take place in 2011, starting by consolidating the two companies income statements and balance sheets. The problem using cash to purchase Take-Two is that Activision will have to acquire debt in order to balance the balance sheet. The debt will be around $1.2 billion, which the company will pay back through a loan, amortized for ten years with annual principal payments plus interest of 6.5%. On the balance sheet, goodwill increases to approximately $9 billion due to the 24% premium paid to Take-Twos stockholders. Incurring this debt is a hard move to make, but seeing as this is the only long-term liability Activision will have, the purchase will pay off when Activision benefits from the higher profits in the future. At the end of the first year, revenues will be around $4.5 billion and net income will be around negative $53 million. The reason Activision will have negative net income in 2011 is not only due to the purchase of Take-Two with cash, but also because costs of goods sold is about 66% of net revenues. Since the merger will most likely take place later in this year, Activision Blizzard, Inc. will not have enough time to work together to decrease these costs, but will work to decrease that percentage in the next five years by reducing product costs.
I m p a c t o f Ta ke - Two M e r g e r
2011 Major Impacts of Take-Two Merger

Purchase Take-Two for $1.8 Billion
Issue $1.2 Billion Worth of Debt
Add $9 Billion to Goodwill
Net Revenues of $4.5 Billion
Net Income of -$53 million

(Refer to Appendices C and D for condensed financial statements) 30
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
In 2012, the recommendation of buying Take-Two will account for most of the 30% increase of net revenues. The net revenues will increase to around $5.8 billion and net income will increase to around $254 million. This is a major increase from the year before with a net profit margin of 40%. One of the reasons for this increase is all the product costs that the company has will start to decrease as a percentage of sales due to cutting unnecessary costs which are duplicated from the two companies. The biggest impact on the balance sheet during this would be the payment on the long term debt and addition to retained earnings.
I m p a c t o f Ta ke - Two M e r g e r
2011: $4.5 Billion Net Revenues
30% Sales Increase
2012: $5.8 Billion Net Revenues
$254 Million Net Income
$5.8 Billion Net Revenues
40% Net Profit Margin
From 2013-2015, buying Take-Two will prove to be a really profitable decision. Net revenues will increase by 1,000 basis points in 2013 and 400 basis points each year after, making net income increase to around $811 million by 2015. This is an increase in net income of over $850 million dollars throughout the 5 years. Reducing costs of goods sold is one of the main reasons for why they were able to make so much money. Costs of goods sold decreased by 1,400 basis points as a percentage of sales over the five years because Activision was able to get rid of costs, as well as use its experience to help make new games cheaper. (Refer to Appendices C and D for condensed financial statements)
Costs of Goods Sold Decreases 1400 Basis Points

31
Increase in Net Income of Over $800 Billion
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Activision Blizzard Incorporated needs a strong entrance into the social gaming platform. According to The Wall Street Journal, *The+ social gaming company Zynga could be worth as much as $7 to 9 billion (Wingfield, Ante, & Das, 2011). Rather than buying out the company, Activision Blizzard should create a ten year strategic alliance or partnership with Zynga. Second Shares stated, This year Zynga should generate about $525mm in revenue. In 2012, we expect Zynga will generate more than $1B in revenue (Loukerner, 2010). Social gaming is not only growing rapidly but highly profitable. Companies can earn revenues from membership fees, advertising, and the sale of virtual goods. Virtual goods are by far the largest source of revenue, with Piper Jaffray predicting $6 billion in virtual good sales by 2013 (Loukerner, 2010). The industry has seen success in large infrastructure companies acquiring independent developers.
(See Exhibit to the Right)
Expansion: Zynga Alliance
Creating a strategic alliance with Zynga will enable Activision to keep development costs low, while increasing presence in social gaming. A partnership between these top two companies could potentially result in the development of social networking games based on Activisions major franchises. Social gaming companies like Zynga benefit from brands paying to be in the games (Loukerner, 2010). Zynga generated about $400 million in profit last year on approximately $850 million in revenue (Wingfield, Ante, & Das, 2011).
(Loukerner, 2010)
32
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
A strategic alliance created between Activision and Zynga appears to be the key in shifting towards casual and social gaming. Referring to appendix C, acquiring the strategic partnership with Zynga contributed to the growth of generated revenue for the years 2012- 2015. Activision sustained revenue growth throughout the following four years due to the acquisition of Take Two Interactive, subscription fee from Project Beachhead, and its partnership with Zynga. Research indicates the alliance with Zynga would increase brand name recognition and continue to generate revenue. According to The Wall Street Journal, Zynga generated about $400 million in profit last year on approximately $850 million in revenue and the company is worth approximately 7-9 billion dollars (Wingfield, Ante, & Das, 2011). Zynga is the dominant social gaming company worldwide. Zynga has 237mm active users per month and 67mm active users per day (Loukerner, 2010). The strong presence that Zynga has through social media drives consumers to the games. Social games based on Activision titles can only have the same effect, therefore reaching a larger consumer base. As seen in the chart, Zynga clearly dominates over every other social game developer. It is evident that the alliance will not only gain recognition for Activision in the social gaming category, but it is also likely for the company to surpass its main competitor, Electronic Arts.
Impact of Zynga Alliance
(Loukerner, 2010)
Partnering with Zynga and developing social games is going to call for advertising expenses. Referring to appendix C, sales and marketing expenses will increase 15% each year related to the advertising of social games. This impact directly correlates with Activisions competitive strategy of continuing to improve profitability.
We continually strive to manage risk and increase our operating leverage and efficiency with the goal of increased profitability. We believe the key factors affecting our future profitability will be the success of our core properties, proven franchises and genres, cost discipline, and our ability to leverage the continued growth of online and digital revenue opportunities (Activision, 2011).
33
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Activision anticipates Beachhead will do for the Call of Duty franchise what direct digital distribution did for Blizzard games. Blizzard sells its main titles through the online Blizzard store. Since the type of pricing that will be associated with Project Beachhead has yet to be disclosed, research has provided possible options for the company. The two main options for how payment could work is either exclusive content and weapons made available individually for a set price or having a subscription fee that would grant access to all of the available content.
(Tan, 2011)
S u b s c r i p t i o n Fe e s f o r Beachhead
Map Packs
Project Beachhead Subscription
Weapons
Personal Performance Statistics
Wedbush Morgan analyst Michael Pachter stated some ways that Activision could go in terms of pricing. "The exclusive content could be pay as you go, or monthlyfor $5 a month you get unlimited weapons and all the map packs we bring out for Modern Warfare in perpetuity (Pachter, 2011). Consumers could then, for example, purchase map packs separately pay as you go, or for $60 per year (as much as the retail game itself) get all of the unlimited weapons and map packs available.
Beachhead also creates an opportunity for quarterly subscriptions. The pricing solution that would create the highest profitability would be a quarterly subscription fee of $14.95 that provides users with limited downloadable content. Quarterly subscriptions would work best when dealing with seasonality. The seasonality of Activision Blizzard Incorporated is the highest in its fourth quarter. Referring to appendix A, the companys net revenues grew 167% from the third quarter to the fourth quarter in 2010.
34
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
I m p a c t o f Fe e s f o r B e a c h h e a d
The recommendation for how to make Project Beachhead a profitable venture for Activision is to make a subscription fee for all the users. The fee will be a quarterly fee of $14.95, which gives a person access to the server where they can interact with their friends and get downloadable content. Users will have to pay extra for most content, but there will be a certain amount of free downloadable fun for anyone who buys a subscription. The implementation of the recommendation should be done in mid-2012 because of the purchase of Take-Two in late 2011. It is still very uncertain as to how profitable Beachhead will be because there is very little information on the service in the public right now. Since its main target market is Call of Duty players, it is very likely it will make profit. In the first year, a substantial amount of gamers will use Beachhead and pay for its services because of the mass appeal that Call of Duty has in the gaming world. Project Beachhead will be a part of the 10% increase in net revenues during the fiscal year of 2012. The main cost that Activision will incur by making Beachhead will be product cost, which will be at 14% of sales at the time. Beachhead will be a major portion of those costs. Beachhead will affect the balance sheet in that it will be contributing to retained earnings through increasing net income.
The impact of Beachhead directly correlates with Activisions competitive strategy of focusing on delivery of digital content and online services.
We continue to shift towards digital delivery of content and to establish and develop direct and long-term relationships with our gamers. We will also continue to support, maintain and enhance World of Warcraft and Call of Duty online communities (Activision, 2011).
$14.45 a quarter per player
Appeal to Call of Duty gamers
Beachhead Profitability
Money for downloadable content
Help increase revenues by 10% its first year
35
36
Introduction
Current Strategy
Key Issues
Recommendations
Conclusion
Activision Blizzard, Inc. has seen revenue growth since the merger with Blizzard Entertainment in 2008. Activisions current strategy confirms its focus on franchises, technologies, and digital content that have proven to be successful in the past. Research indicates that in order to continue economic growth, Activision should be aware of the industrys competitive dimensions, and the potential issues it may face. Its franchise diversification, presence in the social and casual gaming market, and its concentrated time, effort, and funds into Project Beachhead to be its three major issues. Through our analysis of Activision Blizzard, Inc. the recommendations in this report will not only provide the company with revenue growth for the next five years, they also act as stabilizers to ensure future market success for the company.
Conclusion
Key Issues
Recommendations
Game Genres
Franchise Diversification Expansion Lacking Presence in Casual and Social Games Development Cost of Project Beachhead Subscription Fees of Beachhead
Seasonality
37
38
Appendix A: Net Revenues by Quarter
Activision Blizzard, Inc.* Quarter 3 Quarter 4 2010 397,000 1,061,000

(Activision Blizzard, Inc., 2010)
2009 411,000 1,232,000

2008 413,000 1,318,000

Electronic Arts, Inc.* Quarter 3 Quarter 4 2010 613,000 1,053,000

(Electronic Arts, Inc., 2010)
Appendix A
2009 788,000 1,243,000

2008 894,000 1,654,000

Take-Two Interactive Software, Inc.* 2010 2009 Quarter 3 194,381 50,621 Quarter 4 334,259 360,364
(Take-Two Interactive Software, Inc., 2010) (Take-Two Interactive Software, Inc., 2009)
2008 433,836 256,810

(Take-Two Interactive Software, Inc., 2008)
THQ Inc.* Quarter 3 Quarter 4
2010 77,053 314,589

(THQ Inc., 2010)
2009 101,290 356,678

(THQ Inc., 2009)
2008 164,816 357,310

(THQ Inc., 2008)
*(amounts expressed in thousands)
39
40
Appendix B: Primary Research Survey

Below are the questions our group asked in the survey that we posted to SurveyMonkey.com. Q1: Who makes Bioshock the video game? A) THQ Inc. B) Activision Blizzard Inc. C) Electronic Arts D) Take-Two Interactive Q2: Who publishes the video game franchise Call of Duty? A) Activision Blizzard Inc. B) Electronic Arts C) Take-Two Interactive D) THQ Inc. Q3: Who publishes the video game franchise Madden NFL? A) Activision Blizzard Inc. B) THQ Inc. C) Take-Two Interactive D) Electronic Arts Q4: Who publishes the video game franchise World of Warcraft? A) Electronic Arts B) Activision Blizzard Inc. C) THQ Inc. D) Take-Two Interactive Q6: Who makes the WWE video game? A) Take-Two Interactive B) Electronic Arts C) THQ Inc. D) Take-Two Interactive
Appendix B
Q7: Who makes the Battlefield franchise video games? A) THQ Inc. B) Activision Blizzard Inc. C) Take-Two Interactive D) Electronic Arts Q8: Who makes the Grand Theft Auto video game franchise? A) THQ Inc. B) Activision Blizzard Inc. C) Electronic Arts D) Take-Two Interactive Q9: Who the Homefront video game? A) Electronic Arts B) Activision Blizzard Inc. C) THQ Inc. D) Take-Two Interactive
Q5: Who publishes the 2K NBA basketball video games? A) Take-Two Interactive B) THQ Inc. C) Electronic Arts D) Activision Blizzard Inc.
Q10: Who makes the Guitar Hero franchise video games? A) THQ Inc. B) Activision Blizzard Inc. C) Take-Two Interactive D) Electronic Arts
41
Appendix B: Primary Research Survey Statistical Data

Mean=27.03 Median=23 Mode=31 Standard Error=1.37
Standard Deviation=13.68 Sample Variance=187.03 Range= 69 Min=5
Max=74
Ex: Normal Distribution for World of Warcraft
Appendix B continued
P= .9830
27.03
Z=2.12 56
42
43
Appendix C: GAAP Net Revenue Growth by Platforms
Appendix C
Breakdown of the Console Platforms by Company
*All net revenues from the GAAP are in millions.
44
45
Appendix D: Forecasted Income Statements
Net revenues Cost of Goods Sold Gross Income Costs and Expenses Product Development Sales and marketing General and administrative Total Costs and Expenses Operating Income Investment and other net income Interest Expense Income before income taxes Tax Expense (benefit) Net Income (loss)
2011 $4,448,374,820 2,943,539,000 1,504,835,820 711,523,488 714,848,459 234,214,894 1,660,586,841 (155,751,021) 23,000,000 70,839,117 (61,911,904) (9,286,786) $(52,625,118)
Appendix D
2012 $5,782,887,266 3,469,732,360 2,313,154,906 809,604,217 867,433,090 289,144,363 1,966,181,670 346,973,236 29,900,000 77,664,866 299,208,370 44,881,255 $254,327,114
46

2013 $6,361,175,993 3,562,258,556 2,798,917,437 890,564,639 954,176,399 318,058,800 2,162,799,837 636,117,599 32,890,000 66,861,319 602,146,280 90,321,942 $511,824,338
Appendix D continued
2014 $6,615,623,032 3,440,123,977 3,175,499,056 926,187,225 992,343,455 330,781,152 2,249,311,831 926,187,225 34,205,600 56,057,772 904,335,053 135,650,258 $768,684,795
47

2015 $6,880,247,954 3,577,728,936 3,302,519,018 963,234,714 1,032,037,193 344,012,398 2,339,284,304 963,234,714 35,573,824 45,254,225 953,554,313 143,033,147 $810,521,166
Appendix D continued
48
49
Appendix E: Forecasted Balance Sheet

Assets Cash and cash equivalents Short-term investments Accounts receivable Inventory Software development Intellectual property licenses Deferred income taxes, net Other current assets Total Current Assets: Fixed Assets: Long-term investments Software development Intellectual property licenses Property and equipment Other assets Intangible assets Trademark and trade names Goodwill Total Fixed Assets: Total Assets: Liabilities and Shareholders Equity Current Liabilities: Accounts payable Deferred revenues Accrued expenses and other liabilities Take-Two liabilities of discontinued operations Long-term principal payment Total Current Liabilities: Other Liabilities: Deferred income taxes, net Other liabilities Long-term liabilities Income taxes payable Take-Two liabilities of discontinued operations, net of current portion Total Liabilities Shareholders Equity: Common Stock and Additional paid-in capital Retained earnings Less: Treasury Stock Accumulated other comprehensive income (loss) Total Shareholders Equity: Total Liabilities and Shareholders Equity: External funding needed (long-term) 2011 $1,309,118,000 696,000,000 723,845,000 140,592,000 301,763,000 45,000,000 640,000,000 346,976,000 4,203,294,000 23,000,000 148,898,000 28,000,000 190,326,000 25,680,000 179,142,000 433,000,000 9,012,469,000 10,040,515,000 $14,243,809,000
Appendix E
$411,852,000 1,736,412,000 985,498,000 3,799,000 3,137,561,000 121,059,000 184,000,000 1,194,844,097 29,381,515 3,118,000 4,669,963,612
12,353,000,000 (572,154,612) 11,780,845,388 (2,194,000,000) (13,000,000) 9,573,845,388 $14,243,809,000 -
50

Assets Cash and cash equivalents Short-term investments Accounts receivable Inventory Software development Intellectual property licenses Deferred income taxes, net Other current assets Total Current Assets: Fixed Assets: Long-term investments Software development Intellectual property licenses Property and equipment Other assets Intangible assets Trademark and trade names Goodwill Total Fixed Assets: Total Assets: 2012 $1,445,721,817 696,000,000 925,261,963 140,592,000 404,802,109 57,828,873 640,000,000 346,976,000 4,657,182,760 23,000,000 173,486,618 36,400,000 190,326,000 33,384,000 179,142,000 433,000,000 9,012,469,000 10,081,207,618 $14,738,390,378
Appendix E continued
Liabilities and Shareholders Equity Current Liabilities: Accounts payable Deferred revenues Accrued expenses and other liabilities Take-Two liabilities of discontinued operations Long-term principal payment Total Current Liabilities: Other Liabilities: Deferred income taxes, net Other liabilities Long-term liabilities Income taxes payable Take-Two liabilities of discontinued operations, net of current portion Total Liabilities Shareholders Equity: Common Stock and Additional paid-in capital Retained earnings
$535,407,600 1,736,412,000 1,214,406,326 166,208,418 3,652,434,344
157,376,700 239,200,000 1,028,635,679 44,881,255

5,122,527,978
Less: Treasury Stock Accumulated other comprehensive income (loss) Total Shareholders Equity: Total Liabilities and Shareholders Equity: External funding needed (long-term)
12,353,000,000 (317,827,497) 12,035,172,503 (2,194,000,000) (13,000,000) 9,828,172,503 $14,950,700,481 (212,310,103)
51

Assets Current Assets: Cash and cash equivalents Short-term investments Accounts receivable Inventory Software development Intellectual property licenses Deferred income taxes, net Other current assets Total Current Assets: Fixed Assets: Long-term investments Software development Intellectual property licenses Property and equipment Other assets Intangible assets Trademark and trade names Goodwill Total Fixed Assets: Total Assets: Liabilities and Shareholders Equity Current Liabilities: Accounts payable Deferred revenues Accrued expenses and other liabilities Take-Two liabilities of discontinued operations Long-term principal payment Total Current Liabilities: Other Liabilities: Deferred income taxes, net Other liabilities Long-term liabilities Income taxes payable Take-Two liabilities of discontinued operations, net of current portion Total Liabilities Shareholders Equity: Common Stock and Additional paid-in capital Retained earnings Less: Treasury Stock Accumulated other comprehensive income (loss) Total Shareholders Equity: Total Liabilities and Shareholders Equity: External funding needed (long-term) 2013 $1,590,293,998 696,000,000 1,017,788,159 140,592,000 445,282,319 64,350,000 640,000,000 346,976,000 4,941,282,476 23,000,000 212,924,140 40,040,000 190,326,000 36,722,400 179,142,000 433,000,000 9,012,469,000 10,127,623,540 $15,068,906,016
$588,948,360 1,736,412,000 1,335,846,958 166,208,418 3,827,415,736 173,114,370 263,120,000 862,427,261 90,321,942 5,216,399,309
12,353,000,000 193,996,841 12,546,996,841 (2,194,000,000) (13,000,000) 10,339,996,841 $15,556,396,150 (487,490,134)
52

$612,506,294 1,736,412,000 1,389,280,837 166,208,418 3,904,407,549 180,038,945 273,644,800 696,218,843 135,650,258 5,189,960,395
12,353,000,000 962,681,635 13,315,681,635 (2,194,000,000) (13,000,000) 11,108,681,635 $16,298,642,030 (1,107,751,652)
53

$637,006,546 1,736,412,000 1,444,852,070 166,208,418 3,984,479,034 187,240,503 284,590,592 530,010,425 143,033,147
5,129,353,701
12,353,000,000 1,773,202,801 14,126,202,801 (2,194,000,000) (13,000,000) 11,919,202,801 $17,048,556,502 (1,716,490,709)
54
55
Appendix F: Ratios
2011 2012 2013 2014 2015 0.00 0.30 0.10 0.04 0.04 33.83% 40.00% 44.00% 48.00 48.00 % % 14.00 14.00 -3.50% 6.00% 10.00% % % 11.62 11.78 -1.18% 4.40% 8.05% % %
Net sales growth rate Margins Gross Profit Margin Operating profit(loss)margin Net profit (loss) margin Returns Return on assets Return on equity Asset Management Indicators Inventory turnover Days' sales in inventory Accounts receivable turnover Days'sales outstanding Fixed assets turnover Total assets turnover Financial Management Indicators Liquidity indicators ( short-term) Current ratio Quick ratio Solvency indicators ( Long-term) Debt ratio Debt/equity Leverage
Appendix F
-0.37% 1.73% 3.40% 5.06% 5.29% -0.55% 2.59% 4.95% 6.92% 6.80%
20.94 24.68 N/A 6.15 N/A 6.25
25.34 24.47 25.45 N/A 6.25 N/A 6.25 N/A 6.25
59.39 58.40 23.37 30.38 0.31 0.39
58.40 58.40 58.40 33.42 34.76 36.15 0.42 0.44 0.45
1.34 1.29
1.28 1.24
1.29 1.25
1.29 1.26
1.30 1.26
0.33 0.49 1.49
0.35 0.52 1.50
0.35 0.50 1.46
0.34 0.47 1.37
0.33 0.43 1.29
56
57
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Merger Case Analysis

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Team # Student 1 Student 2 Student 3 Student 4 Student 5

Subject: Analysis of Activision Blizzard, Inc.

THE ACTIVE VISION: THE DEMAND TO EXPAND

Prepared by: Team # Student 1 Student 2 Student 3 Student 4 Student 5

ATVI TTWO ERTS

Digital Distribution Marketing Strategy Platform Compatibility

Action Games 20%

Family Entertainment 15%

(Entertainment Software Association, 2010)

(THQ UFC Undisputed 2010 for Xbox 360, 2011)

(Madden 2011 to Hit iPads, 2010)

50 Percentage of Growth Rate

Percentage of Growth Rate

100 200 300 Percentage of Growth Rate

One, one, and two

Grand Theft Auto

Sid Meiers Civiliztion

Activision Blizzard, Inc. ROI

Brand Name Recognition in Video Game Industry

Grand Theft Auto Game Titles THQ Take-Two Interactive

Activision Blizzard Electronic Arts

Activision 2010 Game Releases by Platforms (single or multiple)

Single Platforms 23% Multiple Platforms 77%

PS3 Call of Duty: Black Ops

(Call of Duty: Black Ops, 2010) 16

Net Pre-Tax Charges

500 Employees $35$50

GAAP Net Revenues: $174

(VGChartz, n.d, pgs. 2-5)

GAAP Net Revenues: $35

(VGChartz, n.d, p. 1) (GameSpot, n.d.)

Digital Distribution Marketing Strategy Platform Compatibility

% of Activision Revenue 2010

Top 10 Titles % of Industry Sales

(Activision Blizzard Inc., 2011).

Activision: Call of Duty

(Werewolf News, 2009)

(Windows 7 Themes.net, 2011)

Casual and Social Gaming

(Parks Associates, 2011)

Cost of Project Beachhead

Digital Distribution Marketing Strategy Platform Compatibility

Activision Blizzard, Inc.

Video Game Powerhouse

Grand Theft Auto

Two huge successful franchises

Grand Theft Autos profitability

True Crimes profitability

Top Spin Golf

2011 Major Impacts of Take-Two Merger

Issue $1.2 Billion Worth of Debt

Add $9 Billion to Goodwill

Net Revenues of $4.5 Billion

Net Income of -$53 million

2011: $4.5 Billion Net Revenues

30% Sales Increase

2012: $5.8 Billion Net Revenues

$254 Million Net Income

$5.8 Billion Net Revenues

40% Net Profit Margin

Costs of Goods Sold Decreases 1400 Basis Points

Increase in Net Income of Over $800 Billion