Blizzard Activision Is Gaming's First Monopoly

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No industry will dominate the 21st century quite like entertainment.  As automation reduces the hours worked per week by the world's population while technology makes it possible to do more in less time, the rise in leisure time will facilitate a huge amount of spending through an economy increasingly devoted to reducing boredom (if you could somehow invest in a boredom stock, you'd be the richest person in history).  Despite this fact, the future doesn't look entirely rosy for some entertainment companies -- most notably a music industry that has yet to figure out how to compete with the business model of "free."  Those looking for a sure bet, however, have a particularly attractive option at their fingertips in the form of video games, one of the largest growers on a year-to-year basis in terms of consumer spending.  Of the companies that produce video games, none do so bigger or better or to more cash flow than Blizzard Activision, which has the luxury of the two most popular titles in the world in their library.

From Humble Origins

There's an extreme extinction rate in the video gaming industry for those companies that do not rise to the top, and do so quickly.  The failures of companies like Atari, Sega, and LucasArts (the last of whom was put on ice by Disney) demonstrate the temporary nature of most companies not named Nintendo.  Indeed, Activision Blizzard (ATVI on the NASDAQ, trading for $28.39 a share) had ample opportunity to fail during the 1990s.  Their business strategy of putting out only one game every two to three years, with delays and missed deadlines more common than not, could have led to the designers shutting down if they shipped just a single bad product.  Most of the games that came from Activision Blizzard's early years, however, completely dominated the competition.  Their game series have proven phenomenally popular, with titles like 1997's Starcraft not only dominating the market to the tune of half a billion dollars in sales, but becoming so popular in South Korea that video gaming turned into a full-blown competitive sport.  While there's no shortage of quality titles to the developers' name, they enjoy the lion share of revenue from two particular cash cows.

Dominating The Market

Activision Blizzard represents the envy of their competitors for two titles that provide a nearly unlimited stream of cash.  The first and most important is their online role-playing title World of Warcraft, which features five million subscribers each paying twenty dollars per month for the privilege of playing their characters.  Don't think that these numbers represent a temporary surge: Activision Blizzard released World of Warcraft over ten years ago and subscriptions have stayed consistently high to this day.  As no other online role-playing game has ever surpassed one million subscriptions, Activision Blizzard is quite literally lapping the field, and this one title alone would make the stock worthy of investment.  The other jewel in their crown, however, is the Call of Duty video game franchise, which has its own following of fanatically loyal customers.  Of the fifty all-time best selling video game titles, no less than seven have the Call of Duty prefix attached to their names, including the third installment in the series, which sold $400 million worth of copies in the first 24 hours of release to shatter every game sales record in the books.  With 40 million active players on Call of Duty servers, Activision Blizzard not only has a guaranteed best-seller whenever they release a new game, but also a steady stream of revenue from the subscription service.

Entering New Domains

As if their twin piggy banks weren't performing well enough to merit investment, Activision Blizzard has a few large cards up their sleeves.  The release of a brand-new intellectual property designed around direct downloading, known as Battle.net, allows the company to skip the middleman of retailers and sell its product directly to the consumer.  This release powered a huge amount of Q2 value, in turn driving Activision Blizzard stock up by over 40% through the first half of 2015.  The company now has the largest online customer base in the entire world and in the entire history of video games.  Don't think the company has squeezed all of the value out of its shares, furthermore, since they stand to bring in colossal amounts of revenue in 2016 from the licensing of the Warcraft series into a full-length film.  Short of the film turning into another WaterWorld, it's hard to see how Activision Blizzard won't be in a better position next year than they are today.  Moreover, it's hard to see how any challenger could compete against their throne, seeing as how each of the console companies (Nintendo, Sony, and Microsoft) aren't moving units of their brand-new console products.

Plugging In

  • Due to the gains made through the year 2015, investors may not get the value out of Activision Blizzard stock that they would want in a faster portfolio with short-term aims.  That said, the growth potential makes Activision Blizzard a must buy stock.  If they keep up their growth trend, the company will double in size by this time next year. 
  • No other video game company can challenge their hegemony over the market.  Gamers are not a fickle customer base: the vast majority have demonstrated fierce brand loyalty.  Short of an all-out disaster, Activision Blizzard will have a reliable customer base for years and years.  Long term investors will get the most mileage out of Activision Blizzard stock regardless of short term growth.  Buying mutual funds with other video game companies only dilutes the gains.
  • With steady cash flow, limited debts, and an increasing market share looking for new entertainment options, the risk of Activision Blizzard stock is about as low as an investor could ask for.  Even the most guarded portfolios should include this as a major lynch pin of their holdings.

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