Video game publisher, Activision Blizzard Inc. (ATVI - Free Report) recently announced the launch of a mobile version of its popular franchise Skylanders. The new mobile game known as Skylanders Cloud Patrol will be available for download from Apple’s (AAPL - Free Report) iTunes App store and can be played on iPhone, iPad and iPod touch.
The storyline of Skylanders Cloud Patrol is similar to the web and console versions of the Skylanders franchise. The mobile game is set in a region of Skylands ruled by the followers of evil Portal Master Kaos. Gamers get to play the role of Portal Master, who faces the challenges and finally eliminates the evil rulers with the help of 30 different Skylander characters.
In the course of the game, players can unlock Skylanders and win in-game virtual items by using a password available with each Skylanders action figure. Gamers can also purchase in-game virtual items by using virtual currency, which is an added feature of the mobile version. Although the new mobile game is not a free app, we believe that the popularity of the “Skylanders” brand coupled with its availability on Apple devices such as the iPhone 4S, will benefit the new game going forward.
It seems that Activision is seriously redrawing its mobile gaming strategy to grab significant market share in the rapidly growing mobile gaming market. Although the company introduced a mobile feature known as Call of Duty Elite with its highly successful Modern Warfare 3, Skylanders is its first popular franchise having a full mobile version. We expect that Activision will continue to release mobile versions of its popular games going forward in order to gain market share in the mobile gaming sector over the long term.
Mobile gaming: Long term trends
According to ABI research, mobile gaming is expected to generate $16.0 billion in revenues by 2016, a massive increase from approximately $5.0 billion reported in 2011. We believe that the mobile gaming market will continue to benefit from the increased usage of smartphones and tablets going forward.
As smartphones and tablets become more powerful with faster processors and improving telecommunication technologies (such as 4G), massively multiplayer online (MMO) games will become increasingly easy to play on the move. This will further boost the demand for mobile games going forward.
Most of the mobile games are free to play (freemium) and generate revenue primarily through the in-game sale of virtual goods. According to market intelligence firm In-Stat, the worldwide market for virtual goods was worth $9.0 billion in 2011 and is expected to reach $15.0 billion by 2014. As per Juniper Research, revenues from purchases of virtual goods totaled $2.1 billion in 2011 and are expected to grow to $4.8 billion by 2016.
On the other hand, advertising spending on mobile games is expected to reach approximately $900.0 million by 2015. We believe that the freemium model will continue to remain the primary revenue contributor for mobile game developers over the long term.
Reportedly, Activision is also considering a mobile version of its renowned massively multiplayer game Worldof Warcraft (WoW) going forward. Although WOW’s subscription base shrunk to 10.2 million in December 2011 from over 12 million in December 2010, yet the game boasts of one of the highest subscriber bases among the present generation of MMOs. We believe that mobile versions of WOW will not only boost its subscriber base but will also open up a significant recurring revenue stream through the sale of virtual goods and higher level of advertisement spending.
However, we believe that Activision will face significant competition from Zynga Inc. (ZNGA - Free Report) and Electronic Arts Inc. (EA - Free Report) in the mobile gaming sector. Both these companies have made accretive acquisitions to boost their presence in the sector. However, being a late entrant, Activision may face serious talent crunch to drive its growth going forward.
Moreover, the mobile market runs on a freemium (free to play) business model, which Activision does not seem to follow right now. As freemium models have achieved great success in attracting subscribers, we believe that Activision’s reluctance ‘to follow the model may impede its growth in this sector going forward. We also believe that Activision’s limited presence in the social gaming platform will also impact its performance going forward.
Thus, we maintain our Neutral rating over the long term (6-12 months). Currently, Activision has a Zacks #4 Rank, which implies a ‘Sell’ rating in the short term (1-3 months).