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Industry Overview

2.1 Scope (Products/Customers/Regions)
The interactive gaming industry is comprised of manufacturing and developing of home entertainment software for the PC (including Macintosh), console gaming systems (Xbox 360,Nintendo Wii & GameCube, Sony PlayStation 2 & 3), portable gaming systems – PlayStation System Portable, Gameboy Advance, Nintendo DS), online gaming (web and Java based software), and mobile platforms (iPod, iPhone and Smartphones)6. In this way, this industry is very much global in terms of the development of games to the end users of software that are comprised of hardcore and casual gamers across many multiple platforms.
In terms of the United States interactive software market, it “generated total revenues of $9.5 billion in 2007, which represents a compound annual growth rate (CAGR) of 4.8% for the six-year period spanning 2002-2007”7. It is interesting to know that “console games software sales represented 82.6% of the market’s overall value. In comparison, the sales of personal computing games represented 17.4% of the market’s aggregate revenues”. In this way, development of new hardware sales usually drive the demand for development of high performance gaming software, as illustrated below9.

As depicted previously, the future market value of this industry in the United States is expected to grow by 5% for the next five years, and total market value of $10.3 billion by the end of 201110. In comparison, the Asian market, UK market, and the French market are expected to grow with CAGRS of 15%, 8.9%, and 2.4% over the same five year period11.

2.2 Competitor Analysis
The interactive gaming industry is comprised of 86 competitors as of 200812, with more consolidations of companies likely in the future due to the increased threats faced by piracy, increased competitive factors, riskiness due to upfront developmental costs, economic recessionary factors, and “rise of game players as developers of game content”13. These aspects will be discussed in more detail in the industry and SWOT analysis later on in this report.
The top 10 major competitors in the interactive gaming industry (all figures are from year end 2008) are comprised of the following game developers:

Rank | Company Name | Sales USD (m) | Employees | Market Cap USD (m) | Net Income USD (m) | Net Profit Margin | 1 | Electronic Arts Inc. | 3,665.00 | 9,037 | 5,715.52 | - 454.00 | -12.39% | 2 | KONAMI CORPORATION | 3,233.86 | 5,472 | 2,067.05 | 199.48 | 6.64% | 3 | Activision Blizzard, Inc. | 3,026.00 | 2,149 | 12,915.29 | -107.00 | -3.54% | 4 | SQUARE ENIX HOLDINGS CO., LTD. | 1,605.53 | 2,973 | 1,874.94 | 100.19 | 6.19% | 5 | Take-Two Interactive Software, Inc. | 1,537.53 | 2,100 | 591.14 | 97.10 | 6.32% | 6 | Ubisoft Entertainment SA | 1,450.90 | 4,323 | 1,429.89 | 142.36 | 8.49% | 7 | THQ Inc. | 1,030.47 | 2,400 | 184.41 | -35.34 | -3.58% | 8 | Real Networks, Inc. | 604.81 | 1,774 | 290.21 | -243.88 | -40.32% | 9 | Infogrames Entertainment | 372.01 | 555 | 47.31 | -65.39 | -21.33% | 10 | KOEI CO., LTD. | 309.42 | 1,191 | 469.34 | 55.96 | 18.44% |
Source: Reuters, Factiva14

In this way, competition in the interactive gaming industry (Please refer to Exhibit 1 that highlights the competitive profile matrix) can be described as very strong. Since the “development costs are high and many titles often make little profit, as software development companies rely even more heavily on blockbuster hits for substantial revenue streams”15

2.3 Value Chain Analysis
The Value Chain for the interactive gaming industry can be illustrated in the following manner:

* Design of new software titles for various platforms * Protection of intellectual property * Design of new software titles for various platforms * Protection of intellectual property * Development of gaming studios * Manufacturing Services * Development of gaming studios * Manufacturing Services - Attracting the right human capital talent (developers/producers)
- Attracting the right human capital talent (developers/producers) * Forecasting Models/Trends * Value added services * Forecasting Models/Trends * Value added services

Firm Infrastructure Human Resource Management Technology development (R&D)
Procurement

Inbound Logistics Operations Outbound Logistics

Marketing
& Sales

Service

* Capital layer: (content providers
& software developers) * Talent layer: in- house or individual development team *
Production layer: content creation & added services * Tools layer: game engines, mgmt. tools, etc. *
Distribution layer: generating game titles for placement through online and retail distribution channels *
Publishing layer: establishing royalty and retail fees with console partners; * Hardware layer: marketing/promotion of the game catalogue

-‘End Users’ Layer: services through e- commerce models (online updates, subscription based models, etc.)

Source: Flew, Terry & Humphreys, Sal (2005). "Games: Technology, Industry, Culture". New Media: an Introduction (Second Edition). Oxford University Press. pp. 101-114

According to Ben Sawyer of Digital mill, the interactive gaming industry value chain is made up of six interconnected layers:

1. Capital and publishing layer: upfront costs of developing new titles and seeking returns through licensing of the titles (typically through royalties from console manufacturers) 16.

2. Product and talent layer: consists of developers, designers and artists, who may be working under individual contracts or as part of in-house development teams17. 3. Production and tools layer: creation of content production tools, game development middleware, customizable game engines, and production management tools18.

4. Distribution layer: involved in generating and marketing catalogues of games for retail and online distribution19.

5. Hardware (or Virtual Machine or Software Platform) layer: or the providers of the underlying platform, which may be console-based, accessed through online media, or accessed through mobile devices. This layer now includes non-hardware platforms such as virtual machines (e.g. Java or Flash), or software platforms such as browsers or social networking platforms such as Facebook.20

6. End-users layer21: Value-added services after the games have been sold that includes up- selling of another game title, online updates, subscriptions for new features, etc.

.

Company Analysis: Activision-Blizzard Inc.

3.1 History
Activision-Blizzard Inc. is a console game publisher and online involved in “publishing, developing, and distributing interactive entertainment and peripheral products”37 to its consumers around the world. This company “was founded in 1979 by James Levy, along with four former Atari programmers: David Crane, Alan Miller, Bob Whitehead, and Larry Kaplan. The company was incorporated in the state of California and traded in 1979 as the first independent developer and distributor of entertainment software.”38 In the early stages of the company, Activision Inc. “launched a series of multi- million selling Atari 2600 titles, including the Pitfall! Series, Kaboom, and River Raid in the early 1980s and company completed its initial public offering, in 1983.”39
Throughout its 30 year history, Activision Inc. has gone “through bankruptcy and series of alliances and mergers with small development studios before becoming successful.”40 Blizzard’s past history also has been turbulent in terms of having “a number of owners before ending up in the hand of Vivendi in 1998.”41 More recently in December 2007, it was announced that the French owned media conglomerate “Vivendi SA would merge with fellow games developer and publisher Activision-Blizzard in a deal worth USD $18.8 billion.”42 This deal was finally approved by the European Commission in April 2008, and on July 9, 2008, Activision Inc. announced that stockholders had agreed to the merger, as there were no anti-trust issues as a result of this unification.”43 As a result of this merger, “Vivendi has a 52% stake in the company, whereas rest of the shares are held by institutional and private investors and continues to be traded on NASDAQ stock exchange.”44 As part of the merger, “Blizzard will invest $2 billion USD in the new company, while Activision Inc. is putting up $1 billion USD.”45
It is interesting to note that Activision Inc. and Blizzard Entertainment will remain as separate entities for the foreseeable future. While “Blizzard retains its autonomy and corporate leadership (Michael Morhaime is still President of Blizzard, other Vivendi Games divisions such as Sierra Entertainment”46 were closed down shortly after the merger was completed. The CFO of Activision-Blizzard Inc. – Thomas Tippl, has alluded to future layoffs, stating that the company “will exterminate some of our overlap through redundancy – but we will treat people fairly and respectfully in that process."47

3.2 Business Model
Activision-Blizzard Inc.’s model is based on combination of selling interactive gaming software and subscription-based online games48. In this way, “the company operates in two business segments: publishing of interactive entertainment software/peripherals and distribution of interactive entertainment software and hardware products.”49 In terms of the publishing segment, that includes the subscription-based “multi-player online role-playing games, or MMORPGs,”50 develops “markets and sales for the various game products both directly, and by licensing through third party publishers.
The direct sales channels for Activision-Blizzard Inc. are “discount warehouses, consumer electronics stores, mass-market retailers, and game specialty stores.”51 This particular segment accounted for 80.4% of Activision-Blizzard Inc.’s total revenues in 200852. The distribution segment of Activision-Blizzard is comprised of “providing logistical and sales services to affiliate publishers of entertainment software and manufacturers of entertainment hardware.”53 This particular segment accounted for 19.6% of the company's total revenues.54

3.3 Financial Information
The financial position of Activision-Blizzard Inc. can be illustrated by the following diagrams55:

Source: Reuters

It is interesting to note that most of Activision-Blizzard Inc.’s revenues in terms of geographical regions are generated in North America (60.8%), followed by Europe (35.8%), and Asia-Pacific (3.4%)56.

3500

3000

2500

2000

1500

1000
Revenue
Net Income
500

0

-500
2004
2005
2006
Year
2007
2008
3500

3000

2500

2000

1500

1000
Revenue
Net Income
500

0

-500
2004
2005
2006
Year
2007
2008
Revenues & Net Income (Million USD)
Revenues & Net Income (Million USD)
Source: Activision-Blizzard Inc. Annual Report, Investex Report (2008)

Analyzing Activision-Blizzard Inc.’s financials over the 2004-2008 period more closely, we can see that it “reported revenues of USD $3,026 million during the fiscal year ended 2008, an increase of 100% over 2007.”57 In addition, “the operating loss of the company was USD $233 million during the fiscal year 2008, a decrease of 418.52% over 2007, and overall net loss of the company was USD $107 million during the fiscal year 2008, a significant decrease of 224.72% over 200758.
In comparing the two separate entities, it is interesting note that Activision Inc. as a separate company is much more profitable than when it is combined with Blizzard. This is particularly evident in the Activision Inc. 2008’s “net revenues of $2.9 billion USD, a 92% over the prior year, operating income of $480 million USD, a 558% increase over the prior year, and net income of $345 million, which represents a 302% increase over fiscal 2007.”59 Consequently then, Activision Inc., generated “a GAAP operation margin of 16.5% that exceeded their peak-cycle target range approximately two to three years ahead of plan.”60 (Please refer to Exhibit 4 for a detailed comparison of financial ratios)

3.4 Products & Services
Activision-Blizzard Inc. has over the past two years, has become the number one supplier of interactive video game software. This is evident by the fact that “during the fiscal year of 2008, the company had three of the top ten bestselling titles in the U.S. and set an industry record for U.S. sell-through.”61 In addition, “two of the largest franchises, Call of Duty (#1 bestselling PC game title worldwide) and Guitar Hero, both of which surpassed $1billion in life-to-date sales during the fiscal year (2007), with Guitar Hero reaching that milestone in a record 26 months.”62 Activision Blizzard Inc.’s portfolio has numerous video game titles “such as Guitar Hero, Call of Duty, and Tony Hawk, as well as Spider-Man, X- Men, Shrek, James Bond and Transformers, and franchises, such as Crash Bandicoot and Spyro and Blizzard Entertainment’s StarCraft, Diablo and Warcraft.”63

3.5 Competitive Strategy
As mentioned in the business model section, Activision-Blizzard Inc.’s strategy is primarily based on marketing video gaming software and online based MMORPGs that are subscription-based such as StarCraft, Diablo, and Warcraft. This organization “focuses on diversified categories of games which include action sports, simulation, first-person action, racing, role-playing, action and adventure and music-based gaming.”64 This is particularly evident with its recent acquisition strategy of Bizarre Creations in order to compete in a
$1.5 billion USD segment that previously Activision-Blizzard was not competing in, outside of sports65. The reason behind this acquisition was that for many years, it “didn’t have the development capability to put out a top game (to compete with the Need for Speed franchise) and there were not many external options around.”66 In terms of the revenues from gaming platforms through licensing agreements, “82.76% is comprised by console gaming, followed by Handheld which is 10.84%, and PC with 6.39% respectively.”67

3.6 Branding & Website Analysis
Brand management in this case is the application of the marketing framework in order to increase brand equity in the consumer’s mind. For Activision-Blizzard, it becomes especially important for the gaming products/procurement services to be positioned in such a way that it becomes the brand of choice for its consumers and be easily distinguished from the competitors in the interactive gaming industry. Thus, integration of an e-commerce strategy with a dynamic website becomes even more important for companies in this industry because of specific factors that relate to strong rivalry, high buyer power, and consolidation trends due to unfavorable economic conditions that exist currently. Visiting the Activision-Blizzard site (see Exhibits 5 to 9), we can see that it is separated into two different entities, with each developer having different categories of games. In measuring how well these websites are designed, a list of common website metrics was devised and websites were compared as follows:

Website Metrics | Activision Inc. | Blizzard Inc.68 | Visitor | | | Traffic Rank & (based on all page views and reach) | 14,680 (Average of 1 week) | 1,690 (Average of 1 week) | Exposure | | | Page Views | + U.S. users rank #1 with 29.9%+ German users rank #2 with 6.1% | + U.S. users rank #1 with 33.6%+ German users rank #2 with 8.7% | Visit | | | Stickiness | + 1.79 (Decrease of 7% over last three months)+ Seems to be less sticky; too many gadgets and videos slowing down the speed at which all the elements load on all the pages+ Users are not tracked and asked for information when buying products | + 2.58 (Decrease of 5.8% over last three months)+ Seems to have more stickiness; artistic and niche based game titles; no animated flash elements (much faster loading times)+ Users are tracked and information is asked when buying products | Raw Visits | + 3 month average of 0.01% of all internet users in the world | + 3 month average of 0.0578% of all internet users in the world. | Hits | | | Overall Ranking (Searches) | + Ranked 24/65 competitors in the interactive gaming industry | + Ranked 4/65 competitors in the interactive gaming industry | Ranking by Pages | * Activision.com - 91.0% * Investor.activision.com - 3.0% * Devtrackbeenox.activision.com - 2.4% * Kronos.activision.com - 1.3% * De.activision.com - 0.8% * Games.activision.com - 0.8% * Gownload.activision.com - 0.7% | * blizzard.com - 54.3% * eu.blizzard.com - 25.8% * us.blizzard.com - 15.1% * ftp.blizzard.com - 2.8% * kr.blizzard.com - 0.8% * mobile.blizzard.com - 0.8% * download.blizzard.com - 0.1% |
Source: Activision.com - traffic details from Alexa. Retrieved 3/17/2009, 2009, from http://www.alexa.com/data/details/traffic_details/activision.com

3.7 SWOT Analysis
SWOT analysis for Activision-Blizzard Inc.’s can be summarized in the following manner:

Strengths | Weaknesses | * Good market position globally * Diversification of innovative gaming products and services | * Lack of competitive strength in some market segments * Over-reliance on limited game software titles * Weak financial performance after the merger with Vivendi games | Opportunities | Threats | * Acquisition of new subscribers – online gamers from the Asia-Pacific region * Room for consolidation through strategic acquisitions of smaller game development firms * Growing demand for in-home entertainment due to changing consumer preferences (availability of downloadable content) | * Piracy * Intellectual property capabilities (lack of competitive advantage) with the rise in popularity of third party developers * Unfavorable economic factors * Overall Market Riskiness |

3.8.1 Strengths
Activision-Blizzard Inc. enjoys a prominent position in terms of being the “world’s leading player in the multiplayer online role-playing games category.”69 In addition, the parent company, Vivendi S.A. is in a strong financial position, and diversified in terms of the kinds of entertainment businesses (mobile phones, film production, television entertainment, and video game entertainment70) it is involved in.

3.8.2 Weaknesses
Activision-Blizzard Inc. has some weaknesses in terms of not being competitive in some market segments – mainly sports gaming and acquiring licensing for their movie entertainment business. In addition, there is too much reliance on a few hits (Call for Duty and Guitar Hero) for generation of significant percentage of its revenues. It is interesting to observe that Activision Inc. was in a much better financial position before the merger occurred with Vivendi Games (see financial section of the report for details).

3.8.3 Opportunities
There are lots of opportunities for Activision-Blizzard to solidify its market share in continuing to acquire smaller gaming studios (diversify in other game categories). In addition, the “global video games market is forecast to reach $45 billion in 2010, and in the developing markets, the online game market is forecast to be driven by increased penetration of the broadband.”71 Another major opportunity for Activision-Blizzard Inc. is the potential to acquire subscribers” in the Asia Pacific region, where online games became the second-largest category, passing the PC games, and are expected to grow by 23% compounded annually, reaching $4.4 billion in 2010.”72 In this case, Activision-Blizzard can pursue opportunities in expanding its content for downloading, improve efficiencies in online gaming through development of Internet gaming. In essence, following these opportunities could have a great impact on improving Activision-Blizzard’s overall market share and financial viability in the future.

3.8.4 Threats
Despite promising opportunities in this market, there are lots of threats facing the players in this industry in terms of increasing piracy, development of intellectual property, and high market riskiness due to eroding margins. Increasingly, intellectual property is being pirated by the means of file sharing networks, and illegal modifications to consoles to facilitate pirated software. According to the IPFI agency, “CD and cassette pirate sales have declined in 2006 and the trend has shifted towards digital, private copying, and development of innovate software by third party developers.”73 In this case, the number of infringing illegal files being pirated on the Internet is estimated to be around $1 billion USD74. Another substantial threat to this industry is relating to global economic slowdown due to recessionary factors. The “recent turmoil in financial markets, very weak housing market indicators and decrease in consumer disposal income,”75 and lower consumer demand has led to negative consequences for all the players in the industry to remain financially viable in the long term.…...

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