This Company Will Save the Video Game Industry

John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

So much can change in a decade, can’t it? 10 years ago, my friends and I were obsessively saving our pennies so that by summer we could be the first person to say that we had the holy grail of gaming at the time - the Xbox 360. Never mind that it was $400, it was a necessity to play some of the coolest games on the block, like Activision Blizzard’s (NASDAQ: ATVI) Call of Duty franchise.

A decade later, the video game industry isn’t the monopoly that it used to be thanks to the rise of smartphones, tablets, and the growing popularity of Facebook (NASDAQ: FB). Some have speculated whether or not people will still buy $60 video games to go with $500 consoles when the hottest games sell for around $3 on $400 tablets and phones. Lucky for gamers, just like how they were the big dogs 10 years ago, Activision will be the one that will save the video game industry.

Adaptability and mergers made the company grow

The reason why Activision will save video games should make sense to any enthusiast of Activision’s gaming franchises. Probably better than any other company, it has been able to adapt to the changing world of social gaming by introducing offerings that cross generational divides. During the times when the console and the PC were the go to spots for games, Activision was making deals with companies like Marvel and Disney to produce games based on some of the most popular characters in the genre, such as Spider Man, to build on an already successful console franchise from the days of the Atari and Sega consoles, where Activision was the first third-party developer for console gaming, and began investing in PC games in the 1990’s when consoles were starting to go stale.

In the 21st century, Activision knew that it had to go shopping for new developers to keep the company fresh and up to date, and that investment has paid off big time. In 2002, Activision merged with Infinity Ward and signed a product deal with DreamWorks, giving the company control over the successful Call of Duty franchise, which has sold over 124 million units, approximately $7 billion, over a decade. With consoles making a comeback with the 6th generation Xbox and PS2, representing 95% of CoD players, it was a winning scenario for Activision at a cost of only about $500 million in royalty bonuses and the initial $5 million purchase price, probably the steal of the century.

In 2008, at the height of the PC-based role-playing game and real-time strategy game phenomenon, Vivendi, owners of Blizzard Entertainment, merged with Activision to create Activision Blizzard, which now owns the MMORPG game titan World of Warcraft with its 8 million online players and nearly $2 billion in subscription sales for players to become rulers of the Warcraft world. This investment helped Activision move with the quickly changing video game world, and has kept them competitive.

Zynga who?

Looking forward, Activision has to contend with the rise of social media gaming. This became hot a few years ago with Zynga (NASDAQ: ZNGA), which made it big with games like FarmVille and Words With Friends. Using Facebook as a medium for game play made Zynga one of the hottest stocks of 2010, and Facebook raked in the profits from people paying to maximize the gameplay experience.

In retrospect, this could be considered the beginning of social gameplay that smartphones would pounce on. Facebook relied on Zynga for up to 19% of revenue from 2011-2012, largely through advertising and selling Facebook money to be used on-site. Zynga was the No. 1 Facebook game developer, and this helped Facebook stand above the rest of the social media industry by promising fun games that you could play with your friends without ever having to leave home or buy a big, bulky game console.

The success of Zynga's games, and the money they were making, convinced Zynga to offer an IPO that, at its height, rose 50% in share price in the spring of 2012, but an over-reliance on core titles and the smartphone revolution doomed Facebook and Zynga's combined stranglehold on the market, and both companies’ IPO’s (though Facebook’s came out after the Zynga bounce ended).

Facebook has since been able to bounce back in gaming with the success of King's Candy Crush Saga, resulting in $2.9 billion of revenue over the last two quarters ($2.5 billion from advertising and by allowing game developers to tap into Facebook's ecosystem to gain players).

Zynga, though, has fallen by the wayside due to the staleness of their products as well as a lack of new development, which was a problem that Activision has been able to avoid for the entire Zynga dynasty, however short that turned out to be. 

Skylanders is going sky-high

The smartphone market though was strong, and cloud gaming was the new thing rather than console gaming, but Activision stepped to the plate yet again with Skylanders, a revolutionary franchise with a third edition set to be released this fall.

As video game playing dropped 5% this year thanks to smartphone gaming’s popularity, Activision may help turn it around for the industry. With the new Skylanders, players buy $8 toy figures to be placed on the games specially designed pad that puts that very character (and all the stats you gave it over time) into the game as a controllable character. These toys can be put on any pad, which uses radio frequency technology to wirelessly get into the game, making the toys tradable and shareable. 

Since the franchise’s release in 2011, the toys gained a cult following and a thriving black market for the best ones (up to $2,400 on eBay for top figures). It takes the old time fun of trading card games and makes it applicable for the new generation of social gaming, creating a franchise that has established Activision as a dominant player in the industry, as well as being a trendsetter for a challenged market looking to re-assert its dominance.

Disney has released an offering like Skylanders as well called Disney Infinity, which takes the idea of placing a toy character on a mat and inserting that character into the game as well, except with various characters from Disney movies like Jack Sparrow and Mr. Incredible. However, it is different because it is designed to target casual gamers and younger audiences with their families, given the cartoony nature of the game, which even the creators admit is not "photo-realism." 

It will have its fans though, thanks to the familiar characters and settings from Disney's most popular movies, like the campus in Monsters University, and the ability to customize your terrain in the manner you like, but Activision goes for detail in Skylanders, not to mention characters more vicious-looking than Mike and Sully, which will make the game more appealing to hardcore gamers, Activision's main demographic, but both will do very well, and that's bigger for Activision than it is for Disney (which will have Kingdom Hearts 3 coming out next year anyway). 

Trade toys – and Trade Stocks

Activision is even better for investors right now. With a cheap forward P/E of around 15, and a price of $15.22 per share, it is a steal for investors headed into the big holiday shopping season, where Activision will feature prominently on kids’ wish lists and on store shelves next to the new consoles.

With Skylanders looking to be a hit, keep your eye on potential copycats like Electronic Arts, whose games like Star Wars: The Old Republic borrow heavily from the Warcraft series in terms of gameplay mechanics and pricing, may be tempted to introduce a Skylanders-like game of their own to compete with Activision. It would be good for EA to do that, but it also shows that Activision is one of the alpha-male companies that lead and set trends.

Activision was around for the Atari and the Genesis, it prospered with the Xbox and PS2, and now with the world wondering whether or not consoles are still important, Activision is set to give hope to the industry, and to hardcore gamers.

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John McKenna has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Facebook. The Motley Fool owns shares of Activision Blizzard and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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