A Huge Untapped Market

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

Periodically I read through the headlines on companies I follow on Fool.com. One headline by Dan Carroll in particular caught my eye, Activision-Blizzard (NASDAQ: ATVI) Announces Diablo 3 For Sony Game Consoles.” The fact that Activision is developing Diablo 3 for the PlayStation 3 and 4 isn't the headline, it's the precedent this sets that's a much bigger deal. The short version is, Activision is beginning to realize that games shouldn't be limited to one format. If the company capitalizes on this opportunity, everyone else in the industry needs to duck and cover.

Old School Gaming
Old school gamers are the customers that patiently wait for new releases of their favorite games to come out. They may own multiple game systems, but generally speaking they prefer one system over the others. These are customers that the mainstream media refers to as “hardcore gamers.” 

This set up works perfectly for a company like Activision, or at least it did. The company could target certain segments of the industry with different releases. Activision could release updates to World of Warcraft and Diablo to the PC gaming crowd, and they would sell in huge numbers. The company could release an updated Call of Duty title to the PS3, Xbox 360, and Wii (or now Wii U) crowd. These titles would sell well also. The great thing about this set up is, the company doesn't have to do a lot of coding for the same games on every format possible. In theory, this keeps expenses down, and as long as the titles sell who cares?

And Then Gaming Changed
The problem is, there has been a tidal wave of what the industry calls “casual gamers.” These gamers aren't tied to a console or a PC at all. Instead they find games wherever they already are. Some of these games like Zynga's (NASDAQ: ZNGA) Farmville came to prominence through Facebook. Other games like Take-Two Interactive's (NASDAQ: TTWO) Grand Theft Auto, have morphed from console games to versions that can be played on the iPhone, iPad, or an Android device. 

In fact, the only gaming company that really seemed to get this cross-platform development was Electronic Arts (NASDAQ: EA), primarily with their Madden franchise. EA offers the traditional Madden game on PC and game consoles, but also offers Madden on iPhone, iPad, Android, and Facebook. In addition, EA and others have acquired mobile gaming companies to try and take more of the casual gaming industry.

Gaming On Any Device Is The Future
What Activision seems to be pointing to with the development of Diablo 3 for PS3 and PS4 is, they are willing to take their most popular games and make them available on other systems. This is a step in the right direction, but the company can go further. When a hit game is released, it shouldn't be limited by device. 

While it's true that not every game can be effectively played on mobile devices, there are parts of most games that are portable. In EA's case, the Madden rosters, depth charts, and statistics should be portable. Many players spend time with their franchise trading players, re-ordering their depth chart, and setting the game up. What better way to increase engagement than to make this available online through the PC, or in app. form for iOS, Android and others? Activision has this in a small way with Call of Duty Elite for Android and iOS.

Gamers Are Gamers No Matter What You Call Them
The opportunity for Activision is huge because of their well established franchises. Arguably no other company in the industry has as many hit games. If Diablo 3 can be developed for PS3 and PS4, what about Xbox? If Activision has an app. for Call of Duty Elite, what about an app. for World of Warcraft? Thinking outside of the PC box or console is what can drive results going forward. 

Looking at the industry, there are multiple companies that look like good values. Zynga is probably the most problematic to figure out because their numbers look good, but their business appears so tentative. The company said in December 2012, players spent 10.7 billion minutes inside Zynga games. This speaks to the magnitude of opportunity for any company to steal these minutes from Zynga. That being said, Zynga is generating positive free cash flow, and they have $2.7 billion in cash and investments. In fact, Zynga's cash and investments represent over 58% of their market cap. I could see one of the larger players stepping in to take this company over.

When it comes to the more traditional companies like Take-Two, EA, and Activision, the choice seems pretty simple. Activision has the highest gross margin at 72.53%, versus 53.47% at EA, and 47.98% at Take-Two. Activision is the only stock that pays a yield at 1.32%, and believe it or not, Activision's cash to market cap. is higher than their competition as well. Currently 21.3% of Activision's market cap. is the cash on their balance sheet. By comparison, EA's percentage is 17.24% and Take-Two is at 9.25%. What investors get with Activision is arguably the best gaming company. If the company can capitalize on this recent move to develop more games cross-platform, Activision will fire a shot that may bring their competition to their knees.

MHenage has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Take-Two Interactive . The Motley Fool owns shares of Activision Blizzard. 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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