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Has the House of Mouse Become the Ultimate Gamer?

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

As a gaming company, keeping up with the joneses is a difficult task.  A large populous of casual gamers have abandoned their consoles, replacing them with smartphones and tablets.  This sea change has put pressure on gaming companies to recoup lost revenues from mobile platforms.  Subscription based models and new digital endeavors remain crucial to future success.  So far, the results have been mixed. 

Electronic Arts (NASDAQ: EA) has attacked the decline of console sales with an increased focus on free-to-play games, mobile games, digital subscriptions, and full game downloads.  Between these channels, their bases appear to be covered, and revenue growth has been strong.  During the most recent quarter, these divisions brought in 39% more revenue compared to last year.  But this doesn’t tell the whole story.

Overall revenue has remained flat compared to last year’s second quarter results.  That’s because revenue derived from packaged goods saw a decline of 20% from the previous year.  This is problematic since those divisions make up nearly 55% of their business.  In this case, digital has a long way to grow before becoming the dog that wags the tail.                  
In terms of revenue composition, Activision Blizzard (NASDAQ: ATVI) is in a slightly better position for a digital future.  As of last quarter, digital sales made up 51% of total sales, and packaged goods made up 43%.  But digital sales growth was nonexistent, yet packaged games saw 43% year over year growth.  The latter results have been skewed because Diablo III was a homerun release this year.          

Still, Activision has some of the best gaming franchises, including World of Warcraft, Diablo, and Call of Duty.  World of Warcraft holds the title of largest subscriber base with 10 million strong.  Even with this brand equity and recurring revenue, Activision’s main problem area is digital.  Comparing the last three quarters on a year over year basis, digital revenue is down 15%.  That’s a worrying sign, considering the underlying trends in digital gaming. 

A Crack in the Model

Boil it down and both of these companies rely heavily on big game releases to drive future sales.  A large percentage of their businesses are focused on the weakened game console market.  Some of this could be blamed on the lack of new console releases.  And the rest of it could be blamed on smart devices becoming casual gaming platforms.  Add all these factors together and it’s evident why die-hard gamers have decreased in popularity and the ones left are buying fewer games.    

Even as these companies shift their efforts towards new digital platforms, they may not experience overall revenue growth.  It’s difficult for a long-term investor when companies experience this type of revenue shift.             

Casual Gaming on the Rise

According to a recent NPD report, digital video game sales in the third quarter grew 22% since last year, and now account for the majority of new game sales.  This is not surprising, considering that Android and iOS devices have become the fastest growing segment in the history of consumer technology.  This growth has brought on a whole new group of casual gamers. 

With an infinite number of mobile games now selling for $1 a pop, it’s easy to see the resistance from companies that have become accustomed to selling games for $50-60 per title.  Look at Take-Two Interactive (NASDAQ: TTWO) if you need more convincing. 

Between all of their labels, a total of seven games are available on Android.  Seven.  For iOS, the same query returns twenty-one titles.  Take-Two omits sales data from Android and iOS on their quarterly releases.  If it were something to be proud of, they’d certainly include it.  Their lack of mobile interest compels me to believe that Take-Two has a weaker-than-its-peers story going for it.          

A Social Gathering

The rise of social media brought a renewed surge in free-to-play gaming.  The most well known example is Zynga’s (NASDAQ: ZNGA) FarmVille.  Users can play for free and purchase premium items during game play.  The issue for developers is stickiness.  History shows that users tend to lose interest tending to their virtual farms, and that tends to leave less room for revenue generation.  It’s not only Zynga who has experienced this phenomenon.  Last year, EA’s social gaming platform boasted 101 million active members.  Today, that number has declined by 59 million users.  It’s still too early to say, but developers either overlooked an important ingredient, or social gaming is not a stable cash cow.                

A New Mouse in Town


In a world where mobile dominates gaming, attention spans are shorter than a tweet, and casual gaming has become ridiculously cheap, what company could thrive?  Look no further than Disney (NYSE: DIS).  They build a game, make a movie, and by the time users get bored, they’ve already made their payday.  It’s a model for today’s level of engagement and it serves as a marketing tool for Disney’s other businesses.      

Unlike the traditional gaming companies, Disney has a much lower dependence on gaming consoles.  They’ve already gone on record stating their plans to ditch console development and focus primarily on mobile and social game releases.  In other words, the writing is on the wall for gaming consoles, and Disney is positioning itself accordingly.  A quick iTunes query reveals Disney boasts 99 applications available for the iPhone.  It should be increasingly clear the house of mouse is taking this mobile opportunity very seriously. 

Foolish Bottom Line

Today, there are over one billion active smartphones online, and this number is expected to double in the next three years.  Casual gaming has already become the new face of gaming.  The companies who fail to capitalize on this opportunity are leaving money on the table.  For traditional gaming companies, this is a difficult place to be in because revenues will likely remain under pressure.  The previous kings were never built for $1 games. 

Going forward, the company most fit for a more casual future appears to be Disney.  Tying it all together, Disney’s games create a branding experience that promotes future blockbuster releases.  They have transformed entertainment into effective marketing.  By all means, I’m not declaring the days of $50-60 titles as being officially over, but they’ve certainly reached their peak.           

TopDownTrends has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard and Walt Disney. Motley Fool newsletter services recommend Activision Blizzard, Walt Disney, Electronic Arts, and Take-Two Interactive . 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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