Activision is acutely conscious that its dependence on Call of Duty and World of Warcraft for revenues could be disastrous, and says that while it will continue to devote resources to "proven intellectual properties", it has taken "strategic steps" to insure profits in the event of their decline.
"Activision continues to focus its efforts in the areas we believe have the most opportunity for growth and higher profitability, while reducing investments in areas we believe have less profit potential and limited growth opportunities," reads an Amended Annual Report, spotted by VG247. "To that end, investments are being focused on proven intellectual properties to develop deep, high-quality content that offers engaging online multiplayer gaming experiences.
"For example, during 2012, Activision released Call of Duty: Black Ops 2 , which set new video game launch retail sales records with over $1 billion of retail sales within 15 days of launch, according to GfK Chart-Track, retail customer sell-through information and the Company's internal estimates. Activision is currently developing sequels and additional content to build on the continued success of the Call of Duty franchise."
However, the publisher has deep misgivings about the polarisation of the market. "While many new products are regularly introduced in our industry, increasingly only a relatively small number of high-quality "hit" titles account for a significant portion of net revenue, and an even greater portion of net profit," reads one of the entries under "Risk Factors". "It is difficult to produce high-quality products and to predict prior to production and distribution what products will be well received, even if they are well-reviewed, high-quality titles."
A subsequent entry enlarges on this. "A significant portion of our revenues has historically been derived from products based on a relatively small number of popular franchises and these products are responsible for a disproportionately high percentage of our profits. For example, our four largest franchises in 2012-Call of Duty, Diablo, Skylanders and World of Warcraft-accounted for approximately 83% of our net revenues, and a significantly higher percentage of our operating income, for the year.
"We expect that a limited number of popular franchises will continue to produce a disproportionately high percentage of our revenues and profits. Due to this dependence on a limited number of franchises, the failure to achieve anticipated results by one or more products based on these franchises may significantly harm our business and financial results."
Furthermore, "a number of software publishers have developed and commercialized, or are currently developing, first-person action games which pose a threat to the popularity of Call of Duty, and we expect new competitors to continue to emerge in the first-person action category.
"If consumer demand for Call of Duty games declines and we have not introduced new first-person action games or added other sources of revenue, our financial condition could suffer. Additionally, if consumer preferences trend away from first-person action games, our revenue and profitability may decline."
Activision's solution for all this is twofold. On the one hand, the publisher will avail itself of network functionality to refresh existing IPs. "We continue to shift towards digital delivery of content and to establish and develop direct and long-term relationships with our gamers. We will also continue to support, maintain and enhance the World of Warcraft and Call of Duty online communities.
"We believe that focusing our efforts on online product innovations, such as additional online content, services and social connectivity, provides lasting value enhancement to our global communities of players. In addition, we are exploring new business models for delivering content digitally, including offering free-to-play games with monetization through in-game microtransactions."
On the other, Activision is bulking up on new IP. "While focusing on our proven intellectual properties is one of Activision's priorities, we also continue to make strategic investments in developing new intellectual properties we believe have the potential to be successful in the long term.
"For example, in 2011, we debuted a new internally developed franchise with the release of Skylanders Spyro's Adventure, and launched its sequel, Skylanders Giants, in October 2012. Games in the Skylanders franchise combine the use of toys with video games to deliver innovative game play experience to our audiences.
"According to The NPD Group and GfK Chart-Track, the Skylanders franchise has generated more than the $1 billion in worldwide sales life-to-date as of December 31, 2012. Additionally, we have established a long-term alliance with Bungie, the developer of game franchises including Halo, Myth and Marathon, to bring Bungie's next big action game universe, Destiny , to market in future years."
That's the tip of the iceberg - anxious investors may wish to read the report in full. Incidentally, if you are an anxious investor, by all means buy a few shares in Future Publishing. My strategic objectives presently consist of: (1) getting a biscuit, and (2) eating it.