Activision Blizzard (NASDAQ: ATVI ) is 2-for-2 in quarterly earnings so far in
2011. The video game publisher opened big, reporting a 32% jump in net income in
its first-quarter earnings in May. Now it has even more to celebrate. The
company turned in net profits totaling $335 million in its second-quarter
earnings report Thursday, a 53% increase over the same period in 2010. Most
promising of all for the company is digital sales downloadable games purchased
off of the Internet to PCs and game consoles like Microsoft s (NASDAQ: MSFT )
Xbox 360 as well as secondary downloadable content for those games rose 27%
year-on-year. Net revenue from digital products totaled more than $1.1 billion,
up from the nearly $970 million last year. Activision is proving to investors
that its ready for the all-digital future. Despite a strong release schedule
going into the back of 2011, though, ATVI faces stern challenges that may curb
whats been an impressive earning year. First is the lack of a guaranteed major
title release from ATVIs Blizzard studio. A sequel to the companys fan-favorite
series, Diablo III , might come out before the year is out, but its far from
guaranteed. The absence of a major new Blizzard product isnt the biggest worry
in regards to the studio, though. After seven years, the companys massively
multiplayer online role-playing game World of Warcraft is beginning to lose
subscribers en masse. The publisher revealed during its earnings call that
Warcraft s subscriber base had declined to just more than 11 million players,
each of whom pay a $14 monthly subscription fee. Before the December 2010
release of the Warcraft expansion Cataclysm , a product that sold more than 7
million copies in its first 24 hours on shelves, the game commanded a
subscribership of more than 12 million. A loss of 1 million players in less than
a year, especially after the release of new additional game content, is cause
for concern. Activision Blizzard even made a limited version of Warcraft free to
play at the end of June, a promotional move that typically signals an online
game is entering the end of its maximum profitability. The signs suggest the
companys decade-old cash cow is finally running dry at a time when its revenue
is needed most. Activision also needs to worry about over-saturating the market
with its most successful franchises. Call of Duty: Modern Warfare 3 , the latest
entry in the companys most successful running franchise, is due out in November.
While last years entry, Call of Duty: Black Ops, went on to become the
fastest-selling game in U.S. history by selling nearly 14 million copies in just
four months, ATVI and its shareholders would do well to remember how fickle its
audience is. Modern Warfare 3 will be the eighth consecutive Call of Duty game
released in as many years. Its precisely that sort of over-exposure that forced
the publisher to shut down its Guitar Hero franchise . In 2009, Guitar Hero 3
became the first game to make $1 billion single-handedly. By February of 2011,
ATVI struggled to sell even 90,000 copies of Guitar Hero: Warriors of Rock .
Call of Duty is the companys greatest source of revenue aside from World of
Warcraft , and if it isnt careful, it wont have either filling its coffers by
2013. Investors looking at ATVIs consecutive quarters of strong earnings would
be wise to view the stock with caution. The company will be standing on thin ice
by the holidays. As of this writing, Anthony John Agnello did not own a position
in any of the stocks named here. Follow him on Twitter at
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