Activision Blizzard looking to boost margins

Global company seeking nontraditional sources

NEW YORK -- The newly merged video game company Activision Blizzard will not only focus on taking advantage of its global reach but also look to boost operating margins and revenue from nontraditional sources.

"We have definitely been enlightened to the value of a subscription model on 'Guitar Hero' and 'Call of Duty' in particular, whether it's downloadable content, maps or songs, or what we are seeing in the multiplayer dynamic," president and CEO Robert Kotick told The Reporter on Thursday after Vivendi and Activision announced the closing of their merger.

Asked about the overall growth potential of nontraditional revenue, Kotick mentioned estimates that online subscription play, in-game ads and sponsorships, micro-transactions, downloadable content, casual gaming and the like amounted to a global market of about $8 billion-$9 billion last year, compared with the $30 billion traditional games market. Activision hardly participated in these emerging opportunities, while Vivendi's Blizzard game label, known for its massively multiplayer online hit "World of Warcraft," accounted for roughly $1 billion.

"I could easily see that $9 billion doubling in the next five years," Kotick said. While he wouldn't provide a target for Activision Blizzard, he said that in most markets, the firm is only a single-digit-percentage player. "There's a big market opportunity here that we don't participate in to the degree we could," he said. "We are definitely focused on gaining share over time."

Asked whether "Guitar Hero" could see waning consumer interest similar to TV and film franchises that tend to lose momentum over time, Kotick shrugged off such concerns.

"I have heard that about Tony Hawk for 14 years. Same thing with Spider-Man," he pointed out, adding people should think about the hit music game as more than selling just plastic guitars. "If you think about the business as how do you unleash your inner rock star, we are at the very, very beginning." The gaming veteran promised more "Guitar Hero" versions and spinoffs in the future.

Kotick and Vivendi CEO Jean Bernard Levy conducted the telephone interview from Sun Valley, Idaho, where they are attending the annual Allen & Co. retreat this week. Asked which other video game executives are in attendance, Kotick mentioned Walt Disney CEO Robert Iger, Time Warner CEO Jeffrey Bewkes and Sony Corp. CEO Howard Stringer.

Announcing the completion of the gaming megamerger Thursday, Activision Blizzard said it will be the world's most profitable pure-play online and console game publisher. It also said its businesses have been performing so well that the company is on track to exceed its growth guidance supplied when the deal was first unveiled in December. Back then, the merged entity was seen as hitting pro forma operating income of $1.1 billion and pro forma profit of more than $1.20 per share.

Kotick said that one key benefit of merging the two companies is "that people realize that games can be an almost 50% operating margin business," which could help drive profitability higher. "The bar is now set even higher," making everyone think about how to create higher-margin products, he said.

Levy said Vivendi's Universal Music Group also will benefit from its relationship with Activision Blizzard and vice versa.

"This will help 'Guitar Hero' continue to be the leader in its category," he said. "And we also believe that 'Guitar Hero' can be a very valuable platform for music downloads at a time when consumers obviously tend to buy less physical product."
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