While Wednesday's announcement that Activision-Blizzard was pulling the plug on "Guitar Hero" might have turned heads in the gaming world, it was the company's other announcement that might have bigger repercussions for investors.
As it cancelled games and the long-standing franchise, the publisher also announced plans to double down in the digital space and increase its focus on the lucrative "Call of Duty" franchise, two steps analysts say could significantly raise the company's margins.
Headlining that action was the establishment of a new "Call of Duty"-focused development studio known as "Beachhead." Through it, Activision plans to build a digital platform for the franchise's community, offer exclusive content and other services.
A digital community may not sound like a big step, but when dealing with a franchise as large as "Call of Duty"—and a fan base that diverse—a community portal can be a critical way to keep interest and enthusiasm high, even in the lean months between releases.
Bungie Studios, creators of the "Halo" franchise, are one poster child for this sort of tool, with their immensely popular Bungie.net portal.
Activision deflected questions about the potential of subscription-based revenues for Beachhead, but Michael Pachter of Wedbush Securities says he feels it will be the first step in the company ultimately charging for multiplayer elements.
"We are confident that the company intends to charge for multiplayer online premium services with its Beachhead announcement yesterday, and believe that Activision can grow this part of its business by $200 – 300 million per year over the 2012 – 2014 period," Pachter wrote in a note to investors.
Beachhead is just part of the growing digital push at Activision, which has already seen notable success in the space, particularly with subscriptions in "World of Warcraft" and downloadable add-on packs for "Call of Duty".
In fact, the first downloadable content for "Call of Duty Black Ops"—which hit the market Feb. 1—set a record on Microsoft's Xbox Live with 1.4 million downloads in its first 24 hours, generating sales of $21 million.
Margins are higher on that revenue also, as the company does not have to pay the typical 20 percent cut to brick and mortar retailers, though Microsoft does take a percentage of sales.
"The downloadable content we have planned for the Call of Duty universe, alone, should have more commercial potential on its own than most standalone console games," said Eric Hirshberg, CEO of Activision Publishing.
The company is also planning to bring "Call of Duty" to the increasingly important Chinese marketplace via a free-to-play massively multiplayer version that will gather revenue from microtransactions—small dollar purchases that are made by a large number of players.
Microtransactions are the chief source of income for game makers in China. And while players spending a few dollars on an in-game item might not sound like a needle mover for the bottom line, Activision-Blizzard has seen plenty of success with the model already with "World of Warcraft."
Last April, the company began selling a virtual horse in the game. Within eight hours, the queue to buy one was 80,000 players long and eventually topped 140,000. Activision is estimated to have made $3.5 million in one day on sales of the $25 item.
With Wednesday's disappointing forecast for Q1 and 2011, it's easy to take a short-term view of Activision as a company that's in a turnaround mode. But unlike Electronic Arts or THQ, which have seen game sales fall steadily, Activision owns the biggest franchises in the industry right now.
And while it has weeded out some titles with seemingly loyal followings, the hard truth is that passionate fan base simply wasn't buying the games anymore. Last year's "Guitar Hero: Warriors of Rock" sold fewer than 261,000 copies—with nine different SKUs on the market. That's an astonishingly bad performance for any title, much less one that was a $1 billion property a few years ago.
So it's little surprise that the company's decision to focus on what's working seems a smart move to analysts.
"Mid-level titles are just getting killed in the marketplace," says Eric Handler of MKM Partners. "Would you rather spend an extra $10 or $20 million on something that's not going to be a hit or on a 'Call of Duty' or 'World of Warcraft'?"