How Activision Blizzard beat the Devil

August 23, 2012: 11:00 AM ET

Video game makers are having a tough year. Still, the maker of best-selling titles like Call of Duty and Diablo commands the envy of its competitors.

By Don Reisinger, contributor

diablo3FORTUNE -- It's been a tough year for the video game industry. In July alone, according to research firm NPD, total game industry sales reached $548.4 million, down 20% compared to July 2011. Hardware sales dropped 32%, and game makers saw overall revenue decline 23% year-over-year.

It was hard to find a glimmer of hope in the numbers. As countless analysts have said, the industry is facing a perfect storm. Summer months almost always tend to be a bit slower. Secondly, most developers are launching games that are either sequels or appeal to a smaller subset of the market. Game consoles -- Microsoft's (MSFT) Xbox 360, Nintendo's (NTDOY) Wii and the Sony (SNE) PlayStation 3 -- are getting long in the tooth, meanwhile. "The current console cycle, currently in its unprecedented eighth year, is generating fatigue among gamers, with little new IP, mass migration to free online multiplayer gaming, and continued market share losses for the handhelds and Nintendo Wii," Wedbush analyst Michael Pachter wrote recently in a research note.

Despite the industry's obvious troubles, one company continues to achieve results that competitors can't quite match: Activision Blizzard (ATVI). The company announced last month that it generated $1.075 billion in revenue during the second quarter and a $185 million profit. That success accompanied a host of impressive statistics, including news of its standing as the top independent game publisher in the U.S. and U.K. during the second quarter. It also sold the top-selling console and handheld game, in terms of dollars, for the first half of the year. To top things off, its Diablo III is the top-selling PC game so far this year.

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The woes of rivals like Electronic Arts (EA) and Take-Two Interactive (TTWO) haven't hurt.  During the second quarter, for example, Take-Two Interactive, maker of the popular Grand Theft Auto franchise, announced sales of $226 million. The company lost $110.8 million. It was a similarly troubling period for Nintendo, which saw its revenue drop by nearly 10% to $1.07 billion. The venerable Mario maker posted a net loss of $217 million due to slumping Wii sales.

What is Activision Blizzard doing right? For one thing, the company knows how to make games. Its Call of Duty franchise is the world's most popular console title. On the online-gaming front, Blizzard's World of Warcraft has become the fastest-selling PC game of all time. Newer titles have also fared well. "In our view, the success of [Diablo III] is a testament to gamer appreciation for the developer and franchise, as well as for high-quality gameplay experiences," Pachter wrote in a research note this month. "In-line with our thesis, gamers have once again shown a willingness to forego mediocre catalog content and spend on premier new releases."

A slate of upcoming titles has cheered investors made weary by a market down on video games in general. This November, the company will be launching the latest installment in its Call of Duty franchise, Call of Duty: Black Ops 2. Last year's Call of Duty: Modern Warfare 3 was especially popular, generating $1 billion in sales in just its first 16 days of availability. Black Ops 2 is expected to either come close to matching or beat out its predecessor altogether. "When taken in combination with the record engagement of the Call of Duty franchise overall, there is strong evidence of tremendous continued engagement with the franchise," Activision Publishing CEO Eric Hirshberg said on a recent earnings call.

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Plenty could go wrong. Analysts were surprised to see that World of Warcraft subscriptions had slipped by 1 million users, raising concerns about how the company will manage that aging title's decline. And, like the rest of the industry, the firm has had to rely on sequels to boost earnings, leaving less room for original franchises which can generate new long-term business. Most of all, squeamish investors seem to have gone cold on video games over all. But, for the time being, Activision Blizzard still appears to be the one to beat.

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