Activision Blizzard Inc.
(
ATVI
) recently announced that it has entered into a partnership deal
with Chinese Internet service provider Tencent Holdings Limited to
launch its new game
Call of Duty Online
in Mainland China. As per the agreement, Tencent will exclusively
operate the game in China. The financial terms of the deal
were kept under wraps by both the companies.
Call of Duty
has been Activision's one of the most profitable operating
franchises so far and the latest installment is a free to play
game. Activision expects to earn significant revenue from the sale
of in-game items going forward.
Moreover, the partnership with Tencent gives Activision a better
online penetrative capacity in China. According to BOCOM
International, Tencent accounted for 43.6% of China's online gaming
market in terms of revenue in the first quarter of 2012, driven by
strong performance from its role playing game (RPG)
Crossfire
.
On the other hand, Activision's massively multiplayer online
game ("MMO"),
World of Warcraft
, operated by NetEase (15.0% market share) failed to cheer up the
company's top-line, due to the substantial decline in subscriber
base. In such a scenario, we believe that the new game will boost
Activision's prospects in the lucrative Chinese online gaming
market (particularly in the role playing game segment) going
forward.
According to Analysis International, Chinese online gaming
market soared approximately 33.0% year over year to $1.78 billion
in the first quarter of 2012. A study by Markets Research Reports
suggests that the online gaming market in China is expected to grow
at a CAGR of 40% (2009-2015), which we believe justifies
Activision's decision to expand its footprint in the country.
With licensing agreements with two of the leading internet
providers in China, Activision is sure to make inroads in the
online gaming market in the country banking on its popular titles
and a solid portfolio of games that are slated to release in 2012.
Its initiatives to strengthen its portfolio through the launch of
new versions and content packs would be beneficial over the long
run.
However, strict Chinese government regulations on foreign video
game makers and competition from the Chinese video game publishers
are the potential headwinds going forward. We also believe that
Tencent's top-selling
Crossfire
game may cannibalize Activision's
Call of Duty Online
sales going forward.
Additionally, softness in the video game industry and
Activision's limited presence in the social gaming market coupled
with significant competition from
Electronic Arts Inc.
(
EA
) and
Take-Two Interactive Software Inc.
(
TTWO
) are the near-term headwinds. The lack of new titles (not sequels
or downloadable contents) and over-dependence on old franchises,
particularly on
Call of Duty
and
World of Warcraft
, are the other challenges going forward.
We have a Neutral recommendation on Activision in the long term.
Currently, Activision has a Zacks #3 Rank, which implies a Hold
rating in the short term.
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