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Activision CEO Bobby Kotick on His Company, Its Games, and the Industry

By Alex Petraglia on Sunday, March 2, 2008 at 3:00 PM EST  

Earlier this week Activision’s Chairman and Chief Executive Officer Bobby Kotick gave a presentation at the 2008 Goldman Sachs Technology Investment Symposium.

While it was certainly a riveting experience…if you’re a CPA, there were certainly some pertinent, gaming-related points of interest.

Below, we’ve broken his talk down into distinct subjects and are including choice quotes from Kotick himself.

Any emphasis added is our own.

Gaming’s Changing Demographics

“It’s an industry that’s changing, in terms of its demographic appeal. I think for the first time, we are genuinely seeing television audiences, film audiences, people who are spending their leisure time in ways other than video gaming, start to appreciate video games as a new form of leisure time.”

“Guitar Hero, we’ve seen in some markets as high as 40% of the audience being female, which is not something we’ve seen before in video games. I think the Wii has been a great catalyst for expanding the demographic.”

The Hardware Offerings

“For the first time, you’re seeing video game hardware that is really well differentiated. So the Xbox 360 online play and multiplayer is something that is unique. It’s appealing. It’s social, as compared to the historical very solitary experience that you’ve had in gaming.”

“PlayStation 3- I think now that we have a clear video standard in Blu-Ray, they’ve [Sony] done a great, great job in terms of embracing things like some of those new technologies. They need to get the price point down, but they’re a very viable alternative.”

Global Gaming Markets

“The combination of these businesses positions us geographically in a place that we wouldn’t ever have been on our own. So, penetration in China. Penetration in Korea. More opportunities in Europe and emerging markets.”

“Getting the institutional leverage that Blizzard has online, and applying that to franchises that we control. And then in our own businesses, being able to leverage franchises like Call of Duty and Guitar Hero to a much greater degree. The combination has really created something that is unique in the video game world.”

Downloadable Content

“Downloadable content is really an inconsequential part of our business, today. I think that when you look out 3 or 4 years from now,especially with our relationship with Universal Music Group, you’re likely to see downloadable content and music of a variety of kinds playing a more integral role in margin expansions for that franchise.”

Limiting New IP

“I think we’ve developed the capability to selectively introduce new intellectual property, not where we’re trying to do a half dozen or a dozen a year, which we think is a recipe for failure, but one or two very selectively in a year. Where you have focused development resources, focused marketing activities, you’ve taken the time to really make sure that there’s an audience need and a well-defined audience opportunity. And, so we’ve built processes that are very good accomplishing that objective.”

The Future of World of Warcraft

“For starters, they have probably half a billion dollars invested in the franchise over 15 years. They have hundreds of people involved in refreshing the content every year. So remember — when we first started looking at it, it appeared to us like a game in an insurmountable product category where EA, Microsoft, Sony, scores of venture-capital investments had been put to work unsuccessfully in trying to develop massively multiplayer games as a profit opportunity. But we still thought of it as a game.

I think one of the things we realized as you get much deeper into it is that it really is a social network that has an entertainment component to it. And so it is part of the fabric of that consumer base. There are 10 million people around the world for who it is an integral part of their lives. The way that they conduct their lives. The way the communicate.

So, the challenge there is, how do you keep it fresh, engaging and interesting, which they have a big infrastructure set up to do. Whether it’s the 2,000 game masters that they have that are monitoring game play. Whether it’s the hundreds of people they have enhancing content, or the things that they’re doing with expansion kits.

They have a model that’s very well developed. They have a very keen understanding of their audiences. And they’re just scratching the surface of opportunity in a lot of areas…the franchise has grown so much, and the business has grown so much that they, like us, have tried to prioritize opportunities.

And that probably has been at the expense of expanding ARPU to the few million hardcore, rabid hobbyists, enthusiast World of Warcraft fans who would pay substantially more than probably what they’re paying today for enhanced services like character transfers in something like this.”

Take-Two Acquisition

“On the Take-Two front, I think we’ve had, as we’ve said for a very long time now, well-stated criteria for what we’re interested in in an acquisition. We’ve said that we need a history of profitability, good management, the proprietary technology for a franchise, history of multimillion unit sellers. And, for us, Take 2 didn’t fulfill those requirements. Maybe it does over the long-term for EA, but it doesn’t for us.”

Red Octane and Guitar Hero

“So, I think Red Octane is a great example of all of the things that we bring to the table in an acquisition. We bring an ability to increase production capability. I think an added dimension of strategic thoughts. When you look out the next 5 years at the Guitar Hero franchise and related products in that Red Octane business, we brought a rigor in the strategic planning process that they wouldn’t have had on their own.

The global footprint. We’re now bringing the relationship that we have with Universal Music on the development front. Red Octane was not in a position to develop the software on their own. We took our Neversoft studio, and within a year, created Guitar Hero 3.

We’ve got many of our studios working on things like note tracking, new platform implementations. New versions of the product. Expansion of the franchise in a variety of different ways.

The resources that we have are unique in our industry. I think that you’ve seen the results. It was a business that on its own was about $30 million standalone when we acquired it. When you look at where its potential is for the future, it’s a multi-billion-dollar business.”

New Revenue Models

“So you look at the model, how it shifted from packaged goods only. We sell you a $50 product…and now, three months later, we get some downloadable content revenue. Six months later, we get some downloadable content revenue. Some day in the future, we get some in-game advertising and sponsorship revenue. The dynamic, we now have the ability to generate more in-game advertising and sponsorship opportunities than we did in the past, because the installed base is growing.”

Pricing

“There is continued consolidation of the product flow. We have not seen a lot of sensitivity to pricing. So it’s not inconceivable you could see higher pricing. The Wii is a great example of where we made a mistake. We put out Guitar Hero 3 on the Wii, at $89.95 instead of $99.95. We had product shortages almost immediately. But we would have been able to have $10 higher wholesale price than what we sold it for. So that was our mistake.

But I actually think that when you look at the value-per-hour of entertainment in video games, there’s no reason why you couldn’t see premium products, as we’re starting to see the consolidation of the business to more premium products continuing, to demand more premium pricing.”

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Comments

One Response to “Activision CEO Bobby Kotick on His Company, Its Games, and the Industry”

  1. Skyler Sutter on March 3rd, 2008 1:20 am

    He should be happy, considering they just merged with Blizzard.

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