Activision Blizzard, Inc.s Overwatch Is Killing It

By John Ballard Markets Fool.com

Activision Blizzard has new revenue streams opening up based on the game's appealing content. IMAGE SOURCE: ACTIVISION BLIZZARD INC.

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Activision Blizzard's (NASDAQ: ATVI) new Overwatch game has enjoyed remarkable success in the first year since its launch in May 2016. In less than a year, the hit multiplayer first-person shooter game has reached 25 million registered players, making it the most successful launch in the company's history.

Given the strong lineup of games Activision Blizzard has released over the years, this is a very impressive accomplishment. It also comes at a time when growth for Blizzard's aging World of Warcraft franchise is beginning to stall. World of Warcraft is a cash cow for the game publisher, but Activision Blizzard needs to show growth to deliver satisfactory shareholder returns over time, and Overwatch has picked up the slack in a big way.

Overwatch has universal appeal

What has made this game uniquely successful is its universal appeal. There is a balance of engagement in both Eastern and Western regions, which is incredible given that Western companies usually find it difficult to succeed in Korean and Chinese markets -- which is where Overwatch has seen great success reaching an audience.

Activision Blizzard has pounced quickly on the momentum of the game with creative ideas for downloadable content, and the big announcement of Overwatch League to capitalize on the growing opportunity in eSports. The overriding goal is to encourage and increase engagement with the game. Higher engagement leads to higher in-game revenue as we saw in the company's fourth quarter earnings report.

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Additional content drives revenue

In the fourth quarter, Activision Blizzard had record in-game revenues from sales of additional downloadable content across its diverse portfolio of game franchises. For the full year, the company's in-game revenue was $3.6 billion, an increase of 126% over 2015. Because the company has already made the bulk of the investment building a new game, these small, downloadable pieces of content that players purchase within the game carry very high margins.

One key reason for the game's enormous success is its design.Overwatch is easy to learn, highly addictive, and matches are completed within minutes. The game publisher allows free downloads for maps and new characters, but uses micro transactions for "loot boxes" that players earn for certain performance milestones. These loot boxes contain customization items for characters or the players' profile.

Management also creates engagement with Overwatch in the form of seasonal events like the recent Halloween Terror, Winter Wonderland, and Lunar New Year. Seasonal events are available for a limited time and bring a new element to the game with seasonal themed character outfits and environments. For example, in Winter Wonderland players battle each other in a Santa Claus-North Pole-like setting decorated with Christmas lights and snow. With Christmas appealing mostly to Western regions, Blizzard created the Lunar New Year event to appeal to players in China. Seasonal events have been very effective in driving higher engagement with Blizzard, posting a record for monthly active users in the fourth quarter.

eSports and consumer products

In addition to in-game content, Activision Blizzard has several revenue streams to develop in the future with eSports and consumer products. Of these opportunities, Overwatch League could be the biggest going forward. Market researcher Newzoo expects the eSports market to more than double by 2019 with $1.1 billion in global revenue. While North America is the largest market by revenue, the largest eSports audience is in Asia.

Asia is also the fastest growing eSports market. The global eSports audience is estimated to be over 200 million, and Asia makes up nearly half of this total, more than doubling the US. By 2019, the global eSports audience is expected to be 365 million, representing annual growth of 11.2% between 2014 and 2019.

These estimates provide a huge tailwind for Overwatch League. Management has said the game is designed to bring a "new era to eSports." Management's goal in designing Overwatch League was to make the eSports market easier for players, fans, and teams to engage with.

Activision Blizzard will kickoff the inaugural season later this year. On the last investor conference call, management noted that team sales and associated media rights are not factored into 2017 guidance. This will be an important new revenue stream for the company in the future, but the amount will likely have a negligible impact on the total revenue in 2017. Nonetheless, this is something to watch when the company reports third and fourth quarter earnings later in the year.

Last but not least, investors should watch for consumer product opportunities around Overwatch. With a long list of in-game characters and a very marketable global eSports league based on the game, Activision Blizzard has plans to release consumer products that deepen the player connection with the game and attract new audiences.

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John Ballard owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard. The Motley Fool has a disclosure policy.