Activision Blizzard Shows Investors the Power of Franchises

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Video game maker Activision Blizzard (NASDAQ: ATVI) really took things to a new level in its recent third quarter results. Revenue and earnings each significantly beat guidance, leading the company to raise its full-year forecast.

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Investors are getting used to Activision knocking it out of the park, with this now marking the seventh straight quarter that they've exceeded expectations. And there's a powerful reason that we should expect the trend of outperformance to continue even further, which is the company's strong franchises.

The audience size is growing

A few decades ago, video game revenue came almost entirely from upfront software sales. Developers like Activision would put a ton of work into designing a solid game, then would distribute it through retailers to reap the rewards of their work.

But the video game industry of today is much different. Nearly all gamers are internet-connected, so Activision can continue their relationship for years or even decades after the first time they play. The focus is much less on the upfront sales, and much more about the number of people playing and the time spent in a game's ecosystem.

The audience size is one of the things that really stands out from Activision's report. Its Overwatch and Hearthstone games -- both of which are still relatively new and are initially given away for free and no upfront cost -- already claim 35 million and 70 million monthly active users (respectively).

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Between its Activision console games, its Blizzard PC games, and its King mobile games, the company now boasts an impressive 384 million monthly active users. 

The format of how gamers are playing (i.e. on a smartphone or a Sony Playstation) doesn't really matter as much. What's more important is that loyal users have installed the game, and that they're dedicating more time to it each day.

Time spent per user is now greater than 50 minutes every day, which the business notes now falls in line with "some of the most engaging online platforms of the world." That puts Activision in elite company, alongside Facebook (NASDAQ: FB) (50 minutes per day) and Tencent's (NASDAQOTH: TCEHY) WeChat (66 minutes).

The gaming business model is changing

The more time that people are in a game, the more opportunities that Activision has to make money off of them. Online games can capture "recurring" revenue from loyal users in the form of subscriptions or in-game content.  

Take Blizzard's epic World of Warcraft (WoW) franchise as an example. WoW celebrated its sixteenth birthday this year, yet it still has an estimated 10 million people playing the game. Everyone still playing is also still paying 15 bucks each month for a subscription, which tallies up to $1.8 billion of revenue each year. Wow doesn't have a lot of costs or require a ton of developer attention. That $1.8 billion of revenue falls quickly to the bottom line.

Serious gamers also want to win, which means they're also willing to spend for in-game content that will improve performance. Special items can often give players an edge over others, which makes players without those items want to purchase them as well. Think about it as "keeping up with the Joneses" of the video game world.

Activision's taking our competitive spirit one step further. A recent patent details the company may soon purposely match lower-ranked players against higher-ranked ones who have special items, to encourage the lower-ranked players to make in-game purchases. The company could collect not only for selling the items directly to players, but also take a cut of items sold player-to-player -- similar to how eBay (NASDAQ: EBAY) facilitates consumer-to-consumer transactions.

Activision Blizzard pulled in $5 billion last year alone in digital gaming revenue. Of that, $3.6 billion came from in-game purchases. These high-margin, recurring sales that occur after their games have already been sold are an excellent way for the company to boost both its top and bottom line. 

The Foolish bottom line

Time is one of the most precious resources in the entertainment industry. Movie producers, social media apps, and video game developers are all competing for the same 24 hours that you have available every day. The companies that are capturing more of our collective time will also be the ones that capture a greater share of the industry's profits.

Video gaming is becoming increasingly competitive, and Activision Blizzard has taken note. The company's business strategy shift, focusing more on offering recurring subscriptions and in-game content, should make them an excellent opportunity for investors to consider.

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Simon Erickson owns shares of Activision Blizzard and Facebook. The Motley Fool owns shares of and recommends Activision Blizzard, eBay, and Facebook. The Motley Fool has a disclosure policy.