It's quite possible that consumer products could be a $1 billion business for Activision Blizzard (NASDAQ: ATVI) 10 years from now. In 2017, the game maker officially formed a consumer products division and it already has a roster of licensing partners to help turn its deep library of characters and game brands into a meaningful merchandising business. The result so far is Candy Crush branded ice cream, collectibles, and T-shirts and Overwatch branded computer peripherals -- but that's just a warm-up.
Rovio -- the maker of the hit mobile game Angry Birds -- has already had success in parlaying the popularity of one game to success in the broader entertainment world. 2016's The Angry Birds Movie turned into a tremendous success at the box office, and Activision has its own film project in the works for its best-selling Call of Duty franchise. Below, I will explain why gamers are a perfect target for consumer products, and how Activision's movie and esports ambitions are integral to that effort.
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Consumer products are a natural fit
Gamers spend billions of dollars per year on in-game digital items. Activision alone generated more than half of its 2016 revenue from in-game purchases, which include "loot boxes" that randomly unlock various digital items like new outfits or a nifty icon to display on your in-game profile. Obviously, players are not going to spend this much money for digital window dressing unless they love the content.
Take-Two Interactive CEO Strauss Zelnick expressed this connection perfectly, and hinted at the growth opportunity it presents for all video game companies on the company's fiscal second-quarter conference call with analysts:
The love gamers have for these games makes them a very ripe market for consumer products. It makes sense that if gamers want to spend money on digital items that are encapsulated in a digital world, they might be interested in spending even more money on things that let them display their interests in the real world. Think about music bands selling T-shirts and, of course, what Walt Disney does on a larger scale with its licensed toys and merchandise.
New growth opportunities in movies and esports will be vital
Activision's consumer product initiative is just one cog in the wheel of CEO Bobby Kotick's vision to turn the company into a mainstream entertainment powerhouse for the 21st century.
Activision already has a good start, given its player base spent more than 40 billion hours across its games in 2016. The next step is to turn those billions of hours of engagement into a growing stream of profit for shareholders similar to what Disney has done with its content library.
Activision is at work on a few projects that will play a critical role in building its consumer products business in the years to come.
Up first on the horizon is Overwatch League -- a professional esports league based on the game -- which is about to begin its inaugural season in January. It's difficult to imagine being able to sell a lot of Overwatch branded merchandise, such as official team jerseys, without enough people tuning in to watch the competitions. As such, viewership will be important to monitor as the league ramps up.
There is also a major movie in development based on the Call of Duty franchise, which the company is developing in-house within its studios division, and by all accounts has the early look of a major series, where the story will be set within its own unique universe, much like Marvel's superhero movies.
Successful movie series can spur meaningful boosts in sales of branded merchandise. The most successful example, of course, would be the Star Wars movies, in which global sales of Star Wars merchandise is almost its own industry. Star Wars is an outlier example and video games don't have the best track record at the box office, but another maker of games has already shown how to take compelling video game content and turn it into a meaningful revenue stream, including at the movie theater.
Angry Birds maker aiming for new heights
Over the past year, Rovio has successfully bridged its Angry Birds franchise across different consumer product categories, which helped the small game developer generate 21% of its revenue from brand licensing. If Activision grows consumer products to a comparable contribution to its top line, that could translate to about $1 billion from licensing and merchandise.
In 2016, Rovio's The Angry Birds Movie grossed $350 million at the box office worldwide. Not surprisingly, Rovio has a sequel scheduled for 2019.
Imagine what Activision can do with its eight billion-dollar franchises. It all starts with having compelling content and a large audience reach, and Activision Blizzard has that in spades.
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