How Activision Blizzard Inc. Makes Its Money

Activision Blizzard Inc. (NASDAQ: ATVI) has long been the hottest name in video games. The company makes the most popular console game in the world, Call of Duty, as well as PC-based games like World of Warcraft and mobile giant Candy Crush.

Games like Candy Crush have the widest reach with hundreds of millions of downloads, World of Warcraft has sucked in the gamer community and built a juggernaught for the Blizzard Division. But the biggest money-maker for Activision Blizzard is an old mainstay that has proven it can stand the test of time: Call of Duty. That game has its home in the company's Activision division, which is one of three contributing to the company's success. Let's take a look at how the company makes its money.

Division breakdown

There are three distinct segments of operation for Activision Blizzard: Activision, Blizzard, and King.

Activision is home to the crucial Call of Duty and Destiny franchises. Blizzard is where World of Warcraft, Overwatch, and Diablo are developed and distributed. King's results are dominated by Candy Crush. Below is a look at the three segments' revenue and operating income over the past year.

Metric Activision Blizzard King
Revenue $2.725 billion $2.208 billion $2.058 billion
Operating income $1.073 billion $668 million $725 million

Activision's Call of Duty continues to be an incredibly important product, despite the company's efforts to diversify by buying Blizzard and King. Note that King, with its mobile and more-casual games, is the smallest segment. Gamers who spend hours per week playing Call of Duty, World of Warcraft, and Overwatch are where the real money is.

How to make gaming a recurring revenue business

The biggest shift in Activision Blizzard's business over the past decade has been to a more digitally focused business. This goes beyond app revenues from the King segment, which was built for a digital world. The company has done a tremendous job transitioning to a world where add-ons or expansion packs augment a player's game experience. These purchases are primarily made through digital platforms that didn't exist not too long ago.

In the first quarter of 2018, 74% of revenue was from digital sources, and in 2017 the percentage was even higher at 78%.

Digital revenue sources are now crucial to Activision Blizzard's business model, and we should see the company expand digital sales long term.

The unknown growth driver

Let's not forget esports, a booming business for video game companies. Analysts at Newzoo estimate that esports will generate $906 million in revenue during 2018, and will grow to $1.4 billion by 2020.

Activision Blizzard doesn't break out it esports segment specifically, but with the launch of Overwatch League earlier this year and a planned expansion of the league expected soon, esports could be approaching a billion-dollar business by the end of the decade.

Traditional games are still key

One surprising fact about Activision Blizzard is that traditional console games are still key to its revenue and earnings. Newer platforms like mobile are big, but hardcore gamers on consoles and high-end PCs are still the heart of the company's business. Investors should watch to make sure those gamers are kept happy with a steady diet of new content, because if they find more-compelling games elsewhere, they'll take significant revenue with them.

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Travis Hoium has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard. The Motley Fool has a disclosure policy.