Term Project Activision Blizzard & Ea

Table of Contents

I. Executive Summary .......................................................................................................................................... 3
II. Industry Overview ........................................................................................................................................... 4
2.1 Scope (Products/Customers/Regions) .................................................................................................. 4
2.2 Competitor Analysis .................................................................................................................................... 5
2.3 Value Chain Analysis ................................................................................................................................... 6
2.4 PESTDG Model............................................................................................................................................... 7
2.4.1 Political .................................................................................................................................................. 7
2.4.2 Economic................................................................................................................................................ 8
2.4.3 Socio-Cultural....................................................................................................................................... 8
2.4.4 Technological ....................................................................................................................................... 8
2.4.5 Demographic/Psychographic ......................................................................................................... 9
2.4.6 Global ...................................................................................................................................................... 9
2.5 Porter’s 5 Forces Analysis: Interactive Gaming Industry ............................................................... 9
2.5.1 Buyer Power – (Moderate to High) ............................................................................................ 10
2.5.2 Supplier Power – (High) ................................................................................................................ 10
2.5.3 Threat of New Entrants – (Low to Moderate)........................................................................ 10
2.5.4 Threat of Substitute Products & Services – (Moderate) ..................................................... 11
2.5.5 Competitive Rivalry – (High) ....................................................................................................... 11
2.5.6 Overall Attractiveness of the Industry ...................................................................................... 12
III. Company Analysis: Activision-Blizzard Inc. ...................................................................................... 12
3.1 History........................................................................................................................................................... 12
3.2 Business Model ........................................................................................................................................... 13
3.3 Financial Information ............................................................................................................................. 14
3.4 Products & Services .................................................................................................................................. 15
3.5 Competitive Strategy ............................................................................................................................... 16
3.6 Branding & Website Analysis ................................................................................................................ 16
3.7 SWOT Analysis............................................................................................................................................ 18
3.7.1 Strengths ............................................................................................................................................. 18
3.7.2 Weaknesses ........................................................................................................................................ 18
3.7.3 Opportunities..................................................................................................................................... 19
3.7.4 Threats................................................................................................................................................. 19
IV. Company Analysis: Electronic Arts ....................................................................................................... 20
4.1 History........................................................................................................................................................... 20
4.2 Business Model ........................................................................................................................................... 21
4.3 Financial Information ............................................................................................................................. 21
4.4 Products & Services .................................................................................................................................. 22
4.5 Competitive Strategy ............................................................................................................................... 22
4.6 Branding & Website Analysis ................................................................................................................ 23

4.7 SWOT Analysis............................................................................................................................................ 24
4.7.1 Strengths ............................................................................................................................................. 24
4.7.2 Weaknesses ........................................................................................................................................ 25
4.7.3 Opportunities..................................................................................................................................... 26
4.7.4 Threats................................................................................................................................................. 26
V. Comparison of the 2 Companies: Activision-Blizzard Inc. & EA Inc. ......................................... 27
5.1 Summary of Findings ............................................................................................................................... 27
5.2 Financial Information Comparison..................................................................................................... 28
5.3 Website Analysis ........................................................................................................................................ 29
5.4 Branding & Strategic Implications ..................................................................................................... 30
VI. Recommendations....................................................................................................................................... 31
6.1 Strategic Options Analysis: Activision-Blizzard Inc....................................................................... 31
6.2 Strategic Options Analysis: Electronic Arts ...................................................................................... 31
6.3 #1 Priority for the CEO in Activision-Blizzard Inc. ........................................................................ 32
6.4 #1 Priority for the CEO in Electronic Arts ........................................................................................ 32
VII. Appendices ................................................................................................................................................... 33
Exhibit 1: Competitive Profile Matrix ........................................................................................................ 33
Exhibit 2: Impact of General Environmental Trends on the Interactive Gaming Industry ..... 34
Exhibit 3: Porter’s 5 Forces Analysis Diagram (Interactive Gaming Industry) ........................... 35
Exhibit 4: Financial Ratio Comparison for Activision-Blizzard Inc................................................. 36
Exhibit 5: Activision-Blizzard Main Website Screenshot .................................................................... 37
Exhibit 6: Activision Website Snapshots ................................................................................................... 37
Exhibit 7: Activision E-Commerce Model Snapshot .............................................................................. 38
Exhibit 8: Blizzard Website Snapshot ....................................................................................................... 38
Exhibit 9: Blizzard Website E-Commerce Model Snapshots .............................................................. 39
Exhibit 10: Financial Ratio Comparison for Electronic Arts Inc. ..................................................... 40
Exhibit 11: EA Main Website Snapshot ..................................................................................................... 41
Exhibit 12: EA Website Snapshot ................................................................................................................ 41
Exhibit 13: EA E-Commerce Website Snapshots .................................................................................... 42
VIII. References ................................................................................................................................................... 43

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I. Executive Summary
The purpose of this project was to compare two different organizations in the same industry. For this
project, I had chosen to compare Activision-Blizzard Inc. and Electronic Arts Inc. Both of these organizations
operate in the interactive gaming industry across various gaming platforms. In this way, “the company
operates in two business segments: publishing of interactive entertainment software and distribution of
interactive entertainment software and hardware products.”1 After carefully analyzing macro industry and
specific organizational factors, key priorities were identified in developing specific recommendations for
Activision Blizzard and Electronic Arts Inc.
Overall attractiveness of the interactive gaming industry can be described as being fairly attractive
because it has strong competition, high buyer power, moderate threat of entrants, moderate substitutes, and
high supplier power. Overall attractiveness in this industry is expected to get worse as smaller developers get
bought up by bigger players, and the negative impact of the recession gets played out in the future. Provided
that a game developer in this industry is able to mitigate economic factors and buyer power, it has a
tremendous opportunity to stand out amongst the competition and carve out a bigger niche in this industry.
Activision Blizzard Inc. is a console game publisher and online development organization. In terms of
its history, it “was formed by combining Activision, Inc., an independent publisher of interactive
entertainment, and Vivendi Games, Vivendi SA’s interactive entertainment business.”2 Activision Blizzard’s
portfolio has various video game titles “such as Guitar Hero, Call of Duty, and Tony Hawk, as well as Spider-
Man, X-Men, Shrek, James Bond and Transformers, and franchises, such as Crash Bandicoot and Spyro and
Blizzard Entertainment’s StarCraft, Diablo and Warcraft.”3
Electronic Arts Inc. is the leading interactive entertainment software company. It “develops,
publishes, and distributes interactive software worldwide for videogame systems, personal computers,
cellular handsets and the internet. The company’s flagship brands include EA, EA Games, EA Sports, The Sims
and Pogo, as well as Hollywood films game series including The Lord of the Rings, The Godfather, Harry
Potter, and Batman.”4
In conducting a thorough analysis of both organizations based on specific criteria – financing,
website, branding, competitive strategy, SWOT analysis, and products/services, it was concluded that
Electronic Arts is more successful in terms of generating higher revenues, having a greater market share,
availability of product selection, value added services, e-commerce capabilities, and value for money.
However, Activision-Blizzard Inc. has caught up considerably in terms of gaining market share, improving
their product selection, e-commerce capabilities, and reducing operating costs which were lower than EA in
fiscal year end 2008 (107.7% for Activision-Blizzard versus 113.3% for EA). In this way, Activision-
Blizzard’s subscription based model will become more successful in the future because of the potential
growth of subscription-based online gamers in the Asia-Pacific region – 23% compounding growth as
compared to 4.0% growth of gamers in North America 5). In this case, EA has to continue to develop its gaming
architecture further, restructure its publishing studios, divest its worst selling games, and continue to develop
games for the mobile and social networking platform market.
If I had to choose only one company in which to invest in, I would choose Activision-Blizzard Inc.
because of its unique business model, strong global presence in niche based gaming genres, R&D investment
strategies, and potential for growth in the Asia-Pacific region.

1 Marketline > Profile > Activision, inc. Retrieved 1/18/2009, 2009, from
http://www.marketlineinfo.com.ezproxy.library.dal.ca/library/iProduct_product.aspx?R=36B9F70C-2ED3-416A-BD6A
74E543D87235&s=IDAHAJ1B
2 Factiva > Activision Blizzard Company Profile. Retrieved 1/18/2009, 2009, from

http://global.factiva.com.ezproxy.library.dal.ca/ar/default.aspx

http://www.marketlineinfo.com.ezproxy.library.dal.ca/library/iProduct_product.aspx?R=36B9F70C-2ED3-416A-BD6A-
74E543D87235&s=IDAHAJ1B
4 Marketline > Profile > Electronic Arts. Retrieved 1/18/2009, 2009, from

http://www.marketlineinfo.com.ezproxy.library.dal.ca/library/iProduct_product.aspx?R=E9821E9D-293D-4412-AA7F
C16950961D78&s=IDAGMRNB
5 Marketline > Profile > Vivendi S.A. Retrieved 3/10/2009, 2009, from

http://www.marketlineinfo.com.ezproxy.library.dal.ca/library/iProduct_toc.aspx?R=EEA43AE4-13C5-492C-8768-
D27186836EA1&N=4294834008

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II. Industry Overview

2.1 Scope (Products/Customers/Regions)
The interactive gaming industry is comprised of manufacturing and developing of
home entertainment software for the PC (including Macintosh), console gaming systems
(Xbox 360,Nintendo Wii & GameCube, Sony Playstation 2 & 3), portable gaming systems –
Playstation System Portable, Gameboy Advance, Nintendo DS), online gaming (web and
Java based software), and mobile platforms (iPod, iPhone and Smartphones)6. In this way,
this industry is very much global in terms of the development of games to the end users of
software that are comprised of hardcore and casual gamers across many multiple
platforms.
In terms of the United States interactive software market, it “generated total
revenues of $9.5 billion in 2007, which represents a compound annual growth rate (CAGR)
of 4.8% for the six-year period spanning 2002-2007”7. It is interesting to know that
“console games software sales represented 82.6% of the market’s overall value. In
comparison, the sales of personal computing games represented 17.4% of the market’s
aggregate revenues”8 In this way, development of new hardware sales usually drive the
demand for development of high performance gaming software, as illustrated below9.

6 Marketline > Industry profiles (Gaming Software). Retrieved 3/10/2009, 2009, from
http://www.marketlineinfo.com.ezproxy.library.dal.ca/library/DisplayContent.aspx?N=210+4294853461
7 Ibid
8 Ibid
9 Industry: Video games. Retrieved 3/16/2009, 2009, from

http://www.wikinvest.com/industry/Video_Games#_note-14

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As depicted previously, the future market value of this industry in the United States
is expected to grow by 5% for the next five years, and total market value of $10.3 billion by
the end of 201110. In comparison, the Asian market, UK market, and the French market are
expected to grow with CAGRS of 15%, 8.9%, and 2.4% over the same five year period11.

2.2 Competitor Analysis
The interactive gaming industry is comprised of 86 competitors as of 200812, with
more consolidations of companies likely in the future due to the increased threats faced by
piracy, increased competitive factors, riskiness due to upfront developmental costs,
economic recessionary factors, and “rise of game players as developers of game content”13.
These aspects will be discussed in more detail in the industry and SWOT analysis later on
in this report.
The top 10 major competitors in the interactive gaming industry (all figures are
from year end 2008) are comprised of the following game developers:

Rank Company Name Sales Employees Market Cap Net Income Net Profit
USD (m) USD (m) USD (m) Margin
1 Electronic Arts Inc. 3,665.00 9,037 5,715.52 - 454.00 -12.39%
2 KONAMI CORPORATION 3,233.86 5,472 2,067.05 199.48 6.64%
3 Activision Blizzard, Inc. 3,026.00 2,149 12,915.29 -107.00 -3.54%
4 SQUARE ENIX HOLDINGS CO., LTD. 1,605.53 2,973 1,874.94 100.19 6.19%
5 Take-Two Interactive Software, Inc. 1,537.53 2,100 591.14 97.10 6.32%
6 Ubisoft Entertainment SA 1,450.90 4,323 1,429.89 142.36 8.49%
7 THQ Inc. 1,030.47 2,400 184.41 -35.34 -3.58%
8 RealNetworks, Inc. 604.81 1,774 290.21 -243.88 -40.32%
9 Infogrames Entertainment 372.01 555 47.31 -65.39 -21.33%
10 KOEI CO., LTD. 309.42 1,191 469.34 55.96 18.44%
Source: Reuters, Factiva14

In this way, competition in the interactive gaming industry (Please refer to Exhibit
1 that highlights the competitive profile matrix) can be described as very strong. Since the
“development costs are high and many titles often make little profit, as software
development companies rely even more heavily on blockbuster hits for substantial revenue
streams”15

10 Ibid
11 Ibid
12 Factiva > Electronic Arts Company Profile. Retrieved 3/15/2009, 2009, from

13
Video Game Industry - Wikipedia, the free encyclopaedia. Retrieved 3/15/2009, 2009, from
http://en.wikipedia.org/wiki/Video_game_industry

15

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2.3 Value Chain Analysis
The Value Chain for the interactive gaming industry can be illustrated in the
following manner:

- Design of new - - Development of - Attracting the right - Forecasting
software titles for gaming studios human capital talent Models/Trends
various platforms - - Manufacturing (developers/producers)
Services - Value added services
- Protection of
intellectual property

Firm Infrastructure
Human Resource Management
Technology development (R&D)
Procurement

Inbound Outbound Marketing
Operations Service
Logistics Logistics & Sales

- Capital layer: - Production - Distribution - Publishing layer: -‘End Users’
(content providers layer: content layer: generating establishing royalty Layer: services
& software creation & added game titles for and retail fees with through e-
developers) services placement console partners; commerce models
- Talent layer: in- - Tools layer: through online - Hardware layer: (online updates,
house or individual game engines, and retail marketing/promotion subscription
development team mgmt. tools, etc. distribution of the game catalogue based models,
channels etc.)

Source: Flew, Terry & Humphreys, Sal (2005). "Games: Technology, Industry, Culture". New
Media: an Introduction (Second Edition). Oxford University Press. pp. 101-114

According to Ben Sawyer of Digitalmill, the interactive gaming industry value chain is made
up of six interconnected layers:

1. Capital and publishing layer: upfront costs of developing new titles and seeking returns
through licensing of the titles (typically through royalties from console manufacturers)16.

2. Product and talent layer: consists of developers, designers and artists, who may be
working under individual contracts or as part of in-house development teams17.

16
17 Ibid

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3. Production and tools layer: creation of content production tools, game development
middleware, customizable game engines, and production management tools18.

4. Distribution layer: involved in generating and marketing catalogues of games for retail
and online distribution19.

5. Hardware (or Virtual Machine or Software Platform) layer: or the providers of the
underlying platform, which may be console-based, accessed through online media, or
accessed through mobile devices. This layer now includes non-hardware platforms such as
virtual machines (e.g. Java or Flash), or software platforms such as browsers or social
networking platforms such as Facebook.20

6. End-users layer21: Value-added services after the games have been sold that includes up-
selling of another game title, online updates, subscriptions for new features, etc.

2.4 PESTDG Model
In order to gain more understanding of the interactive gaming industry, it is
important to examine the external macroeconomic factors that are affecting this industry
as a whole. The intention of this analysis is to understand the degree to which the
environmental forces affecting this industry, and how a company in this industry can take
advantage of the opportunities, as well as minimize threats posed to their business. Please
refer to Exhibit 2 for a summary of the impact of general environmental trends and events
on the interactive gaming industry.

2.4.1 Political
In terms of the interactive gaming industry, there are some factors that would affect
the future viability of a company operating in this industry. These factors are home market
lobbying/pressure groups, future legislation, and funding/grants by governmental bodies.
For instance, Montreal has quickly become the number one hub of game development, with
“the number of people employed in the game industry sky rocketing to 177% in two
years.”22 This trend “has been fuelled by aggressive government incentives, some of which
Ubisoft helped to shape a decade ago, encouraging companies to set up shop in the region.
Undoubtedly the weaker Canadian dollar of past years helped, as Canada provided US
companies with inexpensive outsourcing to culturally-similar game workers.”23 Despite

18 Ibid
19 Ibid
20 Ibid
21 Ibid
22 Video game venture capital - VGVC » Government Activity. Retrieved 3/16/2009, 2009, from

http://www.vgvc.net/?cat=165
23 Ibid

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these promising trends however, there is a strong possibility in the future that lobbying
interests could effectively pressure the governments to implement legislation that
prohibits production of violent gaming and having a subversive lifestyle. As a result, these
events would have a tremendous negative impact on the game publishing and console
industry, perhaps even ‘killing’ the interactive gaming industry as it exists today.

2.4.2 Economic
Currently, the interactive gaming industry is facing tremendous challenges because
of the increase in costs associated with developing the games, and the recessionary trends
occurring throughout the world. In this way, the general economic trends associated with
issues in the domestic and global economy, monetary/trade policies, and decline in market
trends associated with the interactive gaming industry have tremendous negative
consequences for the future viability of companies in this industry.
Thus, it is essential for companies in the interactive gaming industry to be more
aggressive than ever in acquiring new customers for their products. This is because many
of the game publishers can be creative in this type of economy, where they can offer
innovative products that improves their overall lifestyle (example of this is designing an
interactive exercise [Nintendo Wii Fit] or educational software [Scrabble]).

2.4.3 Socio-Cultural
This trend is particularly important because it greatly influences the organization’s
strategic formulation of which genre of games that it should compete in. In the interactive
gaming industry, a high degree of customization is required, where the end users can adapt
their lifestyle and software to the local culture. To a certain extent, the software is
somewhat standardized, but creation of the ultimate experience and thrills are the crucial
intangibles that makes one game publisher differentiate itself from its competition. In this
way, innovation if gaming and quick adoption of technology has positive impacts on the
interactive gaming industry as a whole.

2.4.4 Technological
Overall, increasing innovations in technology has led to greater development of
products being available to the end user. Consequently then, certain technological
innovations such as the Internet, and processing power, have led to tremendous growth of
interactive gaming. In addition, these trends have generated greater rivalry among the
competitors in this industry, through different procurement channels such as building e-
commerce models, technological innovations, reducing the cost of obtaining information,
and government subsidies that have had a tremendous impact (both negative and positive)
on the consumption habits of consumers around the world.

Page 8 of 44

As technological innovation is continuously evolving and revolutionizing the
landscape of interactive gaming software and its capabilities, those who want to survive
must maintain their competitive advantage developing new and dynamic ways to entice
customers. Organization must be aware of the technology adoption life cycle, realize when
it will reach maturity, and be prepared through research and development initiatives to be
ahead of the curve.

2.4.5 Demographic/Psychographic
These types of trends – demographic and psychographic are important in
understanding the interactive gaming industry because it creates specific opportunities
that organizations can exploit and take advantage of. Understanding specific demographic
trends and the impact of aging population in the developed countries, allows an
organization to effectively create customized strategy that targets different gamers with
products suited to their needs. Psychographic trends are equally as important in
understanding the different mixture of groups of people that exist within the country,
which directly impacts the nature of the strategy (localized or global) that the firms can
engage in.

2.4.6 Global
In today’s globalized society, there is a need for organizations to expand their
products and services beyond the borders of its home nation. This aspect is especially true
game publishing companies, where the emergence of economies in the developing world
such as India and China, has caused surging demand for innovative software, creativity in
how people interact with each other, customization, and consumption of Western lifestyle.
Consequently then, these factors have a significant impact on the organization’s strategic
initiatives and negative impact on the environment due to perception of obsolesce notions.
Perception of obsolesce means that people perceive a product (especially interactive
technology) as being useless after a relatively short period of time because they perceive
the new products as being innovative, when the old technology is still useful and
functioning more effectively than the newer technology. Thus, it is very important for the
organizations to understand the factors of globalization and the impact of competitive
industry trends that exist in the interactive gaming industry.

2.5 Porter’s 5 Forces Analysis: Interactive Gaming Industry
Industry analysis (please see Exhibit 3 for the Porter’s 5 forces diagram) highlights
the underlying issues that determine competitive performance in a dynamic environment,
as well as financial viability in the future. Even if the forces affecting this industry change,
they remain the determinant of competitive success.

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2.5.1 Buyer Power – (Moderate to High)
Buyers in the interactive gaming industry generally fall under one category, which
are mainly consumers of software, “since consumer demand is expected to exert strong
pull-through on retailers.”24 In this way, consumers have tremendous power in this
industry because they can demand better quality of products (resulting in increasing costs
for game developers), and “generally playing industry participants off against one another,
all at the expense of industry profitability.”25 Consequently then, these buyers have
tremendous negotiating advantage depending on their size and influence in the local
markets. Moreover, buyers in this industry face low switching costs and can easy switch to
other game publishers if they feel that they are not getting value for their money. In this
way, “brand loyalty is relatively low and although leading companies achieve a degree of
brand recognition and success through established games lines, the success of individual
titles is highly dependent upon critical review.”26 Thus, buyer power in this industry is
moderate to high, which is unfavourable for the industry as a whole.

2.5.2 Supplier Power – (High)
In the interactive gaming industry, games software publishing is “regarded as being
‘weightless’ and labour intensive, because success in this market requires the services of
talented software developers, whether working in-house or as third parties.”27 In this way,
the variation of inputs (considered to be R&D technology development) increases the
notion of supplier power. For instance, “use of intellectual property from other media –
utilization of characters from popular films, is also a significant input for many
publishers.”28 Thus, supplier power is pretty high, which is favourable for this industry.
Consequently then, suppliers can become more powerful than the buyers in this industry if
they increase the switching costs for the buyers, decrease availability of substitutes, and
offer differentiated products and services.

2.5.3 Threat of New Entrants – (Low to Moderate)
Barriers to entry in an industry is determined by the ease of entry by new players
who are trying to challenge the market share of existing entities, making the overall
industry situation unattractive. In this case, the threat of new entrants in the interactive
gaming industry is considered to be low to moderate. Barriers to entry are relatively low
because “fixed costs are relatively low and thus conducive to the entry of new players into

25 Porter, Michael E., (2008). The Five Competitive Forces That Shape Strategy, Harvard

Business Review, Vol. 86 Issue 1, p78-93

27 Ibid
28 Ibid

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the industry.”29 Despite this favourable trend, “development of games titles is often lengthy,
and thus so are timescales for return on investments. Companies entering the market must
therefore endure substantial start-up costs.”30 Subsequently then, once significant amounts
of proprietary knowledge is developed (software coding), established companies have
tremendous competitive advantages in terms of using that knowledge in developing better
game titles31, thus significantly reducing costs even further. Despite these negative trends,
start-ups can be very successful if they develop innovate branding and game titles which is
then readily accepted by consumers (low switching costs). Thus, barriers to entry in this
case can be described as low to moderate, depending on how new entrants move to
consolidate its position in the market.

2.5.4 Threat of Substitute Products & Services – (Moderate)
The presence of varied substitutes in the interactive gaming industry lowers its
overall profitability, and unless an entity can distinguish itself through performance and a
unique competitive advantage, it may have trouble surviving. Some of the substitutes that
exist in this industry are other forms of entertainment such as music, film, live events, and
participation in sports. Despite the existing forms of substitutes, the gaming industry
enjoys “a strong, captive audience and although indirect competition from other
entertainment forms are apparent, they pose modest threat to games market revenues.”32
However, in the future environmental trends and political pressures can act as a deterrent
for new entrants to remain competitive within this industry. Thus, existing players in this
industry can mitigate the threats somewhat by establishing a strong brand presence, viable
competitive advantage through its strengths, and carving out a unique niche for itself.

2.5.5 Competitive Rivalry – (High)
The rivalry in the interactive games industry can be described as very “strong and a
zero sum game”33. This is because of developmental costs that are quite “high and many
titles often make little profit, with development companies relying upon blockbuster hits
for a substantial revenue stream.”34 In addition, production of software titles is “minimal
(economies of scale process) compared to total development costs and therefore the cost of
capacity increases is also minimal, which has the effect of enabling intensified
competition.”35 Although exit barriers remain moderate, most competitors in this industry

29 Ibid
30 Ibid
31 Ibid
32 Ibid
33 Ibid
34 Ibid
35 Ibid

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are of similar size in terms of market share, and committed to having a focused strategy
that is dependent on minute diversification36, which results in greater magnitude of rivalry.

2.5.6 Overall Attractiveness of the Industry
Although the interactive gaming industry is characterized as having high degree of
competition, high buyer power, relatively favourable competitive trends relating to low to
moderate threat of entrants, moderate substitutes, and high supplier power. In this way,
this industry is somewhat attractive, and the overall attractiveness would be expected to
get worse as unfavourable factors such as consolidation of smaller developers, financial
viability, and recessionary factors gets played out in the future. Provided that a game
developer in this industry is able to mitigate economic factors and buyer power, specifically
through implementing a differentiation strategy, it has a tremendous opportunity to stand
out amongst the competition.

III. Company Analysis: Activision-Blizzard Inc.

3.1 History
Activision-Blizzard Inc. is a console game publisher and online involved in
“publishing, developing, and distributing interactive entertainment and peripheral
products”37 to its consumers around the world. This company “was founded in 1979 by
James Levy, along with four former Atari programmers: David Crane, Alan Miller, Bob
Whitehead, and Larry Kaplan. The company was incorporated in the state of California and
traded in 1979 as the first independent developer and distributor of entertainment
software.”38 In the early stages of the company, Activision Inc. “launched a series of multi-
million selling Atari 2600 titles, including the Pitfall! Series, Kaboom, and River Raid in the
early 1980s and company completed its initial public offering, in 1983.”39
Throughout its 30 year history, Activision Inc. has gone “through bankruptcy and
series of alliances and mergers with small development studios before becoming
successful.”40 Blizzard’s past history also has been turbulent in terms of having “a number
of owners before ending up in the hand of Vivendi in 1998.”41 More recently in December
2007, it was announced that the French owned media conglomerate “Vivendi SA would
merge with fellow games developer and publisher Activision-Blizzard in a deal worth USD

36 Ibid
37 Marketline > Activision, Inc. Overview. Retrieved 3/15/2009, 2009, from
http://www.marketlineinfo.com.ezproxy.library.dal.ca/library/DisplayContent.aspx?N=4294841253
38Factiva > Activision Blizzard Company Profile. Retrieved 1/18/2009, 2009, from

39 Ibid
40 BBC NEWS | technology | video game giants in $18bn merger. Retrieved 3/17/2009, 2009, from

http://news.bbc.co.uk/1/hi/technology/7123582.stm
41 Ibid

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$18.8 billion.”42 This deal was finally approved by the European Commission in April 2008,
and on July 9, 2008, Activision Inc. announced that stockholders had agreed to the merger,
as there were no anti-trust issues as a result of this unification.”43 As a result of this merger,
“Vivendi has a 52% stake in the company, whereas rest of the shares are held by
institutional and private investors and continues to be traded on NASDAQ stock
exchange.”44 As part of the merger, “Blizzard will invest $2 billion USD in the new company,
while Activision Inc. is putting up $1 billion USD.”45
It is interesting to note that Activision Inc. and Blizzard Entertainment will remain
as separate entities for the foreseeable future. While “Blizzard retains its autonomy and
corporate leadership (Michael Morhaime is still President of Blizzard, other Vivendi Games
divisions such as Sierra Entertainment”46 were closed down shortly after the merger was
completed. The CFO of Activision-Blizzard Inc. – Thomas Tippl, has alluded to future
layoffs, stating that the company “will exterminate some of our overlap through
redundancy – but we will treat people fairly and respectfully in that process."47

3.2 Business Model
Activision-Blizzard Inc.’s model is based on combination of selling interactive
gaming software and subscription-based online games48. In this way, “the company
operates in two business segments: publishing of interactive entertainment
software/peripherals and distribution of interactive entertainment software and hardware
products.”49 In terms of the publishing segment, that includes the subscription-based
“multi-player online role-playing games, or MMORPGs,”50 develops “markets and sales for
the various game products both directly, and by licensing through third party publishers.
The direct sales channels for Activision-Blizzard Inc. are “discount warehouses, consumer
electronics stores, mass-market retailers, and game specialty stores.”51 This particular

42 Ibid
43 EU Greenlights Activision-Vivendi merger. Retrieved 3/17/2009, 2009, from
http://www.joystiq.com/2008/04/16/eu-greenlights-activision-vivendi-merger/
44 Ibid

46 INTERVIEW - Thomas Tippl | gaming industry | interview by MCV. Retrieved 3/17/2009, 2009, from

http://www.mcvuk.com/interviews/288/INTERVIEW-Thomas-Tippl
47 Ibid
48 Activision– 2008 Annual Report. Retrieved 3/3/2009, 2009, from

http://investor.activision.com/annuals.cfm

http://www.marketlineinfo.com.ezproxy.library.dal.ca/library/iProduct_product.aspx?R=36B9F70C-2ED3
416A-BD6A-74E543D87235&s=IDAHAJ1B

51 Thomson Research (Investext) – Activision Blizzard Inc. – Financial Analysis. Retrieved 3/12/2009, 2009,

from http://research.thomsonib.com/gaportal/ga.asp

Page 13 of 44

segment accounted for 80.4% of Activision-Blizzard Inc.’s total revenues in 200852. The
distribution segment of Activision-Blizzard is comprised of “providing logistical and sales
services to affiliate publishers of entertainment software and manufacturers of
entertainment hardware.”53 This particular segment accounted for 19.6% of the company's
total revenues.54

3.3 Financial Information
The financial position of Activision-Blizzard Inc. can be illustrated by the following
diagrams55:

Source: Reuters

It is interesting to note that most of Activision-Blizzard Inc.’s revenues in terms of
geographical regions are generated in North America (60.8%), followed by Europe
(35.8%), and Asia-Pacific (3.4%)56.

52 Ibid
53 Ibid
54 Ibid
55 Ibid
56 Activision – 2008 Annual Report. Retrieved 3/3/2009, 2009, from


Page 14 of 44

3500

Revenues & Net Income (Million USD)
3000

2500

2000

1500 Revenue

1000 Net Income

500

0
2004 2005 2006 2007 2008
-500
Year

Source: Activision-Blizzard Inc. Annual Report, Investex Report (2008)

Analyzing Activision-Blizzard Inc.’s financials over the 2004-2008 period more
closely, we can see that it “reported revenues of USD $3,026 million during the fiscal year
ended 2008, an increase of 100% over 2007.”57 In addition, “the operating loss of the
company was USD $233 million during the fiscal year 2008, a decrease of 418.52% over
2007, and overall net loss of the company was USD $107 million during the fiscal year
2008, a significant decrease of 224.72% over 200758.
In comparing the two separate entities, it is interesting note that Activision Inc. as a
separate company is much more profitable than when it is combined with Blizzard. This is
particularly evident in the Activision Inc. 2008’s “net revenues of $2.9 billion USD, a 92%
over the prior year, operating income of $480 million USD, a 558% increase over the prior
year, and net income of $345 million, which represents a 302% increase over fiscal
2007.”59 Consequently then, Activision Inc., generated “a GAAP operation margin of 16.5%
that exceeded their peak-cycle target range approximately two to three years ahead of
plan.”60 (Please refer to Exhibit 4 for a detailed comparison of financial ratios)

3.4 Products & Services
Activision-Blizzard Inc. has over the past two years, has become the number one
supplier of interactive video game software. This is evident by the fact that “during the
fiscal year of 2008, the company had three of the top ten bestselling titles in the U.S. and set
an industry record for U.S. sell-through.”61 In addition, “two of the largest franchises, Call of
Duty (#1 bestselling PC game title worldwide) and Guitar Hero, both of which surpassed $1

57 Thomson Research (Investext) – Activision Blizzard Inc. – Financial Analysis. Retrieved 3/12/2009, from
http://research.thomsonib.com/gaportal/ga.asp
58 Ibid
59 Activision – 2008 Annual Report. Retrieved 3/3/2009, 2009, from

60 Ibid
61 Ibid

Page 15 of 44

billion in life-to-date sales during the fiscal year (2007), with Guitar Hero reaching that
milestone in a record 26 months.”62 Activision Blizzard Inc.’s portfolio has numerous video
game titles “such as Guitar Hero, Call of Duty, and Tony Hawk, as well as Spider-Man, X-
Men, Shrek, James Bond and Transformers, and franchises, such as Crash Bandicoot and
Spyro and Blizzard Entertainment’s StarCraft, Diablo and WarCraft.”63

3.5 Competitive Strategy
As mentioned in the business model section, Activision-Blizzard Inc.’s strategy is
primarily based on marketing video gaming software and online based MMORPGs that are
subscription-based such as StarCraft, Diablo, and WarCraft. This organization “focuses on
diversified categories of games which include action sports, simulation, first-person action,
racing, role-playing, action and adventure and music-based gaming.”64 This is particularly
evident with its recent acquisition strategy of Bizarre Creations in order to compete in a
$1.5 billion USD segment that previously Activision-Blizzard was not competing in, outside
of sports65. The reason behind this acquisition was that for many years, it “didn’t have the
development capability to put out a top game (to compete with the Need for Speed
franchise) and there were not many external options around.”66 In terms of the revenues
from gaming platforms through licensing agreements, “82.76% is comprised by console
gaming, followed by Handheld which is 10.84%, and PC with 6.39% respectively.”67

3.6 Branding & Website Analysis
Brand management in this case is the application of the marketing framework in
order to increase brand equity in the consumer’s mind. For Activision-Blizzard, it becomes
especially important for the gaming products/procurement services to be positioned in
such a way that it becomes the brand of choice for its consumers and be easily
distinguished from the competitors in the interactive gaming industry. Thus, integration of
an e-commerce strategy with a dynamic website becomes even more important for
companies in this industry because of specific factors that relate to strong rivalry, high
buyer power, and consolidation trends due to unfavourable economic conditions that exist
currently. Visiting the Activision-Blizzard site (see Exhibits 5 to 9), we can see that it is

62 Ibid
http://www.marketlineinfo.com.ezproxy.library.dal.ca/library/iProduct_product.aspx?R=36B9F70C-2ED3-
416A-BD6A-74E543D87235&s=IDAHAJ1B

65 INTERVIEW - Thomas Tippl | gaming industry | interview by MCV. Retrieved 3/17/2009, from

66 Ibid


Page 16 of 44

separated into two different entities, with each developer having different categories of
games. In measuring how well these websites are designed, a list of common website
metrics was devised and websites were compared as follows:

Website Metrics Activision Inc. Blizzard Inc.68
Visitor
Traffic Rank & (based on 14,680 (Average of 1 week) 1,690 (Average of 1 week)
all page views and reach)
Exposure
Page Views + U.S. users rank #1 with 29.9% + U.S. users rank #1 with 33.6%
+ German users rank #2 with 6.1% + German users rank #2 with 8.7%
Visit
Stickiness + 1.79 (Decrease of 7% over last three + 2.58 (Decrease of 5.8% over last
months) three months)
+ Seems to be less sticky; too many gadgets + Seems to have more stickiness;
and videos slowing down the speed at which artistic and niche based game titles; no
all the elements load on all the pages animated flash elements (much faster
+ Users are not tracked and asked for loading times)
information when buying products + Users are tracked and information is
asked when buying products
Raw Visits + 3 month average of 0.01% of all internet + 3 month average of 0.0578% of all
users in the world internet users in the world.
Hits
Overall Ranking + Ranked 24/65 competitors in the interactive + Ranked 4/65 competitors in the
(Searches) gaming industry interactive gaming industry
Ranking by Pages  Activision.com - 91.0%  blizzard.com - 54.3%
 Investor.activision.com - 3.0%  eu.blizzard.com - 25.8%
 Devtrackbeenox.activision.com - 2.4%  us.blizzard.com - 15.1%
 Kronos.activision.com - 1.3%  ftp.blizzard.com - 2.8%
 De.activision.com - 0.8%  kr.blizzard.com - 0.8%
 Games.activision.com - 0.8%  mobile.blizzard.com - 0.8%
 Gownload.activision.com - 0.7%  download.blizzard.com - 0.1%

Source: Activision.com - traffic details from Alexa. Retrieved 3/17/2009, 2009, from
http://www.alexa.com/data/details/traffic_details/activision.com

68Activision.com - traffic details from Alexa. Retrieved 3/17/2009, 2009, from
http://www.alexa.com/data/details/traffic_details/blizzard.com

Page 17 of 44

3.7 SWOT Analysis
SWOT analysis for Activision-Blizzard Inc.’s can be summarized in the following
manner:

Strengths Weaknesses
 Good market position globally  Lack of competitive strength in some market
 Diversification of innovative gaming products segments
and services  Over-reliance on limited game software titles
 Weak financial performance after the merger
with Vivendi games
Opportunities Threats
 Acquisition of new subscribers – online  Piracy
gamers from the Asia-Pacific region  Intellectual property capabilities (lack of
 Room for consolidation through strategic competitive advantage) with the rise in
acquisitions of smaller game development popularity of third party developers
firms  Unfavourable economic factors
 Growing demand for in-home entertainment  Overall Market Riskiness
due to changing consumer preferences
(availability of downloadable content)

3.7.1 Strengths
Activision-Blizzard Inc. enjoys a prominent position in terms of being the “world’s
leading player in the multiplayer online role-playing games category.”69 In addition, the
parent company, Vivendi S.A. is in a strong financial position, and diversified in terms of the
kinds of entertainment businesses (mobile phones, film production, television
entertainment, and video game entertainment70) it is involved in.

3.7.2 Weaknesses
Activision-Blizzard Inc. has some weaknesses in terms of not being competitive in
some market segments – mainly sports gaming and acquiring licensing for their movie
entertainment business. In addition, there is too much reliance on a few hits (Call for Duty
and Guitar Hero) for generation of significant percentage of its revenues. It is interesting to
observe that Activision Inc. was in a much better financial position before the merger
occurred with Vivendi Games (see financial section of the report for details).

69 Marketline > Profile > Vivendi S.A. Retrieved 3/10/2009, 2009, from
http://www.marketlineinfo.com.ezproxy.library.dal.ca/library/iProduct_toc.aspx?R=EEA43AE4-13C5-492C
8768-D27186836EA1&N=4294834008
70 Ibid

Page 18 of 44

3.7.3 Opportunities
There are lots of opportunities for Activision-Blizzard to solidify its market share in
continuing to acquire smaller gaming studios (diversify in other game categories). In
addition, the “global video games market is forecast to reach $45 billion in 2010, and in the
developing markets, the online game market is forecast to be driven by increased
penetration of the broadband.”71 Another major opportunity for Activision-Blizzard Inc. is
the potential to acquire subscribers” in the Asia Pacific region, where online games became
the second-largest category, passing the PC games, and are expected to grow by 23%
compounded annually, reaching $4.4 billion in 2010.”72 In this case, Activision-Blizzard can
pursue opportunities in expanding its content for downloading, improve efficiencies in
online gaming through development of Internet gaming. In essence, following these
opportunities could have a great impact on improving Activision-Blizzard’s overall market
share and financial viability in the future.

3.7.4 Threats
Despite promising opportunities in this market, there are lots of threats facing the
players in this industry in terms of increasing piracy, development of intellectual property,
and high market riskiness due to eroding margins. Increasingly, intellectual property is
being pirated by the means of file sharing networks, and illegal modifications to consoles to
facilitate pirated software. According to the IPFI agency, “CD and cassette pirate sales have
declined in 2006 and the trend has shifted towards digital, private copying, and
development of innovate software by third party developers.”73 In this case, the number of
infringing illegal files being pirated on the Internet is estimated to be around $1 billion
USD74. Another substantial threat to this industry is relating to global economic slowdown
due to recessionary factors. The “recent turmoil in financial markets, very weak housing
market indicators and decrease in consumer disposal income,”75 and lower consumer
demand has led to negative consequences for all the players in the industry to remain
financially viable in the long term.

71 Ibid
72 Ibid
73 Ibid
74 Ibid
75 Ibid

Page 19 of 44

IV. Company Analysis: Electronic Arts

4.1 History
Electronic Arts Inc. (EA) is the leading interactive entertainment software company.
This company “develops, publishes, and distributes interactive software worldwide for
videogame systems, personal computers, cellular handsets and the internet.” 76 Electronic
Arts was officially incorporated in 1982 by Trip Hawkins77, and “in 1998, EA bought
Westwood Studios for $122 million. In the following year, the company established EA.com,
an Internet division to develop games for online players. It also agreed to pay America
Online (now a part of Time Warner) about $80 million to operate AOL's game channel.”78
EA started off as a small computer game publisher, and “in the late 1980s, the company
began developing games in-house and supported consoles by the early 1990s. EA later
grew via acquisition of several successful developers. By the early 2000s, EA had become
one of the world's largest third-party publishers.”79 In September 2008, EA Mobile
announced a list of nine games that includes Spore Origins, a game for the iPhone and iPod
touch.”80
More recently, EA has been involved in series of anti-trust issues relating to
licensing agreements with the NFL and intellectual property protection (EULA
agreements)81 that resulted in substantial damage to the corporate brand image of
Electronic Arts. In February 2008, “Electronic Arts had made a public takeover bid for rival
game company Take-Two Interactive, for revised price of $26 per share, which represented
a 64% premium over the previous day's closing price.” The reason behind this aggressive
action by EA was that there were “rumours had been floating around the internet prior to
the offer about Take-Two possibly being bought over by a bigger company, albeit with
Viacom as the potential bidder.” However, in September 2008, the buyout offer for Take-
Two entertainment was withdrawn by EA, and no reason was given82.

http://www.marketlineinfo.com.ezproxy.library.dal.ca/library/iProduct_product.aspx?R=E9821E9D-293D
4412 AA7F-C16950961D78&s=IDAGMRNB
77 Ibid

79 Electronic Arts - Wikipedia, the free encyclopaedia. Retrieved 3/15/2009, 2009, from

http://en.wikipedia.org/wiki/Electronic_arts
80 Ibid
81 Ibid
82 Ibid

Page 20 of 44

4.2 Business Model
EA’s business model is based on transaction based model where it is actively
“engaged in developing, publishing and distributing video game software for advanced
console systems, casual web-based games and games for mobile phone devices.”83 In this
way, EA has been pretty aggressive in responding to competitors trying to take away
market share from its sport franchises by entering into “series of exclusive licensing
agreements with the NFL, NHL, Collegiate sports, and ESPN which gave EA exclusive first
rights to all ESPN content for sports simulation games.”84 Thus, “much of EA's success, both
in terms of sales and with regards to its stock market valuation, is due to its strategy of
platform-agnostic development and the creation of strong multi-year franchises. EA was
the first publisher to release yearly updates of its sports franchises—Madden, FIFA, NHL,
NBA Live, Tiger Woods, etc.—with updated player rosters and small graphical and game
play tweaks.”85 Only recently in 2006, EA recognized that this strategy had run its course
and in “midst of facing increasing threats of franchise fatigue among consumers, it
announced that it would concentrate more of its efforts on creating new original
intellectual property.”86

4.3 Financial Information
The financial position of EA can be illustrated by the following diagram87:

Source: Reuters

83 Ibid
84 Ibid
85 New challenges // report. Retrieved 3/17/2009, 2009, from

http://www.gamesindustry.biz/articles/new challenges
86 Ibid


Page 21 of 44

Analyzing EA’s financials more closely over the 2004-2008, we can see that it
reported revenues of “USD $3,665 million during the fiscal year ended 2008, an increase of
18.57% over 2007.”88 However, the operating loss of the company was USD $487 million
during the fiscal year 2008, a decrease of 1,348.72% over 200789, and the net loss for this
company was USD $454 million during the fiscal year 2008, a increase of 697.37% over
200790. (Please refer to Exhibit 10 for a detailed comparison of financial ratios)

4.4 Products & Services
In essence, EA’s core business occurs in “seven segments: EA Games, EA SPORTS,
The Sims, POGO, EA Mobile, Hasbro and Casual Entertainment. Due to their similar
economic characteristics, products and distribution methods; EA Games, EA SPORTS, The
Sims, POGO, Hasbro and Casual Entertainment’s results are aggregated into one reportable
segment which is named as the ‘Label segment’.”91 In this way, the flagship brands also
include Hollywood franchises including “The Lord of the Rings, The Godfather, Harry
Potter, and Batman.”92 However, recently, “EA's aggregate review performance had shown
a downward trend in quality over recent years and was expected to affect market shares
during competitive seasons.”93 According to the Evan Wilson, who is a Pacific Crest
Securities Analyst, “poor reviews and quality are beginning to tarnish the EA brand.
According to our ongoing survey of GameRankings.com aggregated review data, Electronic
Arts' overall game quality continues to fall...Although market share has not declined
dramatically to date, in years such as 2007, which promises to have tremendous
competition, it seems likely if quality does not improve.”94

4.5 Competitive Strategy
EA’s strategy is primarily based on “geographical performance which combined
global publishing organizations represented as one reportable segment, namely publishing,
because of their similar economic characteristics, products and distribution methods.”95 In
this way, “publishing refers to the manufacturing, marketing, advertising and distribution
of products developed, or distribution of certain third-party publishers’ products through

88 Thomson Research (Investext) – Electronic Arts Company Report. Retrieved 3/4/2009, 2009, from
89 Ibid
90 Ibid
91 Ibid

93 Reimer, Jeremy (2006), EA brand “tarnished” according to analyst – Arts Technica, Retrieved 3/15/2009,

2009, from http://arstechnica.com/gaming/news/2006/12/8339.ars
94 Ibid
95
Factiva > Electronic Arts Company Profile. Retrieved 3/15/2009, 2009, from

Page 22 of 44

its co-publishing and distribution Program.”96 More recently in 2007, EA had restructured
its organization into four publishing labels, and implemented a city-state strategic model.
The implications of this will be discussed later in this report in the branding and strategic
implications section for EA.

4.6 Branding & Website Analysis
Management of brands for EA in essence, is the number one priority for it to
position itself as the brand in the consumer’s mind. As mentioned earlier, assimilation of
an e-commerce model with a vibrant website becomes even more important for players in
this industry because of factors that relate to strong rivalry, high buyer power, and
consolidation trends due to unfavourable economic conditions that exist currently. It is
interesting to know then how EA perceives its global customers with its development of
customizable content (different game titles and genres for each of the regions) for each of
the regions it operates in – North America/Latin America, Europe, Asia Pacific/Oceania,
and Africa (see Exhibits 11 to 13). In measuring how well these websites are designed, a
list of common website metrics was devised and websites were compared as follows:

Website Metrics97 Electronic Arts
Visitor
Traffic Rank & (based on all page 789 (Average of 1 week)
views and reach)
Exposure
Page Views + U.S. users rank #1 with 41.2%
+ U.K. users rank #2 with 3.9 %
Visit
Stickiness + 4.46 (Increase of 7.1% over last three months)
+ Seems to be very sticky; good combination of flash animation and
static images (customized local content)
+ Users are tracked and asked for information when buying products
Raw Visits + 3 month average of 0.1147 % of all internet users in the world
Hits
Overall Ranking (Searches) + Ranked 3/65 competitors in the interactive gaming industry
Ranking by Pages  thesims2.ea.com - 29.4%
 ea.com - 10.0%
 eastore.ea.com - 7.7%
 thesims2store.ea.com - 4.8%
 thesims3.ea.com - 4.7%
 lossims.ea.com - 4.6%
 fun.ea.com - 2.9%

96Ibid
97Source: Activision.com - traffic details from Alexa. Retrieved 3/17/2009, 2009, from
http://www.alexa.com/data/details/traffic_details/ea.com

Page 23 of 44

4.7 SWOT Analysis
SWOT analysis for EA can be summarized in the following manner:

Strengths Weaknesses
 Strong global presence and popularity of  Declining operating profit margins
game franchises  Too dependent on licensing agreements
 Fairly strong financials  Employee morale and productivity
 Strong R&D (Acquisition of Bio-Ware and  Limited diversification – singular game engine
Pandemic Studio)98 platform and manufacturing99
Opportunities Threats
 Growing demand of entertainment industry  Piracy & unauthorized file sharing
(changing consumer demands)100  Very competitive and market driven by small
 Strategic acquisition of smaller developers percentage of hit game titles
 Growing demand for online services  Overall market risk (delays in development of
new hardware systems)
 Intellectual property licensing101

4.7.1 Strengths
EA Inc. has become “the market leader in the video game publishing market and was
ranked second among the Game Developer Magazine’s Annual Top 20 Publishers for the
years 2007 and 2008.”102 In addition, it has quickly retained higher market share “with
total revenues of $3,665 million in the FY 2008, achieved through strong sales of Rock
Band, Madden NFL 08, FIFA 08, Need for Speed ProStreet, and The Simpsons Game. In this
way, the company was ahead of its rivals like Activision, Ubisoft, Sony, Take-Two and
Sega.”103 In terms of global presence, EA increased its net revenues internationally “by 21
percent increased by 21 percent to $1.723 billion, or 47 percent of total net revenue in
fiscal 2008, compared to $1.425 billion, or 46 percent of total net revenue in fiscal 2007.”104
Another strength for EA is that it has consistently increased its spending in R&D
over the past three years (investments represent 31.2% (2008) , 33.7% (2007) and 25.7%
(2006) of its total revenues)105 It is interesting to note that EA’s “R&D investment as a

99 Ibid

http://www.marketlineinfo.com.ezproxy.library.dal.ca/library/iProduct_product.aspx?R=E9821E9D-293D
101 Ibid
102 Ibid
103
Ibid
104
Thomson Research (Investext) – Electronic Arts Company Report. Retrieved 3/4/2009, 2009, from

http://www.marketlineinfo.com.ezproxy.library.dal.ca/library/iProduct_product.aspx?R=E9821E9D-293D-

Page 24 of 44

percentage of sales is one of the highest in the industry.”106 This notion is particularly
evident when comparing EA’s R&D figures to its competitors – Take-Two Interactive
investments represent“6.1% (2005), 6.2% (2006), and 5%(2007) of its total revenues,”107
while Activision-Blizzard investments represent “9% (2005), 8.8% (2006), and 9.3%
(2007) of its total revenues.”108 Thus, EA’s strong investments in R&D has “helped it launch
products much faster on a consistent basis,”109 and resulted in greater revenue growth.

4.7.2 Weaknesses
EA has some weaknesses in terms of declining profit margins, dependency on
licensing agreements, lack of productivity and contribution by employees, and limited
diversification in having a single game engine platform for development of game titles. In
recent years, EA has recorded declining “net profit margins from 12.8% in 2003 to 2.5% in
2007, and negative operating margin of 12.4% in FY 2008.”110 Another weakness that EA
has that it is very dependent on licensing agreements and manufacturers. In this way, “the
video game hardware manufacturers set the royalty rates and other fees that it must pay to
publish games for their platforms, and therefore have significant influence on its ability to
extract significant revenues.”111 Thus if EA “is unable to maintain or acquire licenses to
intellectual property, it will publish fewer hit titles and its revenues will decline and
competition for these licenses may make them more expensive and reduce its
profitability.”112
Another weakness that exists for EA is with respect to employee productivity (see
Exhibit 10 in examining the negative return on capital) and the use of single game engine
in manufacturing of its games. In comparing the quality levels of games, EA’s PC-games are
lower than its competitors, and “none of the company’s products were ranked among the
top three quality products in any of the three categories (MMO, RTS, and RPG), while
Activision-Blizzard had ranked number one in all three categories.”113 In comparing the
average quality rating, Activision-Blizzard’s rating “on all releases is over 90%, while EA is
setting a standard of 80% quality scores to be achieved on its core titles by 2011.”114 Thus,
continued reliance in developing games on a single game engine would negatively affect
EA’s operating performance in the near future.

106 Ibid
107 Ibid
108 Ibid
109 Ibid
110 Ibid

112 Ibid

http://www.marketlineinfo.com.ezproxy.library.dal.ca/library/iProduct_product.aspx?R=E9821E9D-293D-
114 Ibid

Page 25 of 44

4.7.3 Opportunities
EA has some opportunities that it can take a look at in order to solidify its place in
the interactive game industry. In some ways, EA can continue to acquire smaller studios in
order to diversify its gaming titles in other titles. For instance, EA recently acquired
“BioWare and Pandemic Studio which create action, adventure, and role-playing games,
and brought about 10 new intellectual properties.”115 Subsequently then, EA can continue
to target smaller developers that will bring it increase its online direct-to-consumer
presence. In this way, “Strategic acquisitions add new teams and intellectual properties,
which provide the company a chance to further strength its global publishing
infrastructure.”116
Another opportunity for EA is with respect to increasing demand for online gaming
and downloadable content. According to “research estimates by Ovum, the online games
revenue is forecast to reach $14 billion in 2011”117 that represents a 75% increase from
2008. This notion coupled with the faced that internet usage is increasing, can allow EA “to
increase its revenues from direct-to-consumer sales and online advertising.”118 Moreover,
consumers are consuming more interactive entertainment than ever, which results in
significantly changing spending habits over the last decade. Related to this notion is the fact
that demographics of gaming have also been rapidly changing, where “the average age of
gamers in the US was 35 years in mid 2008, with about 40% of them being women and this
continues to rise owing to the increasing number of players aged over 50 years, which was
about 25% in mid-2008.”119 For EA, continued development of gaming architecture and
mobile platforms represents two significant areas of sustainable revenue growth in the
near future.

4.7.4 Threats
Despite promising opportunities in this market, similar threats are faced by EA as
Activision-Blizzard in terms of piracy, development of intellectual property, and high
market riskiness due to eroding margins and exchange rate fluctuations. In essence,
significant portion of EA’s financial performance is heavily dependent on delivering ‘hit’
gaming titles that have significant amounts of risk associated with it in terms of
developmental costs (operating costs have been increasing from 98.7% in 2007 to 113.3%
in 2008120). Thus, these factors represent a huge risk for EA “if its competitors develop
more successful products or services, offer competitive products or services at lower price
points or based on payment models perceived as offering a better value proposition (such

115 Ibid
116 Ibid
117 Ibid
118 Ibid
119 Ibid
120 See Exhibit 10 – EA Financials

Page 26 of 44

as pay-for-play or subscription-based models).”121 Therefore, EA needs to mitigate these
threats by continuing “to develop consistently high-quality and well received products and
services, its revenue, margins, and profitability will decline.”122

V. Comparison of the 2 Companies: Activision-Blizzard Inc. & EA Inc.

5.1 Summary of Findings
In comparing Activision-Blizzard and Electronic Arts against selected financial,
qualitative, and quantitative criteria (See Exhibit 1), we can see that currently Electronic
Arts is more successful in terms of generating higher revenues, having a greater market
share, availability of product selection, value added services, e-commerce capabilities, and
value for money. These aspects can be illustrated further by the market share chart in
2006:
Electronic
Arts
20%
Konami
Other 10%
52%

Take 2
Interactive
9%
Activision-
Blizzard
9%
Source: Datamonitor123

Despite this, Activision-Blizzard Inc. has over the past 2 years, caught up considerably in
terms of gaining market share, improving their product selection, e-commerce capabilities,
and reducing operating costs which were lower than EA in fiscal year end 2008 (107.7%
for Activision-Blizzard versus 113.3% for EA). More recently in March 2009, Activision-
Blizzard has been concentrating on increasing operating income margins in excess of
25%124. In comparison, “EA’s operating margins based on their guidance for the fiscal year
March 2009 are at 12%”125. Therefore, this represents a considerable gap that Activision
has been able to achieve in surpassing EA as the largest game publishing developer after its
acquisition of Blizzard Inc. in 2008. In this way, Activision-Blizzard is in a better

122 Ibid

124
INTERVIEW - Thomas Tippl | gaming industry | interview by MCV. Retrieved 3/17/2009, 2009, from
125 Ibid

Page 27 of 44

competitive position for future growth and increased profitability because of its diversified
business model, strong manufacturing architecture, and less dependence on licensing
agreements as a major source of generating revenues.

5.2 Financial Information Comparison
Comparison of Activision-Blizzard and EA Inc.’s financial position can be illustrated
by the following diagrams:

4000
Revenues & Net Income (Million USD)

3500
3000
2500
2000 ATVI Revenue
1500 ATVI Net Income
1000 EA Revenue
500 EA Net Income
0
-500 2004 2005 2006 2007 2008
-1000
Year

Source: Annual Reports for Activision-Blizzard and EA Inc., Investex Report (2008)

ATVI Stock
Performance over the
past year (May 2008-
March 2009)
EA Stock Performance
over the past year
(May 2008- March
2009)

Source: Quotes for ATVI - Yahoo! Canada - share prices, charts, news and more. Retrieved 4/10/2009,
2009, from http://ca.finance.yahoo.com/q/bc?s=ATVI&t=1y&l=on&z=l&q=l&c=ERTS

Page 28 of 44

In analyzing the diagrams on the previous page, we can clearly see that Activision-
Blizzard has been outperforming Electronic Arts over the past year in terms of stock
performance, and generating lower negative profits (-$107 million for Activision-Blizzard
versus -$454 million loss for Electronic Arts in 2008). The reasons why both of these
firms lost money is because of the extremely high development costs of gaming titles which
did not sell as well due to numerous reasons relating to increased piracy, delays in product
development, competitive nature of the gaming industry, and decreased ROI for
development of newer gaming architecture for mobile and social networking platforms.

5.3 Website Analysis
In comparing the website design and e-commerce operations of Activision-Blizzard
and EA Inc. (See Exhibits 5-9 and 11-13) different metrics were analyzed such as: visitor,
exposure, stickiness, and hits. These aspects can be further illustrated by the following
graphs:

Average Stay in Seconds Pages Per Visit
700 16
600 14
Number of Pages

500 12
10
Seconds

400
Activision.com 8 Activision
300
6
200 Blizzard.com Blizzard
4
100 EA.com 2 EA
0 0
Mar-08

Jan-09
Mar-09
May-08
Jul-08
Sep-08
Nov-08

Unique Visitors
2500000
Unique Visitors (millions)

2000000

1500000

1000000 Activision-Blizzard
EA
500000

0
Apr-08
May-08

Jul-08
Aug-08
Sep-08

Nov-08

Feb-09
Dec-08
Mar-08

Jun-08

Oct-08

Jan-09

Mar-09

Source: SnapShot of activision.com (rank #11,894), blizzard.com (#2,619), ea.com (#835) - compete. Retrieved
4/10/2009, 2009, from http://siteanalytics.compete.com/activision.com+blizzard.com+ea.com/?metric=uv

Page 29 of 44

Overall, EA has a better designed website in terms of overall customizability (based
on where the person is located), stickiness, and inclusion of a community forum, content,
and ease of use). Activision’s site in comparison is very graphics heavy, too many flash
objects embedded, and very hard to get around. Blizzard website is much more artistic, has
an integrated community forum, and easier to get around. In this way, Blizzard does a
better job in integrating the online community where gamers can discuss the games, give
tips, ratings, and suggestions for future game titles. In comparing the e-commerce
capabilities for Activision-Blizzard and EA Inc. (See Exhibits 7, 9, and 13), it is much easier
for a user to buy a game either by digitally downloading it onto a hard drive or by mail on
the Activision site as you do not have to register when buying a game, and the number of
click throughs is a lot fewer than buying a game on the Blizzard website. On both of the
Blizzard and EA website, the user has to register with their full details in order to buy or
download the game from a secure server, which inevitably increases the number of clicks
before he or she receives the product of their choice. Over the past 6 months, EA has begun
to integrate its online forum and make it a larger presence on its website, but users still do
not feel that EA has done enough in incorporating their suggestions to improve their
overall experience of the gaming titles that EA has produced. To a certain extent, the
discussion that takes place on these online forums and other gaming websites such as
IGN.com or Gamespy.com, does influence the buyer behaviour in which games that they
buy based upon popularity, overall ratings, and what other people and experts have said
about the gaming experience of certain gaming titles.

5.4 Branding & Strategic Implications
Management of brands for both of these companies is the number one priority in
positioning itself as being the brand for the potential consumer. As mentioned earlier,
assimilation of an e-commerce model with a unique website becomes even more important
for players in this industry because of factors that relate to strong rivalry, high buyer
power, and consolidation trends due to unfavourable economic conditions that exist
currently. In comparing the business models, Activision-Blizzard’s subscription model can
become even more successful in the future because of the potential growth of subscription-
based online gamers in the Asia-Pacific region – 23% compounding growth as compared to
4.0% growth of gamers in North America126).
In order for EA to be financial viable in the future, it has to continue to develop its
gaming architecture, restructure its labels further, divest its worst selling gaming titles, and
continue to develop games for mobile platforms. Recently in 2007, the new CEO John
Riccitiello had restructured EA into four labels, “each with responsibility for its own

126
Marketline > Profile > Vivendi S.A. Retrieved 3/10/2009, 2009, from
http://www.marketlineinfo.com.ezproxy.library.dal.ca/library/iProduct_toc.aspx?R=EEA43AE4-13C5-492C-
8768-D27186836EA1&N=4294834008

Page 30 of 44

product development and publishing (the city-state model).”127 The objective behind this
reengineering initiative “was to empower the labels to operate more autonomously,
streamline decision-making, increase creativity and quality, and get games into the market
faster.”128 It is very interesting to note that Riccitiello has said that EA’s previous strategy of
acquiring smaller game developers “was a mistake, as it strips smaller studios of its
creative talent.”129 In this way, implementation of the city-state model would allow
“independent developers to remain autonomous to a large extent, and cited Maxis and
Bioware as examples of studios thriving under the new structure.”130

VI. Recommendations

6.1 Strategic Options Analysis: Activision-Blizzard Inc.
My recommendations for Activision-Blizzard are:
 Concentrate on acquiring smaller gaming studios and diversify in other game categories
such as sports and strategy gaming genres in which Activision-Blizzard does not have a
strong presence in
 Increase downloadable content (patches, game updates, customizable content, etc.)
offered through Xbox Live, Playstation 3, Nintendo Wii, and mobile platforms.
 Expanding its subscription base in the Asia-Pacific region, where it is expected to grow
by 23% compounded annually, reaching $4.4 billion in 2010131
 Develop IP (Intellectual property) further through licensing agreements and third party
developers of open source games that would mitigate some of risks associated with
piracy

Following these opportunities should have a great impact on improving Activision-
Blizzard’s overall market share and financial viability in the future.

6.2 Strategic Options Analysis: Electronic Arts
My recommendations for Electronic Arts are:
 Mitigate piracy risk through further development of open source gaming for mobile and
social networking platforms
 Fast track the development of new game architecture

127 Gamasutra - news - EA announces new company structure. Retrieved 4/10/2009, 2009, from
http://www.gamasutra.com/php-bin/news_index.php?story=14374
128 Ibid
129 EA's CEO: How I learned to acquire developers and not screw them up | game | life from wired.com. Retrieved

4/10/2009, 2009, from http://blog.wired.com/games/2008/02/riccitiello.html
130 Ibid
131
Marketline > Profile > Vivendi S.A. Retrieved 3/10/2009, 2009, from
http://www.marketlineinfo.com.ezproxy.library.dal.ca/library/iProduct_toc.aspx?R=EEA43AE4-13C5-492C-
8768-D27186836EA1&N=4294834008

Page 31 of 44

 Divest its worst game titles to improve overall development costs and mitigate risks
associate with development of games
 Continue to target smaller third party developers and decentralize its operations –
“Strategic acquisitions add new teams and intellectual properties, which provide the
company a chance to further strength its global publishing infrastructure.”132
 Develop gaming titles that appeal to women as the demographics are changing, “with
about 40% of them being women and this continues to rise owing to the increasing
number of players aged over 50 years, which was about 25% in mid-2008.”133
 Expansion of its online services through Xbox Live, Nintendo Wii, Playstation 3 by
increasing the amount of downloadable content – game updates, patches, customizable
content, etc.

For EA, continued development of gaming architecture and mobile platforms represents
two significant areas of sustainable revenue growth in the near future.

6.3 #1 Priority for the CEO in Activision-Blizzard Inc.
If I was the CEO of Activision-Blizzard, my #1 priority would be to continue to
acquire smaller third-party developers, diversify into other genres, and expand online
subscription based gaming, which represents strong core competencies for Activision-
Blizzard Inc.

6.4 #1 Priority for the CEO in Electronic Arts
If I was the CEO of Electronic Arts, my #1 priority on my to do list would be
improving employee contribution and productivity through further restructuring of
developer studios, push the development of new gaming architecture onto game console
manufacturers, address the importance of bringing efficiencies in the development process
of games (lowering costs), and form strategic alliances with movie studios in developing
gaming titles for various platforms – consoles, mobile, and social networking websites.
If I was investing in each of the companies, I would put more capital in the third
party developers that are producing hit gaming titles and successful mobile games for each
of these firms. Having said that, however, I have much more confidence investing in
Activision-Blizzard Inc. because its subscription based business model, and it can be more
successful in the future if it continues building on its core competencies and invests in the
opportunities that exist in the interactive game industry.

132 Ibid
133 Ibid

Page 32 of 44

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