Activision Blizzard (ATVI) has cracked one of the codes of the New Gilded Age. It found a way to use scads of digital data to monetize people’s free time.
On February 10, the video-game publisher reported full-year sales of $6.6 billion. That is an increase of 42% over 2015. And digital revenue was a record $4.87 billion, almost double the 2015 figure. It’s all because management bet big on the shift toward engagement monetization.
That’s jargon for selling stuff inside the games on an ongoing basis, or through ads. In its Candy Crush franchise, this may be the sale of an extra life of a lollipop hammer.
Speaking to analysts on the conference call Friday, Activision Blizzard’s Chief Operating Officer Thomas Tippl put the company’s engagement success in perspective: “In 2016, consumers spent approximately 43 billion hours playing and watching Activision Blizzard content, on par with Netflix and over one-and-a-half times Snapchat.”
|Video games are a billion-dollar business.|
Wow. Its newest franchise Overwatch, a first-person shooter multi-player game, already has 25 million registered users. It, in addition to Call of Duty and World of Warcraft, pulled in a record $3.6 billion in micro transactions from the sale of virtual trinkets like loot boxes, supply drops and pets.
Online gaming has a reputation for fanaticism. When Amazon acquired Twitch in 2014, the network was consuming about 2% of total Internet bandwidth. By 2015, it had 100 million monthly active users and 1.7 million broadcasters streaming live feeds every month. The key average monthly minutes watched metric shot up to 421.
Call of Duty, the first-person shooter game originally released in 2003, had 12 annual updates. Through 2015, more than 175 million copies have been sold, accounting for more than $10 billion in sales. John Madden Football was first released in 1988 by Electronic Arts (EA). It has been updated every year since 1990. That franchise has sold more than 100 million copies and has in excess of $4 billion in sales.
On Wall Street, one-time boo birds are now cheering too. In a note to clients last year, Brian Nowak, an analyst at Morgan Stanley, said, “We are bullish on the digital gaming shift as gaming evolves from a ‘units sold’ business into an engagement monetization business. We see digital in-game offerings leading to recurring and growing user bases, higher per-game engagement (time spent per user), and more monetization opportunities. The beginning (the initial unit sale) is now just the beginning.”
It is hard to argue with the premise. Engagement monetization is part of the new order in the New Gilded Age.
When Amazon ponied up almost $1 billion in 2014 for a business built around watching other people play video games online, heads exploded all over Wall Street. It didn’t make sense to casual observers.
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What Amazon saw was the new business of gaming looked a lot like its retail business. It was less about the initial sale and more about ongoing sales.
Amazon Games’ first title is on the right track. Breakaway, is what gamers call a 4v4 mythological sports brawler. Players can engage in online battles individually or in teams, earn Stream+ loyalty points by staying online, participating in polls or wagering on battle outcomes. They can even customize their Twitch live-stream with Metastream, a feature that overlays fancy stats. The experience is built from the ground up to keep players online watching ads and buying features to enhance gameplay.
Meanwhile, traditional media companies are doggedly dragging themselves into the New Gilded Age. They have no choice.
Just look at the big changes under way at Disney to ensure it has a plan B if the current cable TV model falls apart.
MouseCo has announced a strategic investment in BAMTech, the 15-year-old streaming technology company that grew out of Major League Baseball. It will invest $1 billion for a 33% stake with an option to take majority control over the next four to seven years, and to build out a new sports-streaming business.
While BAMTech is best known for flawlessly streaming every MLB game to millions of subscribers – an amazing feat – it is also the technology behind the popular HBO Now streaming service.
Recently cable operators have experimented with so-called skinny bundles. The idea is to cut monthly cable subscription prices by removing costly channels from the bundle. In many cases, Disney’s EPSN sports networks are the first to go. Cable subscribers get lower prices and Disney gets a reduced payout.
This is not a terrible business strategy. It’s a necessity. Cord-cutting is an existential threat cable operators had to meet head on: The acceptance of on-demand streaming services like Netflix and the emergence of gaming networks show consumers are spending more of their time outside traditional entertainment channels.
Disney’s BAMTech investment is pushback. It’s also a glimpse into the near future.
Software is changing the way we consume everything. Car ownership is morphing into mobility. We used to have relationships with travel agents; that has been replaced by keyboard strokes and instant booking sites. Why shouldn’t media consumption go full-scale on-demand too?
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It’s already halfway there. The content is all digital. The rest is just distribution. Technology is making that part easy and widely accepted.
Like most things today, we expect to push a button on one of our smart devices and have the stuff we want just show up, magically. Software is allowing us to embrace our inner caveman.
Me want stuff, me push button, stuff here.
Companies that grew up in the digital era have a strong advantage. They have already figured out how to use data to monetize time.
For the rest, there is no easy fix. They must move more programming online and on-demand across many screens because that is how the most-coveted part of the audience consumes media. And new technologies like self-driving cars will mean people are going to have even more time on their hands. Digital entertainment, already big, is poised to explode in value.
The idea that the future is about software is gaining momentum in the investing world. Although much of the focus has been on artificial intelligence and productivity, investors must not ignore what’s happening with entertainment. It’s a big, growing, lifestyle business with significant revenue streams and less fragmentation every year. This may not be your thing, but as an investor you need to pay attention.