Is There Life at Activision (ATVI) After Guitar Hero?

There is no greater threat to a profitable business than the fickleness of consumers, and tThere is no better illustration of this maxim than the rise and fall of Activision Blizzard (NASDAQ: ATVI) and its Guitar Hero video game franchise. The music simulation game that used a plastic guitar in players’ hands instead of a controller has gone from industry standard-bearer to forgotten novelty in just five short years.

How low has Activision Blizzard and Guitar Hero sunk? Put it this way: In January 2009, Guitar Hero 3 became the first video game in history to break $1 billion in sales. On today — February 9 2011 — Activision announced that it is shutting down its entire Guitar Hero business and that it will lay off 500 staff members as a result. What happened?

In truth, this has been coming for a long time. Even as Activision began to aggressively expand the number of annual Guitar Hero releases in late 2009, releasing offshoots like DJ Hero, Band Hero, and multiple editions devoted to single musical acts like Metallica, the plastic instrument music video game market was already in decline. The shrinking profits with each release following 2007’s Guitar Hero 3 weren’t the only signs. Viacom (NYSE: VIA) and MTV Games’ Rock Band series, made by original Guitar Hero creators Harmonix, were also suffering from decreased consumer interest — 2009’s The Beatles: Rock Band, expected to be a multimillion seller on day one, totaled just 1.7 million in sales over the entire 2009 holiday quarter. This past November, ATVI released Guitar Hero: Warriors of Rock, the sixth title in the core series and twenty-fourth in the franchise to be released in five years, sold a measly 86,000 copies in its first month.

Revenue from the entire music game genre totaled $1.6 billion in 2008. In 2010, it struggled to generate $400 million.This year, it will barely move the needle.

The major take away from the music game genre’s saga is that consumers will not continue to pay premium prices for video game accessories they already own. Guitar Hero 3 became the first game to generate $1 billion in sales thanks to the high price of software that requires a large peripheral, in this case a novelty instrument. Subsequent releases like Rock Band and Band Hero naturally generated less revenue with each release because the market was already saturated with the accessories. By the time ATVI tried to diversify with a new peripheral-based game, DJ Hero, the audience had already become bored.

Investors shouldn’t worry too much for ATVI, though.  With losses from its music game business no longer bringing operation costs down—not to mention other excess fat cut in the cancellation of its Tony Hawk skateboarding series and Grand Theft Auto-competitor True Crime: Hong Kong—the company will reap the benefits of a release schedule that mirror’s 2010’s. Diablo III will stand in for Starcraft II as the latest PC hit from Blizzard, while the expected Call of Duty: Modern Warfare 3 in November will continue that series’ success. Activision is also expected to deliver a brand new title from Halo creators Bungie this year.

The company should be cautious with Call of Duty though. It already found out the hard way how dangerous a fickle audience can be.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here.

Article printed from InvestorPlace Media,

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