Last week, yours truly suggested that the significant financial cost and/or time burden of accessing the best playable parts of the new Electronic Arts Inc. (NASDAQ:EA) Star Wars Battlefront II game was not only a lesson learned for EA, but also for other game publishers like Activision Blizzard, Inc. (NASDAQ:ATVI). In short, EA and ATVI stock owners who had grown accustomed to the big-time revenue growth of in-game purchases may want to temper their expectations, as players were finally starting to push back.
Though Electronic Arts was the focal point at the time because it was the developer of the game that brought the long-brewing issue to a head, and the bulk of its revenue does indeed come from in-game purchases (tools, maps, weapons and power-ups that make winning a game or clearing a level more likely), EA is by no means unique.
Activision also relies heavily on extracting more revenue from game-play-related spending and subscriptions than it garners through sales of games themselves.
How much? Though Activision data is a little tougher to find, a closer look at the company’s full-year 2016 investor report indicates $3.6 billion worth of in-game revenue. That’s more than half of last year’s top line of $6.6 billion.
It’s still not a perfectly clear picture of Activision’s business model. Nor is it a true apples-to-apples comparison that means much to current and would-be owners of ATVI stock. Many of Activision’s games were built from the ground up with the explicit purpose of requiring in-game transactions to make them more playable.
Still, the underpinning of the recent game-player revolt is something that can, and likely will, turn into a headwind for Activision.
Activision Isn’t Immune
For investors who have no idea what just happened within the video gaming industry, here’s the short version of a long story. Electronic Arts’ new Star Wars Battlefront II game, which was only in beta trials until a few days ago, required too much time to “earn” your way into playing the coolest characters like Darth Vader or Luke Skywalker.
Alternatively, a player could buy access to Darth Vader, but at a purchase price of $80. But with the game costing $60 upfront, playing it to its maximum level of fun quickly turned into a costly proposition.
Incredibly, gamers made their frustration known, so much so that EA lowered the bar and the cost of unlocking certain characters and weapons in the game.
For the record, this game wasn’t the first to cause such an uproar. Activision’s Destiny 2 game was called out by players in September, some of whom said it was a “pay to win” scam.
In other words, to have a fair shot at beating the game you already paid for, you had to pay quite a bit more for the right weapons and tools. You just heard more about EA’s gaffe because, well, it’s Star Wars, which is only the most successful movie and licensing franchise of all time.
And if you’re willing to dig a little, you’ll find such complaints have been circulating for a while, leaving no name in the industry untouched. Even the Amiibo characters from Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) and Sony Corp (ADR) (NYSE:SNE) have both been targeted by pay-to-win claims.
It matters to all gaming companies and their shareholders — including anyone who owns ATVI stock — simply because for the first time, game publishers have been forced reel in their aggressive revenue strategies.
Given how much revenue in-app and in-game purchases have meant for these companies, it’s a good reason to rethink how much growth is really in the cards.
Looking Ahead for ATVI Stock
It’s worth noting that not everyone sees the player pushback as a problem. KeyBanc analyst Evan Wingren noted in response to the Star Wars Battlefront II debacle:
“We view the negative reaction to Star Wars Battlefront II (and industry trading sympathy) as an opportunity to add to Electronic Arts, Take-Two, and Activision Blizzard positions. The handling of the SWBF2 launch by EA has been poor; despite this, we view the suspension of MTX [micro-transactions] in the near term as a transitory risk. Gamers aren’t overcharged, they’re undercharged (and we’re gamers).”
Wingren added, “If you take a step back and look at the data, an hour of video game content is still one of the cheapest forms of entertainment. Quantitative analysis shows that video game publishers are actually charging gamers at a relatively inexpensive rate, and should probably raise prices.”
From that perspective, the player pushback almost sounds like an embarrassing complaint.
On the flip side, a second read on KeyBanc’s stance indicates a certain level of naivety about the video gaming business. If KeyBanc’s analysts are indeed gamers, they’re also gamers with much more disposable income than the average teen and twenty-something that are now forced to pay a proverbial arm and a leg to get the most out of an already-expensive title. Nothing breeds competition like profits.
Whatever the case, let’s be crystal clear. The same concern that expensive in-game purchases pose a threat to Electronic Arts’ profit growth should also be heeded by ATVI stock owners, current or prospective. Players are frustrated enough to start voicing their irritation, and some of them are inadvertently boycotting by skipping purchasing of such games.
This isn’t a matter that’s going to simply fade away in the foreseeable future. There are too many alternative forms of entertainment (even video games) out there.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter at https://twitter.com/jbrumley.
