Activision's president and chief executive Bobby Kotick has warned investors that the upcoming launch of Sony's PlayStation 4 and Microsoft's next-generation Xbox may not be the gift to the company others are claiming - and that the games industry may have some tough times ahead.
Speaking during his company's most recent earnings call this week, Kotick warned that he has some concerns surrounding the launch of next-generation consoles from Microsoft and Sony later this year. 'We continue to face the uncertainties of the console transition,' Kotick told investors. 'There are still many unknown factors, such as pricing, launch dates and quantities, the level of first-party support and, importantly, consumer purchase intent in a world where consoles are no longer just competing with each other, but also with new platforms, such as smartphones and tablets.'
It's certainly true that the landscape of gaming has changed: when Microsoft launched the Xbox 360 back in 2005, mobile gaming was roughly on the level of Nokia's Snake or, at best, badly-written and poor-quality Java-based casual titles. Now, mobile gaming has grown to the point where its flagship creations can rival lower-end Xbox 360 launch titles for graphical complexity - so much so, in fact, that one company is enjoying great success with creating a standalone console based on a smartphone-oriented system-on-chip processor.
That's troubling for the mainstream games industry for a couple of reasons: first, it represents yet more competition for consumers' cash; second, it makes the £40-plus recommended retail price of console games seem incredibly high. While it's true that games cost less now than in almost any period of console gaming history, corrected for inflation, when a gamer is faced with a choice of buying one console game or five high-end smartphone or tablet games, the console game comes off worst in the value comparison.
It's not just the increased competition from mobile gaming that has Kotick worried, however. The company president also called out the first of the next-generation consoles, Nintendo's Wii U, as evidence that Microsoft and Sony may struggle to drum up interest in their devices when they launch towards the end of the year. 'In addition, the newest console, the Wii U, has had a very slow start,' explained Kotick. 'All of these factors further heighten our concerns heading into the back half of the year, particularly during the very competitive fourth quarter.'
It's hard to fault Kotick's analysis: the Wii U has been a poor seller for Nintendo, and has seen a whopping £100 knocked off its £299 recommended retail price since its launch last year. A lack of triple-A games from third party developers - something that may not change any time soon, with numerous publishers stating outright that their franchises won't be making the move to the Wii U - combined with the misconception among the company's casual gaming customers that the Wii U is a mere upgraded version of the Wii they already own are thought to be to blame, with Nintendo working hard to correct both issues.
The PlayStation 4 and, if rumours are to be believed, Xbox 720 have at least one thing in their favour compared to the Wii U, however: both are expected to use AMD accelerated processing units (APUs) which will make the process of porting titles between the two consoles and the similarly x86 PC platform simpler than ever before - and leave Nintendo's Power-based Wii U as the odd man out of the generation. As a result, both should perform better than Nintendo's offering.
Uncertainties surrounding the next-gen launches aren't the only things keeping Kotick awake at night: Activision's president also highlighted increasing competition in the company's core segments, coupled with dramatically dropping subscriber numbers for Blizzard-developed massively multiplayer on-line role-playing game World of Warcraft, as roadblocks for his company as the financial year progresses. 'During the quarter, subscribership declined by approximately 1.3 million subscribers - roughly 14 per cent - and we ended the quarter with approximately 8.3 million subscribers, admitted Kotick. 'Though the majority of our subscriber declines occurred in the east, where we have more subscribers and lower revenue per subscriber, we saw declines in the west as well. We do believe further declines are likely and we expect to have fewer subscribers at year end than we do today.'
And that increasing competition? 'This year, we expect a number of well-established video game franchises and well-capitalized new entrants to compete directly for our consumers' time and attention, particularly as certain of our competitors have moved their launches into the back half of the year. Our Skylanders franchise will face much more direct and substantial competition than it has in the past. And our next Call of Duty game will face a more competitive environment than last year. The competitive landscape will likely require us to further increase our sales and marketing investments for our 3 largest franchises, especially in the important holiday season.'
Activision generated $804 million in revenue for the quarter on a 31 per cent margin (or $1.3 billion on a 44 per cent margin, depending on whether you accept the company's official Generally Accepted Accounting Principles (GAAP) or non-GAAP figures), driven primarily by its Call of Duty, Skylanders, World of Warcraft and StarCraft franchises.