Blog

Blizzard’s World of Warcraft: The China Growth Story

March 11, 2010 | SIN Picks | Author Asif

The Blizzard division of Activision Blizzard (ATVI) generated $1.2 billion in annual revenue last year without releasing a single new game in 2009. Blizzard still gets some of its revenue from legacy games like the original Starcraft that was released more than a decade ago in 1998. In fact Starcraft managed to crack the list of top 10 PC games as recently as May 2009 according to the top game industry research firm NPD Group. Starcraft has been spotted in the top 20 multiple times since the announcement of Starcraft 2 in 2007. The beta version of Starcraft 2 featured in the video below was released last month and the game is expected to ship sometime in the first half of 2010.

A majority of Blizzard’s revenue however comes from its hugely popular MMORPG World of Warcraft (WoW) that had 11.5 million subscribers as of last month and has helped Blizzard generate above average operating margins when compared to Activision as a whole. Operating margins for the Blizzard division in 2009 were over 46%. Given how important World of Warcraft numbers are to Activision, I decided to dig into the subscriber numbers and specifically look at the growth opportunity from China as I have received a couple of questions about this from SINLetter subscribers.

As you can see from the chart below, World of Warcraft experienced exponential growth from its launch in November 2004 through 2008. Only Second Life by San Francisco based Linden Labs, which unlike WoW is free to play, managed to surpass WoW’s subscription numbers. Keen followers of the Massively Multiplayer Online Gaming space noted that the 11.5 million subscribers that Activision Blizzard reported at the end of 2009 were the exact same number of subscribers reported at the end of 2008.

With WoW restored in China as of September 19, 2009 following regulatory hurdles, are subscription numbers going to start growing again or has WoW peaked until the next expansion pack Cataclysm comes along? The bigger question to ask is how many of the 11.5 million subscribers are from China and how much revenue do they generate for Activision Blizzard.

If all 11.5 million subscribers were paying $15/month or $180 annually to play WoW, Blizzard’s revenue from just this one online source would be,

$15 X 12 months X 11.5 million subscribers = $2.07 billion.

Even after averaging the monthly fee down to roughly $14 after taking into account that some subscribers pick the cheaper $13.99 plan by paying for three months at a time or the $12.99 plan by paying for 6 months upfront, the expected revenue drops to,

$14 X 12 months X 11.5 million subscribers = $1.93 billion.

This is significantly higher than the $1.2 billion in revenue the entire Blizzard division reported for 2009. So it stands to reason that a large number of these 11.5 million subscribers are Chinese subscribers that don’t shell out roughly $14/month like their North American and European counterparts do. Based on what I have read from various sources, it is possible that between 4 to 6 millions subscribers are from China and they pay 6 cents per hour to play the game. Assuming 5.5 million subscribers and adopting a conservative estimate of 10 hours played per month, annual Chinese revenue works out to,

10 hours X $0.06 X 12 months X 5.5 million subscribers = 39.6 million

Chinese revenue is probably even smaller after Activision splits the proceeds with its Chinese partner Netease.com (NTES). The rest of the non-Chinese 6 million subscribers generate approximately $1 billion in revenue, putting the total WoW subscription revenue at $1.04 billion. Taking the sales of legacy titles like Diablo, Starcraft, etc., into account, we get very close to the $1.2 billion in annual revenue Blizzard reported for 2009.

There is a good chance that given the addictive nature of the game, Chinese players spend more than 10 hours/month playing the game and that the release of expansion packs (some of the old ones have not yet been approved in China) might drive additional revenue. But even if you were to double both the hours and the number of subscribers, revenue would top out at $158.4 million before Netease takes its cut.

The conclusion I came to after digging into the China factor was that the Activision Blizzard investment thesis cannot rest on expectations of growth from China. The strong pipeline of games from Blizzard for 2010 and the potential of another MMORPG are better reasons to get excited about Activision.

Related Posts:

Thoughts on Activision Blizzard’s Q4 Results

Ten Reasons I am Buying Activision Blizzard (ATVI)

Activision Blizzard: Playing Diablo’s Advocate

1 comment so far

The Apple App Store Ecosystem and Glu Mobile – Part 2

March 10, 2010 | Special Updates | Author Asif

Note: I was going to publish this as a regular blog entry but given the potential of Glu Mobile, I decided to post it as a Special Reports update before distributing it through other channels later this week.

Glu Mobile (GLUU) $0.98

With 38 games currently in the Apple app store, San Mateo, California based Glu Mobile is smack in the middle of the nearly $3 billion Apple app store ecosystem discussed in the first part of this two part article. Founded in 2001, Glu was once a successful start-up, focused on producing and publishing games for mid-range ...

The rest of this blog entry is only accessible to Special Report Subscribers. Click here to subscribe to Special Reports

The Apple App Store Ecosystem and Glu Mobile – Part 1

March 4, 2010 | Stocks | Author Asif

Note: As mentioned in the March 2010 newsletter, we recently migrated to a new platform and this is the first article on this new platform. I would appreciate your feedback letting me know if the content of this email displayed properly in your email client.

The app store by Apple (AAPL) has been immensely successful since its launch on July 10, 2008 and has been the subject of countless media articles like this Dec 2009 New York Times article gushing about how it has helped certain developers become millionaires overnight. One billion apps were downloaded from the app store by April 23, 2009 and it was just 5 months later that Apple announced on September 28, 2009 that downloads had topped more than 2 billion. It took the app store just over 3 months to hit 3 billion downloads by January 5, 2010.

Everyone from mom and pop development shops to current SINLetter portfolio holding Activision Blizzard (ATVI) want in on this gold rush. Just like the California Gold Rush in the mid nineteenth century, it is often the people selling the tools that may end up becoming rich after the easy gold had been mined by early arrivals. This article is about those developers and companies that have tried to capture some of the app store magic only to find their apps disappear in a vast ocean of more than 160,000 apps.

One of the first iPhone games we reviewed on our sister site AppStruck shortly after its launch in May 2009 was a game with stunning graphics called Glyder published by a company called Glu Mobile (GLUU) that is listed on the Nasdaq stock exchange. There are just a handful of public game companies and when I found Glu, I decided to kick its tires to see if it was an investment worth considering especially given its focus on building games for the iPhone and the iPod touch. But before we get into the specifics of Glu, I figured it might be a good idea to get a reading on the market size.

Size of the App Store Ecosystem:

One of the first things a venture capitalist wants to know when you enter a room with your business plan is the size of the market and what portion of that market you expect to capture. The perception of the sheer size of the App Store ecosystem is one of the reasons start-ups like ngmoco have managed to raise $40 million from venture capital funds over the last two years. In stark contrast, Glu, which targets the exact same market, has a market cap of just $25.7 million.

The size of the App Store ecosystem has been a subject of lot of discussion and probably even Apple does not have the answer to it because the ecosystem not only includes the sales of apps through the App Store but also in app purchases of virtual goods and advertising revenue. Mining through the database of apps we built on AppStruck, I found that over 24% of the nearly 160,000 apps in the app store were free and 42% of them were priced at $0.99. Given below is the price distribution for 95% of the apps in the app store.

While having lunch in San Francisco with Jeff Scott, the founder of the leading iPhone app review site 148Apps.com and the Best App Ever Awards, we started discussing the size of the app store and he told me that roughly 70% of the people who land on his website are looking for free apps. GIGaom pegs the number of free downloads to 75% of all downloads based on data obtained by mobile analytics firm Flurry. Using the more conservative 75% number and assuming that downloads for the year 2010 are likely to hit 6 billion, it means that 1.5 billion downloads are for paid apps.

Based on the price distribution from the AppStruck app database, the weighted average price works out to $2.41 per app. The number should probably be lower because more 99 cent apps are likely to be downloaded than apps priced at $99.99. Taking a conservative approach, I am going to put the average price at $2. This means that the Apple app store is likely to generate $3 billion in revenue in 2010 on the low end and $3.61 billion on the high end of the range. Since developers get paid 70% of revenue, we have a potential market size of $2.1 to $2.53 billion available for developers.

AdMob, a mobile advertising company acquired by Google last November for $750 million, was approaching $100 million in gross revenue from advertising. Once you add revenue generated from virtual goods and advertising, the app store ecosystem could begin to approach $3 billion.

Part 2  of this blog entry will cover some of the challenges and opportunities that Glu Mobile faces in this rapidly evolving app store ecosystem.

Leave A Comment

Is Toyota Worth Buying at Current Levels?

February 26, 2010 | Stocks | Author Asif

A friend of mine likes to tell a story about how the first car he bought in the 1990s was a brand new Toyota Corolla that stalled in the middle of the 101 freeway in the San Francisco bay area, leaving him feeling very vulnerable and causing him to swear off all Toyota (TM) cars. He has since then purchased a number of cars made by Ford (F) and appears to be happy with them.

I had personally experienced a stalling issue with a new 2000 Toyota Camry that would manifest itself only when I exited a freeway and was stopped at a red light without manually turning the cruise control off. The dealer could not figure out why this was happening and the problem went away after a few months. In contrast I had very good luck with two Fords and still sometimes regret trading in my reliable 35th anniversary Mustang for an IS 350. Both these incidents occurred during a period of time when Toyota enjoyed the unblemished status of being one of the safest car companies and went on to surpass General Motors as the largest car company in the world. With two cars made by Toyota parked in my driveway (the IS 350 is affected by the recall), I have to say that over the years I have been satisfied with the quality and reliability of these cars.

Stalling of a car especially in the middle of a freeway could be dangerous but there is little that can unnerve drivers more than an accelerator pedal that gets stuck or brakes that do not do their job when needed. The situation Toyota faces right now has a number of parallels with the sudden acceleration related issues that Audi ran into in the mid 80s. The company issued a number of recalls and sales suffered as a result of the media attention the case received. It later came to light that there were really no problems with sudden acceleration and that most of the reports related to sudden acceleration had to do with human error. However the damage to Audi was already done and it took Volkswagen’s luxury brand a number of years to recover from this negative publicity. Given Toyota’s global reach and product lines, the impact of these recalls will probably not be felt as deeply at Toyota as they were at Audi.

These recalls and the associated media circus will impact Toyota in a number of ways including,

1. The direct cost of the recalls, which is estimated to range anywhere from $1.1 billion (Toyota’s estimate) to as much as $4 billion (analyst estimates).
2. The intangible impact on Toyota’s brand, which until now was synonymous with quality.
3. Loss of sales estimated at close to $1 billion by the company.
4. The impact on the brand potentially leading to pricing and hence margin pressure in the near term.
5. Defending against individual and class action lawsuits.

Valuation:

Toyota has shed more than $33 billion of its market cap since these recalls began but to ascertain if Toyota looks attractive at these levels, I am comparing several financial and valuation metrics of Toyota versus competitors like Honda and Ford in the tables below. With the acquisition of Jaguar and Land Rover from Ford, India based Tata Motors (TTM) has also become a global player and I have included this SINLetter favorite in the comparison as well.

These car companies are complex entities with operations in many countries and a number of product lines, so simple valuation metrics may not give us the complete picture but they provide a starting point for further analysis.

When you look at some of these valuation metrics, at first glance Ford actually looks more attractive than its peers with a trailing P/E of just 13.7 and a P/S of 0.33. However these numbers mask the fact that Ford’s profits in 2009 were primarily driven by Ford Credit and the automotive division lost money last year. The $132 billion in debt on Ford’s balance sheet is also as a result of Ford Credit and automotive debt at the end of 2009 was “just” $34.3 billion. Ford does expect its automotive division to post a profit in 2010 after excluding special items.

Toyota’s stock is currently trading at very close to book value at a price of $73.90, off 19.48% from its January 19th high of $91.78. In contrast, at the height of the financial crisis, the stock hit a low of $57.68 on March 9, 2009 and fell well below book value. There remains a distinct possibility that Toyota shares still have a ways to fall especially in light of the fact that they don’t exactly look cheap when compared to peers like Ford and Tata Motors. According to some estimates Toyota is losing $500 million in sales each month right now.

Given that the nearly one year old market rally appears to be sputtering and attractive investments are still available in the small cap sector, I would personally hold off on investing in Toyota at this juncture.

2 comments

Marcus Revisited: The Avatar Effect

February 20, 2010 | SIN Picks | Author Asif

Note: This blog entry was originally published as a Special Reports update on 2/16/2010 and is now open to everyone. Marcus has risen since this update was originally published and is now trading slightly above book value.

2009 was a record year for the U.S box office with moviegoers spending more than $10 billion ($10.585 billion to be precise) despite the Great Recession. James Cameron’s epic Sci-Fi flick Avatar and 3D technology have given new life to movie theater chains and investors are looking at companies in this sector with renewed interest. It should be noted that Avatar, which was released on December 18, 2009 managed to “only” generated $283.8 million in domestic box office receipts before the end of the year and that the biggest domestic earner of 2009 was actually the sequel to the Transformers movie, Transformers: Revenge of the Fallen, that managed to pull in $402.1 million on the domestic box office and over $800 million worldwide. The lifetime gross domestic receipts for Avatar currently stand at $667.61 million, surpassing Titanic’s $600 million gross to become the biggest selling movie of all time (on an inflation adjusted basis, Gone With the Wind released in 1939 still kicks the wind out of Avatar).

In stark contrast 2009 was a terrible year for the lodging industry. Revenue Per Available Room or RevPAR in industry parlance, a key metric used to determine the financial performance of a property, fell in both 2008 and 2009 with both business and leisure travelers tightening their purse strings. The good news is that RevPAR declines have moderated in recent months and now appear to be stabilizing at a number of companies in the lodging industry including Wyndham Worldwide (WYN), Starwood Hotels (HOT) – love that symbol – and Marriott International (MAR). Both Starwood and Marriott raised their outlooks for 2010 when they reported recently reported 2009 results. Wyndham Worldwide, the parent company of chains like Ramada, Howard Johnson and Wyndham amongst many others tripled its dividend from 4 cents to 12 cents.

These two trends reminded me of Marcus, a company I last wrote about in the October 2007 edition of SINLetter. Marcus owns and operates 668 movie screens in the Midwest. The company also owns 8 upscale hotel properties including the Four Points by Sheraton in downtown Chicago and manages an additional 11 properties. Marcus could in the short-term benefit from the Avatar effect and in the long run benefit from improvement in RevPAR in its lodging division.

In the fiscal second quarter ended November 2009, revenue from theater admissions and concessions was $41.29 million, more than twice the $20.43 million in revenue generated from rooms. However the gross margins in the lodging division are much higher than margins from the theater division. Since Avatar was released in December, the company should see a boost to revenue when it reports results for its fiscal third quarter ending this month. Besides Avatar, the third quarter will also benefit from the $204 million that Sherlock Homes rung up since December, about $150 million in box office receipts from The Twilight Saga: New Moon since the close of the second quarter on November 26, 2009 and a strong showing from The Book of Eli in January.

The four key reasons I like Marcus at this point are,

1. When compared to other movie theater companies like Regal Entertainment (RGC), Cinemark Holdings (CNK) and Carmike Cinemas (CKEC) that could benefit from Avatar and the move towards 3D, I prefer Marcus because it trades at a valuation that is comparable to its peers but at the same time its balance sheet has the least amount of leverage of the group.
2. The company has been booking charges against an investment in Las Vegas called the Platinum Hotel & Spa that fell in value following the implosion of the real estate bubble and this has impacted reported earnings for a number of quarters. Marcus booked a $12.6 million impairment charge last quarter related to the remaining 16 owned condominium units in the Platinum Hotel & Spa. The company also took a one time $1.4 million charge last quarter related to a pension withdraw liability. This liability had to do with a multi-employer pension plan connected to Chicago projections union and the one time charge allowed Marcus to exit now and lock in their portion of the unfunded liability in this plan. The company reported a small loss in the second quarter on account of these two charges but since these charges should not weigh down earnings going forward, valuation metrics will begin to start looking attractive in the next few quarters.
3. The company pays a dividend of 34 cents per share, which gives you a 3.1% yield while you wait for the stock to appreciate.
4. Best of all the stock trades slightly below book value of $11.17. The good news is not just that the stock trades below book value but that the assets on its balance sheet including the theaters and especially the 8 company owned hotel properties are carried at cost and are probably worth significantly more at this point.

I will purchase 500 shares of Marcus for the SINLetter Special Reports portfolio and also for my personal portfolio after this post is published. The closing price of the day on 2/16/2010 will be used as the purchase price.

Leave A Comment