CASE 3-8: The Activision Blizzard Merger
In December of 2007 the merger of Activision and Blizzard was announced. Blizzard Entertainment, one of four divisions of Vivendi games, was the key ingredient for synergy between the two firms. First, an introduction to the video game software industry is pertinent. This will be followed by some discussion regarding the major trends and major players in the industry. Second, some insight will be provided on the merging companies, Activision and Blizzard. Third, the potential value of the merger will be explored, along with some analysis of the partnership. Lastly, I will give my personal views of the merger itself. The Industry, domestically the video game software industry was worth $9.5 Billion in 2007, with expected growth to be $12.5 Billion in 2011. Projections for growth were even larger in international markets, with emphasis on Asian countries. There are two basic forms of hardware that can be used to play a video game a computer, or a gaming console, like an Xbox. Some hardware makers also make their own software, but the most successful games usually come from developers, or third-party software manufacturers. Developers specialize in the development of the games itself, leaving the sales and distribution to publishers. Historically the two branches of the value chain were separate, but as the industry evolved and as we dissect the case study, the economic efficiencies to be gained by combining both efforts under one company will be realized. Some problems with independent software development include the potential risk for a game, or piece of software to be a failure, and not sell. This puts enormous pressure on the firm to develop successful games, because a lackluster game could lead to economic loss if the development costs prove to be more than the revenues. Other problems include finding the right partnership between developers and publishers, as the two companies’ goals may not always align. Also, the cyclical nature of video game development may hinder profitability. The revenue model for the video game software industry has changed in recent years with the integration of the internet and gaming. After the initial purchase of the software, consumers may go online and choose to buy additional features that will enhance their gaming experience. Moreover, some PC games and some consoles require subscriptions which provide firms with reoccurring revenues. Another recent source of revenue to the industry has been the increase in active users, mainly females and older adults with more disposable income. Lastly, since the internet has connected individual gamers to one another, a network effect is in play. Meaning that the more people that are connected, the more valuable the connection becomes. In this case the connection is through a certain game, like World of Warcraft. Many firms are competing to produce software for the video game industry, THQ, Electronic Arts, and Take-Two interactive are Activision Blizzard’s strongest competitors. THQ, while a large company, is not all that dangerous to Activision Blizzard. The demographics the companies appeal to are fairly different age wise and geographically. THQ focuses on a young audience, and they failed to gather support in Asia, a market where Activision Blizzard looks to exploit. Electronic Arts, maker of many professional sports related video game titles and Take-Two, publisher of arguably one of the best console game series ever, Grand Theft Auto, are the largest threat to Activision Blizzard. Electronic Arts has exclusive rights to the NFL, which makes its Madden series extremely profitable, especially since EA releases a new version every year. EA also uses ad space in its games to create additional revenue. Besides those key success factors, EA distributes games developed and published by other companies. What makes these two companies so threatening to Activision Blizzard is EA’s...
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