Activision Blizzard realizing future of video games as online services

Activision Blizzard says the way it makes and sells games is rapidly changing, and it's all about the Internet.

In its fiscal first-quarter earnings report Wednesday, the company behind popular military shooter franchise Call of Duty and the fantasy game World of Warcraft said that, despite drops in both sales and profits, it's following a plan to shift sales to the Internet, which now account for a record $3 out every $4 the company rings up.

Activision also said two of its newest games -- the space-age shooting game Destiny, and the digital card game Hearthstone: Heroes of Warcraft -- have accumulated more than 50 million registered users and are now responsible for more than $1 billion sales. Hearthstone, for tablets and smartphones, is offered for free to download, and makes its money by charging for upgrades and additional items over time. Destiny is also designed to get players spending money over the next ten years of its development by offering additional storylines and other items. Activision says Destiny's player base clocks around 3 hours of playtime a day.

"The transition to digital continues to drive our business," said Activision CEO Bobby Kotick during a conference call Wednesday.

The 11-year old World of Warcraft game is one of Activision's best known and longest-running active games. That has helped executives see the value in creating titles of all types that operate less as products burned onto physical discs and played over a short time to living titles, regularly expanded and updated over time.

So far, it's paying off. Activision said a record 76 percent, or $538 million, of its total revenue came from sales over the Internet of full-game downloads and in-game adds-ons.

This shift, though more dramatic with Activision, follows an industry trend with other large game makers, like Electronic Arts and Take-Two Interactive, which have both seen consistent boosts to sales over the Internet in recent quarters. These companies are beginning to see success in the games industry as less a matter of selling the most units and more a question of how to get gamers to play a single game for longer -- and spending real money in the virtual worlds as well.

With Call of Duty, Activision is also applying what it's learned about the Internet to help sales for those games stretch out amount of time. Call of Duty: Advanced Warfare was released last fall and continues to be the best-selling game for the newer generation of game console hardware. That isn't necessarily new for a Call of Duty game. More important, Activision says, is a double-digit percentage jump in sales for the title when counting the Advanced Warfare's new payment system that allows players to spend small amounts of money for in-game items like extra supplies to use on a difficult mission.

Looking ahead, the company is planning to revive the once-popular Guitar Hero franchise, which let players use a plastic guitar-shaped game controller to rock out to classic songs with on-screen prompts. With Guitar Hero Live, Activision is trying to revive a genre that rose to pop culture prominence seemingly overnight almost a decade ago before crashing around 2009.

Activision has already announced its next Call of Duty game, called Black Ops 3, and is planning a new title Overwatch, which it will open up to players in an early beta format this fall and is incorporating elements from a canceled spiritual successor to World of Warcraft codenamed project Titan. World of Warcraft still has around 7 million paying subscribers, but has seen its player base dwindle steadily over the years, meaning Activision is in search of a new hit multiplayer game that can sustain itself for a decade or longer.

Investors largely yawned at the results, keeping Activision stock flat in after-hours trading. The company's shares have remained mostly steady this year, though it peaked at an all-time high of $24 a share back in early September ahead of Destiny's release.

Overall, Activision said sales in the quarter ending March 31 were $703 million, down 9 percent from this time a year ago, after adjustments for deferred revenue and other items. The company's profit fell almost 18 percent and its earning per share came were 16 cents a share, down from 19 cents a share a year ago.

Analysts had expected the company to report on average a gain of 7 cents on sales of $655.4 million, according to surveys by Thomson Reuters.

For its full fiscal year, Activision readjusted its sales guidance with a $25 million increase in sales, to $4.425 billion for the year, and an earnings per share increase of 2 cents to $1.20.

In April, the company set its fiscal-year outlook at $4.4 billion, well under 2014's $4.8 billion. Activision cited harm to overseas sales due to weakened foreign currencies as the primary reason behind its lowered forecasts.