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ATVI Presentation Harvard Computer Society

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					 Stock Purchase Pitch




Harvard Financial Analysts Club
       Activision-Blizzard
Summary
Headquartered in Santa Monica, California, Activision
Blizzard, Inc. is a worldwide pure-play online and
console game publisher with leading market positions
across all categories of the rapidly growing interactive
entertainment software industry.
Activision Blizzard's portfolio includes best-selling video
games such as Guitar Hero, Call of Duty, and Tony
Hawk, as well as Spider-Man, X-Men, Shrek, James
Bond and TRANSFORMERS, leading franchises such as
Crash Bandicoot and Spyro and Blizzard Entertainment's
StarCraft, Diablo, and Warcraft franchises including the
global #1 subscription-based massively multi-player
online role-playing game, World of Warcraft.
                    Porter’s Five
  Supplier Power
• Industry is rather concentrated
   – Most successful titles are almost exclusively developed by established
     companies rather than new startups.
• Volume of sold games is of utmost importance
   – Fixed development cost but minimal distribution costs
   – Failing to cover the development costs can therefore ruin a company
• Products in the market are differentiated
   – Differences in quality are large
   – Gamers are usually loyal to certain types of games and are unlikely to
     accept substitutes
• Even major publishers are not forward integrated
   – Rely on the customary types of distribution.
• Compared with the rest of the computer industry, the average
  cost of computer games lies well below the average cost of
  the whole software industry.
                 Porter’s Five
  Barriers to Entry
• Technically no barriers to enter the market of computer
  games as any teenager with a computer and sufficient
  knowledge can develop a game.
• Nevertheless, starting a larger company requires major
  investments (teams consisting of coders, graphical designers,
  music composers, game designers, and marketers). With
  increasing complexities of the games, these costs are
  understandably increasing.
• The companies have very limited absolute cost advantages as
  they cannot patent their technologies and development costs
  are very similar for the single companies.
• The possibility that governments might outlaw certain types of
  games because of objectionable content poses a risk for game
  publishers. Nevertheless, it is very unlikely that any such
  steps will be actually taken.
               Porter’s Five
  Threat of substitutes
• The switching costs on the market are virtually non-
  existent and the market is very competitive.
• Nevertheless, the buyers are very unlikely to accept
  substitutes and the aggregate game sales are usually
  down prior to the release of a long awaited title.
               Porter’s Five
 Buyer Power
• The companies do not have long-term
  agreements and are dependent on a small
  number of customers who generate large
  percentages of the sales (game store etc.).
  These have large bargaining power as the
  companies must reach an agreement with
  every single one of these chain stores whereas
  the stores do not.
              Porter’s Five
  Degree of Rivalry
• The industry is growing rapidly. The size of the
  whole market is now almost USD 12 billion.
• The corporate stakes are high as the single
  corporations are dependent on the revenue
  solely from the one sub-industry (apart from
  giants such as Sony or Microsoft).
• There are very few exit barriers as the
  companies, apart from its staff and
  computers, do not own much.
• Companies who want to exit the market are
  more likely to be acquired by another
  company rather than go out of business
  completely.
              SWOT Analysis
  Strengths
• Very strong franchises (Starcraft, Diablo, World of
  Warcraft, Guitar Hero, Call of Duty); the previous
  titles in the various series were critically acclaimed
  and sold in the millions
• The Blizzard name is highly valued by customers;
  arguably the most highly esteemed in PC gaming
• Multi-year agreements with companies like
  DreamWorks granting exclusive rights to create
  video games based on their theatrical releases
  (games based on movies tend to sell very well)
• Diversity: the company releases products on all
  major gaming platforms, including PC
        SWOT Analysis
 Weaknesses


• Near total reliance on a limited
  number of franchises
• Failure of any of these would pose
  a significant threat to the
  company’s profitability
           SWOT Analysis
  Opportunities
• Growing gaming industry




                            Music: -10%
                            Movies: 1.8%
                            Games: 28.4%
             SWOT Analysis
  Opportunities
• Growing gaming industry
• Another MMORPG in the works; their current one is the
  most successful in the genre and provides approximately
  $165 million in revenue per month
• Sequels to their Starcraft and Diablo franchises slated for
  release in late 2009 / early 2010; previous titles in the
  series sold millions of copies
• Releases of more Guitar Hero titles later this year
• X-Men Origins game, Transformers 2 game in time for
  the movie releases
• The company has expressed interest in future
  acquisitions of successful small- to mid-size game
  developers
             SWOT Analysis
  Threats
• Delays in product releases; the life of most games is
  relatively short and the vast majority of revenues from a
  given title come within the first few months of release
• Loss of customer interest in current franchises (like
  Guitar Hero, which will likely prove to be a “fad”)
• Every game title that is produced for a specific gaming
  console requires a license from the manufacturer of that
  console; if said manufacturers were to increase their
  licensing fees, ATVI would suffer
• Product development costs are likely to increase with the
  advent of new technology; new technology forces
  developers to make ever more sophisticated games,
  which in turn raises the cost of their development
                  CAPM
                        0.3
                                 y = 1.0327x + 0.0012
                       0.25
                        0.2
                       0.15
                        0.1
                       0.05
                          0
-0.15   -0.1   -0.05   -0.05 0     0.05          0.1    0.15
                        -0.1
                       -0.15
                        -0.2
      Assumptions
                                  DCF
 • Discount Rate: 11%
       Revenue Growth:
      2006      2007     2008     2009E    2010E   2011E   2012E    2013E
      N/A      3%       124%     20%      35%      25%     20%      15%
        Growth decreasing by 1 percentage point per year
        there-after until reaching 10% in 2019
 • Terminal growth rate: 3%
 • Tax rate: 33%
 • Total Expense as Percentage of Revenue:
 2006        2007      2008     2009E     2010E    2011E    2012E    2013E
99%         86.7%   107.7%      100.1%    99.1%    97%     96%       95%

             This decreases slowly to 88% by the last projected
             year
   Results
                     DCF
Price per share: $13.05
Price at close on 4/22: $10.06

				
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