http://www.businessweek.com/articles/2012-10-04/activision-the-anti-zynga

Technology

Activision, the Anti-Zynga


Tree Rex, one of the characters from “Skylanders Giants.” When a player places the toy on the “Portal of Power,” the character enters the video game

Photo illustration by 731

Tree Rex, one of the characters from “Skylanders Giants.” When a player places the toy on the “Portal of Power,” the character enters the video game

(Changed to reflect U.S. and full European launch date.)

If you don’t have Oct. 21 marked on your calendar, chances are you’re not a big fan of Gill Grunt, Trigger Happy, and the other heroes in the hit video game Skylanders Spyro’s Adventure. More than 32 million of the games and accompanying toy action figures, introduced last October, had sold by the end of March, and on Oct. 21 tens of millions of copies of its sequel, Skylanders Giants, will be released at a suggested retail price of $75 each.

This is good news for Activision Blizzard (ATVI), the game’s developer, and its chief executive officer, Bobby Kotick. Three years ago he decided not to buy companies that make games for Facebook (FB), as his competitors Electronic Arts (EA) and Walt Disney (DIS) did to compete against Zynga (ZNGA), the leading maker of games for social sites.

Kotick’s restraint now appears prescient. According to industry tracker NPD Group, the number of people in the U.S. playing video games fell by 5 percent last year, to an estimated 211.5 million from 222.5 million. Among the categories that declined was light PC gamers, comprising people who play a few minutes a day on Facebook and other PC-based platforms. Activision’s decision didn’t just spare it from the downturn in the kind of “casual” games played on social media sites. It also enabled the Santa Monica (Calif.) company to spend $300 million to develop video games that could lure fickle social media players. Consumers, Kotick says, see too many online games like Zynga’s FarmVille, making it harder to sustain their interest. “You have to bet really big to get through not just the clutter of video games, but all forms of entertainment,” he says.

Activision’s investment paid off in Skylanders, which Michael Olson, a senior research analyst at Piper Jaffray (PJC), estimates will pass $1 billion in sales by next September. The game, aimed at children ages 6 and older, includes the software, a set of trading cards, and three action figures. Players place the toys on a glowing pad, and the characters come to life onscreen through a wireless technology called RFID, or radio frequency identification. Kids can buy and collect about three dozen Skylanders characters—including the blue fishlike Gill Grunt and the gun-toting gremlin, Trigger Happy—for about $8 each; some of the toys have become collectors’ items, selling on EBay (EBAY) for as much as $2,400. (Toys for Bob, a development company based in Novato, Calif., makes both the figures and the game for Activision.) “It very much fits our definition of what casual game play should be,” Kotick says.

Skylanders uses fantasy quests and puzzles similar to Activision’s adult-themed Diablo and World of Warcraft titles, keeping older game players and parents interested. Players guide the Skylanders through a fantasy world, swapping characters with different superpowers in and out of the game and managing their available resources.

It’s not the first stab at cross-generational gaming, where kids play alongside their parents and grandparents—Nintendo had already attempted that with titles for its Wii console. But Skylanders is the first game that includes toys implanted with chips that keep records of what levels players have reached in the game, so they can transfer the information across game consoles, iPads, and Android (GOOG) mobile devices. Activision is “doing some really innovative stuff, getting the digital world to meet the physical world with shared experiences regardless of what device you own,” says Fred Howard, vice president of marketing at KingsIsle Entertainment, which makes a PC game called Wizard101.

With this unusual approach, analysts say, Kotick has pointed the way forward in an industry that’s struggling to get people to pay top dollar for a game. New titles face competition from an ever-growing lineup of game apps on mobile devices—more than 100,000 on Apple’s (AAPL) App Store alone. That’s left a shrinking base of customers willing to spend $60 or more at GameStop (GME) or Best Buy (BBY), for a packaged title that only works on one of the three major consoles: the Wii, Sony’s (SNE) PlayStation 3, or Microsoft’s (MSFT) Xbox. Activision has “executed significantly better than anybody would’ve thought, and done it in a way that’s never been done before,” says Michael Pachter, an analyst at Wedbush Securities. Piper Jaffray’s Olson estimates the company will generate $280 million in the fourth quarter of this year from Skylanders Giants, plus an additional $25 million to $50 million from sales of Spyro’s Adventure.

Through the end of 2012, Activision will have sold 67.2 million Skylanders toys worldwide, Olson says. The company declined to say how much revenue the toys have generated, but according to NPD, U.S. sales topped $99 million in the first six months of this year. By comparison, toys from Hasbro’s (HAS) G. I. Joe and Transformers franchises combined garnered $54 million in sales during that period.

Other game companies are taking note. Console and mobile device makers, for example, are installing technology that makes it easier to share game data across devices. “There’s a tremendous amount of interest in this category now,” says Richard Barry, senior vice president and chief merchandising officer at Toys “R” Us. “I wouldn’t be surprised to see other products come along.”

Kotick plans to license Skylanders rights for books and clothing and even develop films or TV shows. It’s a belated recognition by the game industry that fantasies can succeed by appealing across age groups, says DreamWorks Animation (DWA) chief Jeffrey Katzenberg. “Even in its earliest form, it was a compelling new play pattern,” he says. “They’ve done something that’s going to be around a long, long time, and you can bet 20 competitors are thinking right now about how to imitate them.”

The bottom line: By bucking the now-slowing social gaming trend, Activision was able to create Skylanders, a nearly $1 billion a year franchise.

Cliff_edwards
Edwards is a reporter for Bloomberg News and Bloomberg Businessweek in San Francisco.

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