Activision game plan sees it heading for $1bn turnover
By Paul Abrahams in San Francisco - Aug 31 2001 00:00:00
For Activision, big is beautiful - or so claims Robert Kotick, chairman and chief executive of the second-largest US-based computer games publisher.
The company, which has often failed to meet its profit forecasts, was the fastest-growing American publisher last year, reporting record earnings.
Mr Kotick, a youthful 37, has little doubt about the reason for Activision's new-found success. "The economies of scale are huge," he says. "Three years ago our sales were under $300m. We have now had two years at above $500m and the difference has been amazing."
Distribution has become much easier, says Mr Kotick. "At $300m annual sales, we were struggling to get access to retailers," he says. "The dynamic with the retailer has changed dramatically."
The company's decision to support multi-platforms - such as Sony's PlayStation 2, Nintendo 64, Sega's ill-feted Dreamcast, Microsoft's Xbox, and Nintendo's handheld GameBoy series, as well as PCs - has helped gain access to shop shelves.
But more importantly, expansion has improved the quality of Activision's games. "In the first place, our new-found size has helped us attract programmers and developers, internal and third-party," says Mr Kotick.
"We have also been able to obtain licensing rights much more easily. Before, we just did not have enough credibility. Scale has given us access to some valuable properties," he says. These include Spiderman, The Simpsons, Star Trek Voyager and Toy Story 2.
Since 1997 the company has made 13 acquisitions. Some have been hugely successful, but at least two were terrible, admits Mr Kotick.
The $26m purchase of Expert Software, a PC games company, in 1999 fits into the later category, he says. The deal should have given Activision an attractive portfolio of games, and greater shelf-space in retailers. But most of Expert's games turned out to be poor quality and Mr Kotick was forced to scrap the brand.
The acquisition binge and growth surge also had an adverse effect on Activision's profitability.
"Five years ago we made the decision to grow the business at the expense of margins. That impacted the share price and the perception of the company," says Mr Kotick.
He says that its focus now is "margin expansion and hitting earnings numbers". As part of that process, the company has given free rein to Ronald Doornick, president and chief operating officer, who joined Activision in 1988 from food group Con-Agra. He has been strongly identified with efforts to streamline the business, and kill off poorly performing games, particularly in the PC market.
Mr Kotick says that his appointment is consistent with a policy - unusual in the games industry - of hiring executives with outside experience. "We have real depth of management - people with experience in packaged goods, at companies such as Proctor & Gamble and Cadbury Schweppes," he adds.
That professionalism is no accident, says Mr Kotick. It is the culmination of a strategy put in place by Mr Kotick in 1991, when at the age of 26 he spent about $500,000 to take a controlling stake in the group, then in Chapter 11 bankruptcy protection. "Even then, I wanted to institutionalise the process of creating computer games," he says.
Mr Kotick says everything is now in place for rapid growth: "We don't need more headcount or infrastructure to become a $1bn revenue company."
The combination of additional revenues, and relatively stable costs are behind Activision's promise to increase earnings per share from 75 cents in 2001, to 87 cents in the current year and $1.09 in 2003.
Mr Kotick is confident partly because of the industry environment. He says the main three hardware vendors - Sony, Nintendo and Microsoft - are financially sound.
Nintendo and Microsoft are expected to spend hundreds of millions of dollars on marketing this winter to generate interest in their platforms. That should drive software sales.
Activision will also benefit from the huge success of the latest version of Nintendo's GameBoy. In the quarter to June, GameBoy games generated about 30 per cent of Activision's revenues.
If the launch of new hardware is set to increase demand for software, competition between the software companies may be less intense. "The industry consolidation means there are far fewer competitors this cycle. Last time round there was Time Warner, Viacom . . . and Disney was a publisher rather than a licenser," says Mr Kotick. The barriers to entry are considerable, he adds.
For the moment, investors appear willing to buy Activision's vision. The shares are up four-fold from their low of $6.50 in 2000, and have been trading in the mid-$30s, near its historic high of $41.
However, even at that price, Activision has a market capitalisation of only about $1bn. There is little doubt that its high growth and fat margins might make it a tasty morsel for a large media group.
Mr Kotick admits that with Electronic Arts, Activision is among the games companies most likely to be acquired. The company rebuffed an offer of $25 a share from Richard Li's Pacific Century CyberWorks, the Hong Kong telecoms group. There have also been rumours of a potential bid from Konami of Japan.
Mr Kotick says he is obliged to study all offers, but it needs to be from the right source, and that is not Richard Li or Konami. The group has adopted a poison pill defence to fend off unwelcome advances.
There is real possibility that Activision - the serial acquirer - could itself be acquired.
© Copyright The Financial Times Limited 2001.
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