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Electronic Arts Inc. (EA), Activision Blizzard, Inc. (ATVI): Multiplayer and Mobile Games to Dominate the Industry

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Video games have always been one of the top leisure time activities for people, and with the advent of smartphones and tablets, the time spent on these activities has increased significantly over the past few years. The videogame industry stood at an estimated $63 billion as per an international development group’s estimate. The industry is highly fragmented, with a few large players and a number of small players within the industry, both private and public. The industry has experienced a lot of consolidation over the past few years, with some of the largest companies involved in business acquisition or asset acquisition in order to enhance their portfolios of products and enter markets for various platforms.

Electronic Arts Inc. (NASDAQ:EA)

Within the gaming industry there are three major publicly listed US companies that have had a successful history in creating some of the most popular and award-winning games in the past. Electronic Arts Inc. (NASDAQ:EA)Activision Blizzard, Inc. (NASDAQ:ATVI) and Take-Two Interactive Software, Inc. (NASDAQ:TTWO) are the publishers of some of the best-known household names in the gaming industry such as Need for Speed, FIFA, Call of Duty, World of Warcraft, Grand theft Auto, and NBA 2K. All the companies have historically been focused on console gaming, but have adapted, and through acquisitions and capital expenditures have also established themselves in the mobile gaming market.

Performance

Activision Blizzard, Inc. (NASDAQ:ATVI) is one of the oldest developers and publishers of interactive software products and content. The company has achieved a revenue growth of more than 10.88% per annum over the last five years, with the highest growth coming in 2008, more than 91% due to acquisition and mergers in that year.

Excluding the results of 2008, the company has achieved a compound annual growth rate, or CAGR, in revenues of around 13.77% over the past 4 years. The operating margin of the company has increased from 16.5% in 2008 to 29.9% in 2012. The major contributor to the improved profitability of the company is the improving gross margin due to favorable pricing in the market, better cost control, and an increasing amount of revenues coming through the digital channels, which have higher margins.

Electronic Arts Inc. (NASDAQ:EA) is also one of the oldest publishers and distributors of game software content and services. It is one of the leading developers of games in the racing and sports category. The company’s revenues have been quite volatile over the years, increasing first in 2008 and then dropping in two consecutive years, and then increasing in 2011 again before dropping in the most recent fiscal year. The company has also experienced losses from the period spanning from 2008 to 2011, as the company incurred restructuring charges and acquisition-related charges.

Post-restructuring the company has been able achieve an operating profit, although it was still not at par with its historic profits due to considerably higher research and development costs. The company spends the most in R&D as a percentage of revenue, and because of this along with the recent acquisitions and restructuring, I expect the company to improve its margin in the future.

The smallest of the lot, Take-Two Interactive Software, Inc. (NASDAQ:TTWO) has developed some of the most popular games in recent history, including the most popular game series of all time, Grand Theft Auto, as per Metacritic reviews. The company has a substantial presence on almost all gaming platforms. It has achieved a growth in revenues of around 4.33% per annum over the past five years. The slow growth in revenues can be attributable to the divesture of SYNNEX in fiscal year 2012, which resulted in a drop in revenue by more than 27% in that year.

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