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Digital Add-Ons Refresh Videogame Makers' Revenues

Digital add-ons for videogames such as Activision Blizzard’s ‘Destiny’ are providing recurring revenue for companies whose profits often hinge on a single game.
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Digital add-ons for videogames such as Activision Blizzard’s ‘Destiny’ are providing recurring revenue for companies whose profits often hinge on a single game.


Photo:

Activision

By

Sarah E. Needleman

March 15, 2016 5:30 a.m. ET


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Jackson Robbins, a high-school senior, spent $60 on the science-fiction videogame “Destiny” in September 2014. Since then he has shelled out $80 downloading new missions, maps and other virtual gear to keep the game going.

“Most games I play and then put down after, like, two months,” said Mr. Robbins, who lives in Short Hills, N.J. But, he said he plans to buy any new “Destiny” content Activision Blizzard
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Inc. creates.

Digital add-ons have become a cash cow for the videogame industry, keeping players spending on their favorite games long after the discs might have ended up on a dusty shelf. They provide the kind of recurring revenue that has long eluded game makers, whose earnings can often hinge on the success of a single game, particularly a big-budget hit around the holidays.

At Electronic Arts Inc.,
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digital extras generated $1.06 billion in adjusted revenue last year, driven largely by people buying virtual currency within its sports games. “If we can extend your engagement, we can typically monetize you over time because you enjoy what you’re doing,” EA Chief Financial Officer Blake Jorgensen said at a technology conference earlier this month.

Activision and Take-Two Interactive Software Inc.
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don’t break out sales of digital add-ons in their earnings reports. But at an analyst day in November, Activision’s finance chief said the company was on track to post $1.6 billion in sales from such items for 2015. Take-Two said in its recent report for the holiday quarter that consumer spending on digital extras grew 45% from a year earlier.

There are downsides, however. Gamers might be less inclined to buy a new game if add-ons allow them to keep playing an older one. They also might bristle at spending dozens more for add-ons after buying a full-priced game.

“It’s content that should be in the game to begin with,” said Mark Burke, a 23-year-old sports blogger in Attlerboro, Mass. “You could be paying well over $100 to play one game.…It’s not worth the money.”

Activision expects to get more than half this year’s profit outside the holiday quarter, citing in part optimism about digital add-ons to its biggest franchises. Four years ago, Activision got more than half of its adjusted annual revenue—54%—in the fourth quarter, compared with 46% in the most holiday period.

“As we see more digital content smooth out revenue over the course of the year, videogame companies will become less and less dependent on Christmas,” said Ben Schachter, an analyst with Macquarie Securities.

Digital extras for console and PC games generated $21.14 billion in revenue world-wide in 2015, up 8% from the previous year, according to industry tracker SuperData Research.

EA’s Mr. Jorgensen has said the add-ons keep revenues from bunching up at the holidays. At a tech conference in November he also credited them, along with full-game downloads, for fattening the company’s adjusted operating margins from single digits to 28% over three years.

Such growth explains why downloadable content, particularly meaty updates called “expansion packs,” have become a strategic part of a franchise game’s rollout. For “Star Wars Battlefront,” EA is offering four expansion packs through early 2017 for $50—a “season pass” that costs nearly as much as the game itself. A spokeswoman said the company is building experiences that play out over months, or even years.

A dearth of major new releases this past holiday quarter drove Take-Two’s adjusted revenue down 49%. Even so, the company raised its earnings forecast for the fiscal year that ends this monthas gamers snapped up digital extras for older titles, including a version of “Grand Theft Auto V” released in November 2014.

“It used to be you bought this big, robust title, you played it and then you moved on,” said Chief Executive Strauss Zelnick, in an interview. Now, publishers can keep delivering additional content and making money off a game long after its initial release, he said.

At Ubisoft Entertainment SA, known for its “Assassin’s Creed” series, digital sales have “really helped provide a source of revenue year-round,” said Tony Key, senior vice president of sales and marketing

Analysts say digital extras can fill the coffers during a lighter calendar of game releases, or when a potentially promising game doesn’t sell. Downloadable content can also bridge the gap when a key game is delayed.

During its recent earnings call, Activision pushed back a sequel to “Destiny” to 2017 without giving a reason. Before then, however, it plans to release a fourth expansion of the original game. The third expansion, a $40 update in September called “The Taken King,” was the most-downloaded launch-day title on Sony Corp.
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’s PlayStation store, the companies said.

Despite the delayed game, Activision expects to post a record $6.25 billion in adjusted revenue this year. A spokeswoman said focusing on players year-round has increased the hours they spend on the company’s games.

On its earnings call, Activision finance chief Dennis Durkin based his bullish outlook in part on new expansions for “Destiny” and the company’s “Call of Duty” franchise.

Write to Sarah E. Needleman at sarah.needleman@wsj.com

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