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Activision Partners Flurry

Zacks Equity Research

Activision Blizzard Inc. (ATVI) is gearing up to become a major publisher in the rapidly growing mobile gaming market. Its publishing division recently entered into a partnership with Flurry Inc., a leading provider of mobile analytics and advertising services.

Flurry’s platform helps mobile application developers to develop, publish, promote and distribute their intellectual properties (IPs) over a number of mobile platforms including Apple’s (AAPL) iOS and Google’s (GOOG) Android operating systems. Most importantly, Flurry’s advertising platform helps mobile game developers to monetize their IPs. The company boasts of a strong client base, which includes more than 70,000 companies.

Based on Flurry’s well entrenched analytics and advertising platform, Activision expects to locate third-party mobile game developers, whose game apps will be eventually published under the company’s new mobile publishing brand. The alliance is expected to broaden Activision’s mobile offerings going forward.

Lately, Activision has been focusing on increasing its penetration in the mobile gaming sector, in order to diversify its revenue base and take part in the huge growth opportunity it presents over the long term. According to ABI research, mobile gaming is expected to generate $16.0 billion in revenues by 2016, a massive increase from approximately $5.0 billion reported in 2011.

Instead of developing new games, the company is bringing out mobile versions of its popular franchises such as Skylanders and Call of Duty, which have received mixed reviews. The company has been toying with the idea of bringing a mobile version of its renowned multiplayer game World of Warcraft (WoW) going forward.

However, we believe that these established franchises are quite mature and therefore present limited room for further growth. This is where we expect Flurry to play an important role, since it identifies new developers. We think this could boost Activision’s portfolio of new games going forward, infusing fresh content and eventually helping the company to solidify its position in the mobile gaming segment.

There should also be a positive impact on Activision’s profitability, as development cost is likely to be much lower than packaged games.

However, the mobile market runs on a freemium (games given away for free with revenues coming from alternative sources, such as advertising, in-game sale of virtual goods and micro-transactions) business model, which Activision does not seem to follow right now. As freemium models have achieved great success in attracting mobile subscribers, we believe that Activision’s reluctance to follow the model could impede its growth in this sector.

Further, the mobile gaming market is fiercely competitive and remains fragmented with the presence of numerous developers such as Electronic Arts (EA), Gameloft, Rovio (developer of the popular title Angry Birds), Ngmoco, Digital Chocolate, Glu Mobile, GameHouse, Capcom and Disney Mobile. Being a late entrant, Activision has been lagging its peers, which it expects to make good through the partnership with Flurry.

However, until that happens we maintain our Neutral rating over the long term (6-12 months). Currently, Activision has a Zacks #3 Rank, which implies a Hold rating in the short term (1-3 months).

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