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Why Is Activision Spending $500 Million On One Game?

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Activision (NASDAQ: ATVI) is planning to spend a colossal amount of money on just one video game.

According to Reuters, the company -- which is famous for producing the Call of Duty franchise -- could spend as much as $500 million on Destiny.

Set for release on September 9, 2014, Destiny is the result of a joint venture between Activision and Bungie, the creator of the acclaimed Halo franchise. The two companies first announced their partnership in April 2010.

Activision's $500 million estimate is massive and could dwarf the budgets of other games. But the enormous fee is not limited to game development alone. Some of that money is being spent on marketing, infrastructure support, royalties, packaging and other (unspecified) costs.

Related: Bank Of America: Buy Activision Blizzard Over Electronic Arts

Regardless of the expense, Wedbush analyst Michael Pachter thinks that Destiny will prove to be a wise investment for Activision.

"First, they have already sunk four years into development, so they have a basis for deciding to spend on marketing and building infrastructure," Pachter told Benzinga. "Second, they have a pretty solid record with franchise building, so it's hard to second guess them at all."

When asked if this $500 million expenditure could set the precedent for the game industry (similar to how $200 million is the new norm for Hollywood), Pachter replied, "No, it's not the 'precedent.' That's why it's news."

Lofty Standards

For better or worse, Destiny's success is likely to be compared directly to Activision's primary franchise, Call of Duty.

Call of Duty: Advanced Warfare, the next chapter in the series, will be released on November 4, 2014 -- just two months after Destiny arrives.

Historically, the Call of Duty series has outsold Halo, but that could have been due to platform limitations. Halo is a Microsoft-owned property that only appears on Xbox game consoles (and occasionally on PC). Call of Duty and Destiny are third-party games and are therefore published on multiple game platforms.

This could give Activision a large enough customer base to turn Destiny into the next big franchise. But even if it proves to be one of the biggest games of the year, it could have a difficult time competing with the industry leader. Call of Duty: Ghosts, the most recent Call of Duty game, has already sold 20 million units.

Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.

Latest Ratings for ATVI

DateFirmActionFromTo
Aug 2014Longbow ResearchUpgradesNeutralBuy
Aug 2014BarclaysMaintainsOverweight
Aug 2014MacquarieMaintainsOutperform

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