Market Overview

Call of Duty's $1 Billion Milestone: Monumental Success or Avatar-Sized Hype?

Activision (NASDAQ: ATVI) was quite happy with itself today, bragging about Call of Duty: Modern Warfare 3 as if it were the fastest-growing entertainment property in the history of entertainment.

In terms of dollar signs, Modern Warfare 3 is the biggest.

It took Avatar, the over-hyped 3D movie from James Cameron, 17 days to earn $1 billion in revenue. Today, Activision announced that it only took 16 days for Modern Warfare 3 to earn the same amount of money.

“Engagement of our Call of Duty audience continues to rise around the world,” Bobby Kotick, Activision's CEO, said in a company release. “Call of Duty as an entertainment franchise has made an indelible mark on popular culture and its broad and continued success is further validation that audiences increasingly value interactive experiences over passive experiences.”

Activision goes on to compare Call of Duty to other major franchises, all of which have spawned video games but were first introduced in other forms of entertainment: Star Wars, Harry Potter, Lord of the Rings, and the National Football League.

This gives Activision some serious bragging rights, no doubt. But is it really fair to say that Modern Warfare 3, a game that retails for $60, is comparable to Avatar, a film whose average ticket price was somewhere around $10 or $12?

Video games justified their $60 price tag years ago, so I'm not going to bring up that argument here. And a $10 movie ticket is never really a $10 movie ticket, since most consumers feel the need to splurge on a $5 Coke (NYSE: KO), a $5 popcorn, and a $5 candy. Before you know it, that $10 movie ticket has become a $25 event that will be over in two hours. Bring a date and you can double that amount. Bring kids and the theater cash register may never stop ringing.

Granted, only profits from the movie ticket are sent to the studio; the rest goes right into the pockets of Regal Entertainment (NYSE: RGC) and other movie theater operators. While movie studios have managed to increase their profits (and raise ticket prices) with the lure of 3D goggles and larger IMAX (NYSE: IMAX) screens, the film industry still banks on standard ticket sales. Thus, Hollywood must sell an average of six tickets just to equal to the revenue of one video game.

This, of course, could lead us back to the argument of you-get-what-you-pay-for. Let's not go there. Everybody knows that a good video game will provide its user with more entertainment (either through initial length, replay value, or both) than a good movie, which is much shorter in length and must be downloaded or purchased on DVD to re-watch for free. This is an old argument. And frankly it is one that any avid reader could win by noting the value of a timeless book (which is cheaper than a game and could provide greater long-term value).

Still, is it fair for Activision to make this comparison?

If the situation were reversed, movie studios wouldn't hesitate to announce that Action Movie X beat Halo's record. They wouldn't hold back in bragging about how Romantic Comedy Z is more popular than Final Fantasy. They'd especially like to tell us that Violent Drama Y is more successful than Grand Theft Auto, though at the rate Hollywood is going, not even a movie based on the Grand Theft Auto video game series could prove to be more popular than the games.

But Hollywood doesn't make those comparisons. It has had the perfect opportunity to do so with DVD sales (ex: the Toy Story franchise broke records on DVD) and digital streams or downloads. But Hollywood stays silent in this regard.

Why? Simply put, Hollywood does not need to make those comparisons. The truth of today's hype-filled press release is that it wasn't written with the sole purpose of bragging; it was written because Activision knows that Hollywood has the bigger property. The Call of Duty series might earn greater profits overall, and it may thrive well beyond Avatar's retirement. It might do more for Activision's stock than Avatar could ever hope to do for 20th Century Fox.

“Every year, new people are drawn into Call of Duty,” Eric Hirshberg, CEO of Activision Publishing, said in today's company release. “And while the franchise continues to set records, our fans still seem to want more, demonstrated by our record setting start on Call of Duty Elite. We are committed to helping everyone connect, compete and improve their game, Call of Duty style.”

Hirshberg is correct in his assessment of the franchise – consumers seem to want more. But Avatar has that little something every entertainment producer wants: mainstream attention. For every five people that own a Call of Duty game, you can probably find 10 or 20 people that paid to see Avatar. And that's just one movie; there have been several Call of Duty games.

Activision should no doubt feel proud today. As a fan and supporter of the game industry, I applaud every step the industry makes toward becoming the leading form of entertainment. But until there are as many people playing games as there are watching movies, the game industry will continue to compare itself to the greatest successes in Hollywood, hoping that major headlines will get the attention of consumers who typically would not care.

ACTION ITEMS:

Bullish:

If you like the game industry's win over Avatar, consider the following:

  • In addition to Activision, Electronic Arts (NASDAQ: ERTS) is doing quite well this year.
  • With a new Grand Theft Auto on the way, Take-Two (NASDAQ: TTWO) is expected to flourish in 2012.
  • Until digital distribution takes over, GameStop (NYSE: GME) will continue to be a thriving retailer.

Bearish:

Those who would prefer that Avatar and other Hollywood properties stay at the top of entertainment should consider these alternatives:

  • One of the most anticipated films of 2012, The Hunger Games from Lionsgate (NYSE: LGF), isn't due next summer – it's coming in March.
  • While Cars 2 failed to repeat the success of the original, Disney (NYSE: DIS) looks to have a much bigger animated hit with Brave in the summer of 2012.
  • In addition to Regal Entertainment, Cinemark Holdings (NYSE: CNK) is one of the largest publicly traded movie theater chains.

Follow me @LouisBedigian

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