Earlier today, during the Call of Duty XP Weekend keynote speech, Eric Hirshberg, CEO of Activision Publishing (NASDAQ:ATVI), disclosed the pricing and features of Call of Duty Elite’s premium subscription plan. For $50/year, the service will provide earlier and more consistent access to content, all free non-premium membership features, as well as: (1) one year’s worth of DLC, including 20 content pieces for the upcoming Call of Duty: Modern Warfare 3, during the 9-month DLC season; (2) monthly content drops; (3) access to daily competitions and events; (4) the ability to level-up through clans; (5) 8x more video capacity (up to 24 minutes of HD) for replays; (6) access to expert strategy and analysis; and (7) Call of Duty Elite TV, which will display content from the game’s enthusiasts in Hollywood.
We expect the $50/year premium Elite membership plan to be very popular with Call of Duty’s hard core gamers. At $50/year, Elite membership is a no-brainer for those who plan to purchase all of Modern Warfare 3’s DLC, as the annual spend will presumably decrease by at least $10 (last year’s Call of Duty: Black Ops had four map packs that cost $15 each, for a total spend of $60). There were 18 million map packs sold in the first six months this year, comprising three different packs: we believe that 1 million consumers bought all three, 3 million bought two packs, and 9 million bought one apiece. Thus, we expect that at least 1 million will sign up for the premium Elite membership by year end. The Call of Duty network effect may be amplified by premium Elite, such that if a gamer’s friend purchases premium Elite and gets access to premium maps, the gamer may feel compelled to purchase premium Elite in order to compete as early and as often as possible. We expect the network of premium Elite subscribers to grow to critical mass within a few years, with 3 million likely subscribers by year-end 2012 and 5 million by year-end 2013. Once critical mass is achieved, the company’s pricing power grows. We do not anticipate any premium Elite price increases for at least two years, to allow the premium service to gain traction.
We expect premium Elite to generate roughly $50 million of incremental high-margin digital revenue for Activision (NASDAQ:ATVI) in 2012. At $50/year, we expect an average of 2 million subscribers for the first full year of the service. We expect an operating margin of at least 60% on this incremental revenue, making it accretive to FY:12 EPS by around $0.02.
Annual subscription fees for premium Elite provide Activision (NASDAQ:ATVI) shareholders much greater clarity into the company’s revenue. We expect the service to be quite sticky, and expect the company to continually improve the offering and mimic popular items created by its competitors for their own games and online services.
We view Call of Duty Elite’s main competition as Battlelog for Electronic Arts’ (NASDAQ:ERTS) Battlefield 3. Battlelog is a free service for Battlefield 3 players that will provide statistics, social networking tools, friend list management, squad setup, and platoons, all with built-in voice chat. Although Battlelog and non-premium Elite memberships are free and offer many similar features, we think that many hard core Call of Duty gamers will opt for premium Elite, particularly if the total DLC spend for Battlefield 3 is expected to exceed $50. Ultimately, we expect Electronic Arts to emulate Activision and charge for Battlelog by including map packs with the service for a $50 fee.
Longer-term, we expect Activision to generate additional incremental Call of Duty revenue as the service grows in popularity, and we expect the creation of an online store similar to Diablo III’s auction house. We believe that the online store will allow Call of Duty Elite gamers to buy and sell different items, with Activision (NASDAQ:ATVI) potentially receiving a flat listing fee, a flat sale fee, and a percentage of any balance that is cashed out using a third-party payment provider.
Michael Pachter is an analyst at Wedbush Morgan.