Economic Analysis of Blizzard Activision Benefits and Costs.

Benefits and Costs

In 2017, Activision Blizzard had net revenues at $7.02 billion, 30.07% from product sales and 69.96% from subscription, licensing and other revenues1 (Activision Blizzard Final 2017 Annual Report, 46). Activision Blizzard changes their internal organization structure into three segments. Activision, particularly for the console platform, had net revenues at $2.39 billion; Blizzard, particularly for PC platform, had net revenues at $2.04 billion; King, particularly for mobile and ancillary platform, had net revenues at $2.08 billion2(Activision Blizzard Final 2017 Annual Report, 5). This year, it had a operating income at $1.31 billion but net income $273 million due to the deferral tax expense within 7 years3(Activision Blizzard Final 2017 Annual Report, 25).

ESports benefit from the rapid development of technology and the wide spread of computers and smartphones, meanwhile, games have been an increasingly popular from entertainment and the total industry has grown, on average, 18% from 2014 to 20164 (Essential Facts About The Computer And Video Game Industry ,12). The industry continues to benefit from additional players entering the market as interactive entertainment becomes more common place across age groups, and therefore innovation and growth help Activision Blizzard to stand a stable market share

Over the past few years, the company has high fixed costs, which will remain consistent no matter how many products and service are sold. As reported, advertising expenses for the year 2017, 2016 and 2015 were $708 million, $641 million, and $523 million, respectively5(Activision Blizzard Final 2017 Annual Report, 58). According to the annual report in 2017, it had $1.07 billion product development expense, 18.73% of total costs and expenses6(Activision Blizzard Final 2017 Annual Report, 23), and the fixed costs makes it harder for new companies enter the industry, because they can hardly offset this part of cost. In terms of the new game, Overwatch, it was an extension for the previous developing game named Titan, which was not successfully carried out to the market, and part of the roles and characters in Overwatch come from Titan. And as a significant part of developing a game, roles design and actions design are fixed cost for the company. Both in the short term and in the long run, product development expenses are sunk costs and cannot be recovered as long as the company decided to work on the development. Other sunk costs such as the payment for a third-party software developer and copyrights also cannot be recovered. Similar to most tech platform based companies, eSports companies have a huge amount of sunk costs. Therefore, the costs can kind of protect the company from more potential entrants.

And variable costs, those who vary from the amounts of output, as for this company, are product costs, game operations and distribution costs, software royalties, amortization and intellectual property for product sales and subscription, licensing and other, sales and marketing expenses, and general and administrative costs at $733, $984, $300 and $484, $1378 and $760 million, respectively(Activision Blizzard Final 2017 Annual Report, 24). Obviously, sales and marketing expenses are significant to the total costs, therefore, the most significant expenses of startup companies are the customer acquisition and stable holding of market share.