As the last of the mid-year financial statements have come in, I've been watching the increasing digital revenues that third-party publishers have been reporting. Today I want to tell you about the four big Western third parties: Activision Blizzard, Electronic Arts, Take-Two Interactive, and Ubisoft. For almost all of these traditional publishers, digital revenues are rising each quarter and that digital revenue represents a greater share of the publisher's total revenue. Given that these publishers developed within a retail-driven market where games were sold on a physical medium, that growth is a good sign that they have a chance at surviving the current trend toward more digitally distributed software. But which of these publishers is generating the most digital revenue? And which publisher has the highest mix of digital revenue in its portfolio? To answer these questions, let's take a look at the annualized digital software revenues of each of those four publishers.

Sizing up digital businesses

The figures below are an annualized digital revenue rate for each publisher, also known as a TTM (trailing twelve month) rate. So, looking at the terminal points on the right, you can see that in the twelve month period prior to the end of June 2013, Electronic Arts generated over $1.7 billion in digital revenue. The Electronic Arts revenue curve is particularly interesting, because it appears to show that in the past three years the company has steadily built its digital revenue stream. Behind that momentum is a company that is trying to grow its digital business from within while acquiring other companies to gain talent, wisdom, and in some cases valuable properties. The entire period shown above, which stretches back to early 2009, includes the acquisition of Playfish in late 2009, Chillingo in late 2010, and PopCap games in mid-2011. During this period, almost all Playfish games have been shuttered and PopCap has had few major releases. Chillingo has ostensibly provided EA with strength on Apple's iOS platform, a fact made clear by EA COO Peter Moore's statement that “Apple was EA's biggest retail partner” for the first time this past quarter. Fortunately, EA breaks out its digital revenues in a reasonable amount of detail, as shown in the slide below from its presentation to investors a couple of weeks ago. As expected, mobile growth is quite strong (55 percent increase over the comparable 12 month period a year ago), but it is also curious to see digital growth on consoles at a comparable level (45 percent increase). Electronic Arts is particularly strong on the HD consoles and I believe that these console digital figures show a very robust market on the Xbox 360 and PlayStation 3, which now have a combined global installed base of over 150 million systems. This gives us what might be a useful metric in the future. EA generated just over $300 million in the past year on an installed base of approximately 600 million iOS devices, but generated over $600 million on an installed base of 150 million HD consoles. That is, about 50¢ per iOS user and $4 per HD console user, on average. If we consider that EA is also selling mobile games on Android devices as well as iOS, then the revenue per device goes even lower.

EA surpasses Activision Blizzard's digital revenue

In terms of company-to-company comparisons, this is the first 12-month period in which EA exceeded the digital revenue of its greatest rival, Activision Blizzard. At the end of March of this year, Activision Blizzard had annualized digital revenue of $1.73 billion per year while EA was hitting $1.66 billion. At the end of June, however, it was EA with the $1.72 billion total and Activision Blizzard with $1.62 billion. Activision Blizzard has its digital revenues closely tied to two major businesses: World of Warcraft and Call of Duty. When a new expansion for World of Warcraft is released, and the numbers of subscribers increases, the Blizzard's digital revenues rise. The game's population peaked at 12 million users in late 2010, and there is a peak in the digital revenue curve graphed above that extends into late 2011. The latest expansion for World of Warcraft, Mists of Pandaria, was released in September 2012. In late 2011, Activision experimented with the Call of Duty Elite subscription program alongside the launch of Call of Duty: Modern Warfare 3. For a $50 fee up front, subscribers were able to obtain all DLC packages for the game at no additional cost. As a result, their a la carte DLC purchases and the higher revenue figures that those individual purchases generate, declined through the middle of 2012. The Elite subscription was not part of the latest Call of Duty title, Black Ops II, and so individual sales of DLC have helped drive higher digital revenue for Activision this year. Which brings me to the other two companies, Take-Two Interactive and Ubisoft, whose total digital revenues are significantly smaller in comparison to Activision Blizzard and EA.

Ubisoft and Take-Two

Back in 2010 and 2011, Take-Two had digital revenue that was somewhat larger than Ubisoft's digital revenue, but both were hovering around the $100 million per year mark. Then in mid-2012, Take-Two's digital revenue began growing very quickly, from $113 million per year up to $301 million per year as of last month. In its post-results briefings, Take-Two has cited strong sales for virtual goods in games like NBA 2K13 and DLC for Borderlands 2. While Ubisoft does have several digital initiatives, including DLC for games like Assassin's Creed III and full games like Far Cry 3: Blood Dragon, it doesn't appear to have had the same level of success that Take-Two has enjoyed. But, what the original graph above does not show is the share of each company's revenue that comes from digital sales. That is, if we divide a company's digital revenue by its total revenue, what percentage do we see? I've put together a graph for that, shown below. In this normalized view, we can now see that Electronic Arts actually surpassed Activision Blizzard last year, in terms of how much revenue it generates from digital sources. Moreover, EA is on track to be a majority-digital company within the next year, the first big Western publisher to break that barrier. This view also demonstrates just how far Take-Two has come in the past two years, increasing its digital revenue share from 10 percent of revenues to over 26 percent. During its last conference call, Take-Two suggested that Rockstar Games has big digital plans for the September release of Grand Theft Auto V, with details to follow soon from Rockstar itself. I think of Ubisoft as having a strong casual set of titles for the casual audience, including the Just Dance, Rabbids, Petz, and the Imagine line of kid-oriented portable games. So it is perhaps not surprising to see that, among these four companies, its digital share of revenue is so low. At 13 percent, it's fully half the share that Take-Two has and less than one-third EA's own share. That's something that I'd expect to see Ubisoft try to address over the coming year, especially as the Xbox One and PlayStation 4 launch. For example, if the company doesn't have a full-blown digital plan in place for Watch Dogs when it launches this winter, it will have missed a tremendous opportunity to capture some important mindshare on the next generation of console systems. And that's true for all four of these publishers. With the release of the new systems, you can expect to see the opportunities for digital sales to expand greatly. Surely, full games will be available digitally on the same day they appear in retail stores. More than that, however, these publishers have been watching how mobile games sell their goods and I fully expect that publishers will have deeply integrated these techniques into their games. We'll also see a greater emphasis on free-to-play games from these publishers. They will be watching carefully as Bandai Namco goes all-in with three of its major franchises – Ridge Racer, Tekken, and Ace Combat – available as free-to-play games on consoles this year. In October we will get our next update on the digital revenues of these publishers, along with others, and I'll revisit the scene then. That will be the last quarter before the new consoles arrive, and it will be worthwhile to take one more measurement then to see what, if anything, might change after those launches. [A quick note about GAAP vs. non-GAAP: Publishers report GAAP (generally accepted accounting principles) revenue and non-GAAP revenue, along with a reconciliation between the two. GAAP figures take deferred revenue into account each quarter, while non-GAAP is generally the actual money taken in during the quarter. So, if a game is sold whose online service period is expected to run over several months, then the company will book some of that revenue in the quarter in which the product is initially sold and then the rest of the revenue over the following quarters. Therefore a GAAP revenue figure for a given quarter will include some revenue from that quarter, some revenue deferred from previous quarters, and will have some revenue removed for games sold during that quarter.]