Call of Duty: Ghosts

Activision Blizzard chief executive Bobby Kotick warned that the industry’s leading video game publisher will face serious competition and possible industry headwinds in the holiday selling season. At the same time, he raised estimates for the company’s financial performance this year based on an outstanding first quarter.

The mixed outlook suggests that the game business is at a more uncertain time now than it has been in years. The industry is in a transition year for consoles, and competition from smartphones and tablets is bigger than ever. At every turn, Activision Blizzard faces more competition. This outlook is different compared to the company’s last comments in February, and it means that Activision will have to spend more on marketing and advertising to hang on to its customers this fall.

Activision plans a major new launch of its Call of Duty: Ghosts first-person military shooter Nov. 5, with a bigger sales and marketing campaign than ever before for a blockbuster Call of Duty game. But the title will face competition from the likes of Electronic Arts upcoming Battlefield 4 and other titles coming for the next-generation consoles.

In a call with analysts today, Kotick didn’t name his competitors, but he said that the weakness of Nintendo’s Wii U game console and the coming competition in the second half is making Activision Blizzard extra cautious about predicting good results. A new version of Activision’s Skylanders is coming this fall. That game, Skylanders: Swap Force, features toys with top and bottom halves. Players can swap those halves to form new creatures for use in the video game. But Skylanders will face huge competition starting in August from Disney Infinity, another game-toy hybrid entertainment product.

Skylanders, another billion-dollar franchise launched just two years ago, is now the No. 1 game franchise of the year, said Eric Hirshberg, CEO of Activision Publishing. That makes it bigger than the No. 2 Call of Duty: Black Ops II in the U.S. and Europe. He said Skylanders was doing well despite the weakness of Nintendo’s Wii and Wii U.

The company is still the healthiest firm in the video game business, with more than $4.6 billion in cash. Its business is driven by major franchises, including Call of Duty, World of Warcraft, Skylanders, and PC games such as StarCraft II: Heart of the Swarm. These have helped make the company into the largest publisher of video games, and it has been making more money than rivals such as EA.

But gaming’s No. 1 publisher warned that risks in the second half of 2013 are “more challenging than our earlier view.”

Activision made no mention of major new franchises in the works, such as Blizzard’s new massively multiplayer online game, code-named Titan. But the pressure to launch that game is building.

Kotick said that while World of Warcraft remains the No. 1 fantasy online role-playing game, it lost 1.3 million subscribers in the quarter, leaving the game with 8.3 million players. The company expects that number to fall further by the end of the year. In recognition of competition from free-to-play games, the company is figuring out how to launch updates more frequently. But it does not have big update, like last year’s World of Warcraft: Mists of Pandaria, on the way.

In after-hours trading, Activision Blizzard’s stock price fell 5 percent to $14.49 a share. The fall may be due to the drop in World of Warcraft numbers and the comments about the second half.

“I think WoW numbers are a bigger deal,” said analyst Michael Pachter at Wedbush Securities in an email. “They are not telling us anything we didn’t know before about competition or weak Wii U sales. The surprise is the sequential drop off in WoW subscribers.”

Mike Morhaime, the head of the Blizzard Entertainment division, said in the conference call that his company is working on its first cross-platform free-to-play game, Hearthstone: Heroes of Warcraft, for the PC, Mac, and iPad. Blizzard’s revenue was up due to sales of StarCraft II: Heart of the Swarm, which sold 1.1 million copies in its first two days. But Blizzard saw a decline in Asian subscribers for World of Warcraft. He said the company will launch new game content at a quicker pace to improve engagement. StarCraft II content is now viewable on Korean TV five days a week (as the Koreans are game fanatics and have a special love for StarCraft).

Morhaime said the company is also working to modify Diablo III so that it will ship on the PlayStation 3 console. BlizzCon is coming to the Anaheim Convention Center in November, and tickets sold out in a matter of minutes. He said the company continues to work on Blizzard All-Stars and the unannounced MMO.

“Regardless of the near-term volatility in the industry, our focus and our disciplined approach to our business, which has served us well in the past, will enable us to continue delivering shareholder value in the long term, as we have for the last 20 years,” Kotick said.

Hirshberg said on the call that Call of Duty: Ghosts is coming Nov. 5. He said that Activision is showing Ghosts at Microsoft’s May 21 event for the debut of the next-generation Xbox in Seattle. Ghosts will have a new story and new characters as well as the biggest sales and marketing campaign ever for a Call of Duty game. That’s saying a lot, since Activision Blizzard makes a lot of noise about Call of Duty every year. Kotick said he would not predict a dramatic shift in the business models for the next-generation game consoles, but he said, “We approach new businsses skeptically.”

Hirshberg said that the current Call of Duty: Black Ops II saw first quarter usage and engagement that was higher than a year ago. The company has launched another map pack, dubbed Uprising, to keep players engaged. Sales for Black Ops II are higher than Call of Duty: Modern Warfare 3 from the year before. Hirshberg said that Call of Duty’s new business model of selling microtransactions, such as a bacon-wrapped decoration for a gun, is also doing well.

“We introduced an all new business model of selling micro DLC (downloadable content),” he said. “It delivers extra value for our fans but in no way compromises game play.”

For the year, Activision Blizzard expects non-GAAP revenue of $4.25 billion for the year and earnings per share of 82 cents.