Pachter: Bungie “sounded quite happy” with Activision deal during conversation; potential 20% profit margin for Activision

The recent Activision/Bungie deal has already generated a lot of speculation; but world famous industry analyst Michael Pachter has added professional speculation to the mix – along with some informed guesses, fed by his post – deal chat with both Activision and Bungie. This is what Pachter told CG, in full:

I think Activision did a deal similar to their ip deals in the past, funding some or all of the development and getting first dollar payback and a healthy revenue share in exchange.

I just spoke with Activision and with the Bungie guys about their deal. While there were no specific details provided beyond the press release, it’s clear that this is a publishing partnership and not a distribution arrangement. That means that instead of normal distribution margins of around 10%, the deal probably allows Activision to participate in profit upside, suggesting that their margins could end up between 15 – 20% if a future Bungie game sells a crazy number of units.

During our conversation, the Bungie guys confirmed that their games would be multi-platform “where that makes sense”, and confirmed that the first game under the agreement is well along in its development. The press release mentions “Bungie’s next big action game universe”, suggesting that there will be a franchise created with multiple sequels and offshoots, similar to the Halo universe.

My guess is that any future Bungie game will sell at least 10 million units, as they will appear on multiple platforms for the first time. As a reference, the typical Halo game made by Bungie sold around 10 million units worldwide over its life at an average retail price of around $50, and these appeared only on the Xbox/Xbox 360. If future Bungie games are as popular as Halo, they could sell as many as 15 million units on Xbox 360 and PS3 combined.

At the 10 million unit level, Activision will probably generate 15% operating profit, so at $450 million in wholesale sales, they will generate around $65 million in profit, or $0.03 per share. At the 15 million unit level, they will probably generate 20% operating profit, so at the $700 million wholesale sales level, they will generate around $140 million in profit, or $0.07 per share. Bungie is a relatively productive studio, and it is likely that we will see a game from them every two years, beginning next year. Therefore, I think it’s safe to assume that Activision will generate around $0.05 per share on average every other year from this deal.

I’m not sure that this will fully offset the negative investor reaction to the ongoing Infinity Ward soap opera, but at least it shows that Activision can deal with world class developers, and I actually thought that the Bungie guys sounded quite happy with their deal and with their relationship.

Activision may be the pantomime villain of the gaming world at the moment, but Pachter asserts that Bungie sounded “quite happy with their deal”. Activision, no doubt, are happy too; note the projected 20% profit margin Pachter predicts could result for them from a massively successful post – Microsoft Bungie game.

Moreover, Bungie have indirectly (via their conversation with Pachter) confirmed that their games will now be multi – platform “where that makes sense”. Y’know, we’ve got a feeling Activision might convince them that going multi – platform with the first game under this deal (which is well underway) is the most sensible thing to do.

20%….