Activision: uncertain next-gen pricing, dev costs a cause for concern

Activision is concerned that shifting retail prices, next-generation development costs, and the need to establish new business models may eat into its profits over the next few years.

"If we are unable to sustain premium pricing on current-generation titles, our operating results will suffer," the publisher stated in a new SEC filing.

"If we are unable to continue to charge the same prices we have historically charged for current-generation titles for Microsoft's Xbox 360, Sony's PS3 and Nintendo's Wii, as well as for next-generation consoles, whether due to competitive pressure, because retailers elect to price these products at a lower price or otherwise, we may experience a negative effect on our margins and operating results.

"Further, we make provisions for price migration and channel protection based upon certain assumed lowest prices and if competitive pressures force us to lower our prices below those levels, we may experience a negative effect on our margins and operating results."

When it comes to premium pricing the market will bear what the market will bear, and the publisher seems to understand it needs to keep a check on development costs and exploring new business models rather than just keep expecting punters to pony up greater and greater amounts.

"If we fail to successfully manage our new product development, or if we fail to anticipate the issues associated with that development, our business may suffer," Activision continued.

"Our business model is evolving and we believe that our growth will depend upon our ability to successfully develop and sell new types of products, including free-to-play games which are monetized through in-game microtransactions rather than an up-front fee, and to otherwise expand the methods by which we reach our consumers, including via digital distribution.

"Developing new products and distribution channels will require substantial up-front expenditures. If such products or distribution channels do not achieve expected market acceptance or generate sufficient revenues upon introduction, whether because of competition or otherwise, we may not be able to recover the substantial development and marketing costs associated with those products and distribution channels.

"In addition, expanding our business model will add complexity to our business and require us to effectively adapt our business and management processes to address the unique challenges and different requirements of any new areas in which we operate, which we may not be able to do, for lack of institutional expertise or otherwise. If any of these occur, our revenues, margins and profitability could decline."

In short, Activision is warning shareholders that it expects to take a profitability hit over the generational transition as it adapts to the shifting market.

Activision generated $3.26 billion in revenue last financial year, the majority of parent company Activision Blizzard's $4.86 billion. Investors probably won't suffer too much for slightly reduced returns.