Bobby Kotick on the business of Call of Duty: DLC, Treyarch, Infinity Ward

This is the second part of Joystiq's in-depth discussion with Activision Blizzard CEO Bobby Kotick, in which we've covered his side of the Brutal Legend situation, Activision's Bungie partnership, and why Kotick's been cast in the role of video game industry villain. Up second: The Call of Duty business, from Xbox Live to DLC to a rotating stable of development teams.

"You know, Call of Duty games probably represent more than 50% of the total Xbox Live traffic," Bobby Kotick told me when I asked him about Microsoft's recent $10 Xbox Live price hike. You see, Activision is tasked with monetizing an immensely popular online game through a traditional – and inflexible – system: a retail disc played in a video game console controlled by another company. And despite a constant refrain of Call of Duty subscription rumors, the only subscription you may pay to play it online isn't to Activision at all; it's to Microsoft.

"I think the thing that sometimes even I don't fully appreciate – and I think I have a greater appreciation for it today, having spent a lot of time up with Microsoft recently – but they invest billions of dollars in the Live platform. Billing, credit collection, things like foreign currency conversion, being able to manage point systems. All of that is extremely expensive to manage and maintain." Of course, this is all to say that it deserves something, but how do Activision and its customers factor into Microsoft's agenda?

"Because of our Blizzard experience we have an incredible understanding of how important the provision of appropriate customer service is," Kotick said, citing 2,500 World of Warcraft customer service employees for the US and Europe alone. "What we'd like to ideally see is that the investment in the subscription fees going towards the provision of a higher level of customer service [...] to see some portion of the subscription fees go towards game enhancement." Activision does enjoy a "very modest amount of the subscription fees," Kotick told us, but he's more interested in seeing any cost increase in the service go towards "directly benefitting the Call of Duty players."

So, with $60 a year out the door for many Call of Duty players – that would be those playing on Xbox 360, as opposed to PC or PlayStation 3 – it's already a significant $5 a month expense and Activision has only snagged a "modest amount" of that $5. So, subscription service, right? "We have an obligation to provide a return for our shareholders," Kotick told me, playing the dependable role of businessman. "At the same time, I think we've probably done more to try and create innovative ways for people to pay for their games." Surprisingly, one of the examples he gave was ... used game sales? "We're not doing anything to suppress used games today," he told me, referring to the various new-game incentives typified by EA's "Project $10" and "Online Pass" programs.

"What we've tried to do is to really support our audiences and, you know, when you talk to players, they like the idea of having a currency. They like the idea of being able to take a game they no longer want to play and use it to get a credit to buy new games." We can't argue with that, and doubt EA would either, but it's a simple matter of economics: Retailers are cutting the game companies out of that second-hand sale. "We can do some of these things that EA and others have done," Kotick said. "We actually don't think its in the best interest of the gamer, and so we've chosen not to."

Instead, Activision's made some serious profits off of downloadable map packs for its Call of Duty titles. "From a financial perspective you look at it and say, 'Okay, well the retailer is not paying us anything for the privilege of doing it and you know we invest all this capital in making a game and we are not getting any credit, any return on their resale of the game,' but, you know something, the best way to keep people engaged in your game experience is keep giving them more great content."

If you read the comments on our Modern Warfare 2 "Stimulus Package" pricing post, you'll find some fairly vociferous opposition to the $15 asking price for the map pack. The followup "Resurgence Map Pack" had the same $15 price and, sure enough, our post had the same vociferous response from commenters. And though your average Joystiq reader (that's you guys!) may not have bought either pack, other people did. A lot of people.

Modern Warfare 2's predecessor, World at War, had three $10 map packs which sold 6.5 million units total between March and August of 2009. Gamasutra estimates that the average Call of Duty player spent $9 on DLC, a hair under EA's $10 initiative. By August of this year, the Call of Duty franchise had sold 20 million map packs, with the first Modern Warfare 2 pack breaking Xbox Live records, selling over 2.5 million units (yes, at $15) within its first week on the virtual shelves.

With sales numbers like those after a price increase, it's tough to suggest that Activision overcharged. "Our customers need to be satisfied that there is a price-value relationship that they feel great about," Kotick said. "As business models evolve, as the way you distribute content evolves, as the ability to do things online changes in terms of pricing or trial or sample, I think we've definitely always been out in front of the rest of our competitors," Kotick said before addressing the disappointment emanating from some corners of the internet. "But I think you always need to be sensitive to that relationship and not crossing the line to a place where the customer feels like they have been taken advantage of."

When asked if Activision Blizzard has any learning to do there, considering some of the audience response, Kotick responded, "Really there's a lot of variables." As an example of one of these variables, he said, "We had no advanced knowledge that Microsoft was raising the subscription fees." How did Activision know that consumers would buy a $15 map pack in such record numbers, after its considerable successes at $10 on Modern Warfare and World at War? "We do spend a lot of time doing audience research to see about pricing models," he said. "You can have a virtual item sale, pay for a level, you can pay for a downloadable content pack, you can pay for a refill product ... There's so many different ways, and they are evolving so quickly that we are spending a lot of time evaluating all these different ways that consumers can feel good about how much they pay for their video game experiences."

Kotick mentioned the health of the national economy, calling video games "probably the cheapest form of entertainment you can buy" on a cost-per-hour basis. "I think we've generally tried to do things like encourage our customers to used-game sales, probably more so than our competitors. But you know, we're very mindful of what's happening macroeconomically and I think that that plays a role when we're thinking about the price of our content." When asked about his thoughts on the future of the $60 boxed retail product Kotick said, "We haven't really raised the price of our products. I can remember selling 8-bit Nintendo cartridges for $59.95. That's in 1990, 1991. We haven't seen the price of video games increase that much over the 20 years that I've been doing this." And it's that retail product – not the map packs or the DLC – that drives most of the profits for games like Call of Duty. And with the sudden exodus of key talent and management from Infinity Ward, Call of Duty's founding studio, earlier this year, Activision's ability to release annual retail blockbusters was seemingly in jeopardy.

"We're in the video game business. If we can't replace twenty-five people, that would say something pretty disappointing about us as a company," Kotick explained. Before the release of Call of Duty: Black Ops, much of Activision's PR was centered around repositioning the series' other developer, Treyarch, as a best-in-class creative force, able to take the reins from a still-recuperating Infinity Ward. When I referred to Treyarch as the "b-team," Kotick replied, "That's an unfair view of Treyarch. You know it's not really an objective view. Treyarch contributed so significantly to the multiplayer technology that's in Modern Warfare 2 and they didn't really get the credit for that."

As for Infinity Ward, while Kotick couldn't comment on the record because of the pending lawsuit with the studio's founders, he did reiterate that "there's no shortage of talented people who want to work on Call of Duty." When asked why they didn't bolster Treyarch and series newcomer Sledgehammer Games instead of repair a clearly damaged Infinity Ward, Kotick replied, "Well there's at least 60 or 70, super-talented, amazingly capable people who are there. They shouldn't have to suffer for the bad actions of a couple of guys. They have a great culture; they're really good independent thinkers; incredible technology base. They can get support like they did from Treyarch, from Demonware and other places."

For Kotick, it's the franchise model itself that drives innovation at his company. Like the limitations of genre films, Kotick suggests that franchises like Call of Duty "can be a great road map for innovation." He continues, "You can talk to your customers. You can ask them what they like." And after Tuesday's launch of Black Ops, already a blockbuster, breaking predecessor Modern Warfare 2's day-one sales record, Kotick and company have another fiscal feather in their corporate hats. They asked their customers what they wanted and, judging by these sales numbers, they wanted more Call of Duty.