Although the video-game industry is about to undergo one of its periodic -- and often disruptive -- console transitions,

Activision

(ATVI) - Get Report

CEO Robert "Bobby" Kotick thinks his company is in the right place at the right time.

Thanks to key franchise titles such as

Tony Hawk

and

Call of Duty

, the past console cycle saw Activision grow from a struggling company to the industry's second-largest games publisher behind

Electronic Arts

(ERTS)

. Still, Kotick thinks the company's best days are ahead, and he has a plan to ensure that.

First, though, he will have to navigate the tricky changeover from publishing games largely for

Sony's

(SNE) - Get Report

PlayStation 2,

Microsoft's

(MSFT) - Get Report

Xbox and

Nintendo's

Game Cube to producing titles for those companies' upcoming PlayStation 3, Xbox 360 and Revolution machines, respectively.

In the first of a series of

interviews from last week's Electronic Entertainment Exposition, Staff Reporter Troy Wolverton spoke with Kotick about the coming console transition, Activision's competition and a stock sale that raised investors' eyebrows.

Q: The conventional wisdom of what happened in the last console transition was that people were too quick to abandon the previous generation of consoles and too quick to adopt the new generation. As we go into this transition, how are you going to be allocating your resources between older console games and those for the next generation?

You have to bear in mind that the prior history of transitions was such that that was sensible. Most people needed to put most of their resources on the next generation, because the prior generation didn't afford really any financial opportunity. Sony's done a better job than anybody in extending the life of the devices. I think everybody was a little bit surprised at the duration.

Companies today, like us, are in better positions because we have more resources, we can manage the franchises a little bit differently than we probably were capable of the last time around. And I think the key there is franchise. Our strategy has evolved to the point where, today, we do have a stable group of franchises that it makes the most financial sense to exploit across every platform; whereas in the last console transition, you could criticize us not just for abandoning the old platform too early, but for not dedicating enough resources to the new platforms, because we just weren't in a position to do either well.

Q: But aren't there tradeoffs? How can you exploit both new- and old-generation devices while putting a significant amount of effort into both?

Activision CEO Bobby Kotick

We're a big enough company now that we have to support new platforms and old platforms. I don't think supporting old platforms is at the expense of supporting new platforms. The skills and capabilities and the experience in terms of use of technology is different in supporting new platforms than it is on the prior platforms. You look at our company from a development organization perspective, we have both.

Q: Sure, but everybody has limited resources.

We've strategically developed those resources so that they're focused on that opportunity. They're not at the expense of doing next-generation development. We have lots of next-generation development under way. Our strategy is 10 to 12 big franchises each year exploited across multiple platforms. And if you really are going to take the brand focus that we have adopted and you're going to be true to it, you can't ignore a platform. The only way that you can successfully exploit that franchise is to be on every platform. So that's integral to our strategy.

Q: Are there any opportunities you see out there that you don't have the resources to pursue today?

I view my greatest responsibility here as prioritization of opportunity. So, I think we're pretty well resourced for opportunities today.

The challenge for us is to make sure that we have access to adequate human resources in all areas. The one area where you have the greatest dearth is in the development area.

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The new consoles have a different architecture than has existed to date. And you don't really have a pool of talented people that have experience in parallel processing. And so, developing that is going to take some time. That's the one area where companies will be competing for a relatively small pool of talent.

Q: Tony Hawk is one of your key franchises. How long can you continue to refresh that series?

Madden is probably on its 16th year? I view

Tony Hawk

as a franchise that we should be exploiting every year forever. I don't see any reason why we can't.

We spent so much time with consumers asking them what features and functions or things they would like to see done differently. There's probably three years of data that we have, and there's a three-year brand plan for that product that has a very deep penetration in terms of features and functions. So, I think we've spent a lot of time building a process that helps us, through our consumer research, identify the expectations of the consumer.

Q: Beyond Electronic Arts, who do you see as your competition?

People often omit

the console makers, but they have huge percentage share on their own platforms, so they are certainly direct competitors.

You have

THQ

(THQI)

. They've done an incredible job.

CEO Brian

Farrell came from bankruptcy to building a $750 million business. They have good franchises. They've gone from no development resources to having pretty significant development resources. They've done a very good job. They're certainly a direct competitor.

Take-Two

(TTWO) - Get Report

: It's hard to argue with the biggest franchise in the history of the interactive entertainment industry.

I think

Ubisoft

has done a really great job over the last year. Those are the principle competitors.

Q: What about the smaller publishers?

It is very difficult to compete in this market in my mind at less than $1 billion in revenue.

We have $800-and-some-odd million in cash on the balance sheet. If we're going to go make a commitment to an intellectual property, that IP owner is going to know -- You know what? That guarantee we make for the next seven years -- we're good for it. They're going to know that we have a history of consistently putting out high-quality product and a process to ensure that. Then they're going to get the benefit of real worldwide distribution.

So, just from sort of a pure apples-to-apples comparison on IP, on development, on worldwide exploitation, on the ability to successfully sell and market, on the ability to enhance the value of an intellectual property, we're going to be able to do those things better than most small companies.

Q: How do you reach the next level of sales and earnings?

When you look at how we go to where we aspire to go -- so let's say, somewhere down the road, over $3 billion in revenue and 20%-plus operating margin -- it's going from the 10 franchises. First, take those 10 franchises and instead of being 2- and 3-million unit sellers, make them 6- or 7-million unit sellers. That's the easiest thing. But the second thing is to then add

additional franchises.

At a certain point you get ... benefit of scale that we're just starting to realize. And leverage across product development investments. We're sort of in the early days of being able to do that. We've made the investments and the commitments where we're now starting to see the benefit of centralized studio organization. Then the general benefits of scale. So, we don't have to add a huge amount of staff in HR or administration or finance if we add a few hundred million dollars in revenue. So, G&A as a percentage of the total will continue to come down.

Those are just simple, little things that will enhance the operating margin pretty easily.

Q: You've been talking a lot about advertising. When does that become a meaningful portion of Activision's sales and the overall industry's revenue?

Not for a long time. I think between five and 10 years you start to see it move the dial. It took cable 20 years, so I feel five years -- that's a pretty reasonable time frame.

Q: You had a big stock sale earlier this year that came right after you were on CNBC. Your stock took a dive after that. I know a lot of investors were questioning the CNBC appearance. Can you talk a little bit about what you were thinking there?

There's never a great time for management selling. Nobody likes to see management selling.

If you look at our history after earnings, we talk to every news outlet that's available to us, and that's to widely disseminate the information about our results. There's no relationship between when management sells and our dissemination of our quarterly financial results.