When video game stock Activision Blizzard (ATVI) released Call of Duty 4: Modern Warfare in 2007, it took a successful gaming franchise out of the World War II era and into the gritty warzone of 21^st century America. The video game hit all the right notes, winning over gamers and industry critics alike — resulting in huge profits for Activision. Call of Duty 4: Modern Warfare led video game sales worldwide in 2007, moving 7 million copies that year despite a summer release, and ATVI has sold an additional 7 million copies in the years since.

Video game stocks seem to have a knack for cranking out sequels to keep dipping in to gamers’ pockets. Think Take Two Interactive (TTWO) and its regular rollout of another version of Grand Theft Auto every few months like clockwork. So it’s no surprise that Activision Blizzard has decided to rebrand the series with a “sequel of a sequel” video game — Call of Duty: Modern Warfare 2 — that was released last fall. ATVI reports that despite the economic downturn and lower video game sales overall, the title has sold 14 million copies worldwide. That would make it one of the top five best selling video games of all time in the U.S.

But the real story is that ATVI isn’t just cashing in on Modern Warfare 2 video game sales. It’s seeing a continued flow of cash from online add-ons and expansion packs.

Activision released the first downloadable add-on for the video game last week with a price tag of $15, and it sold 1 million copies on its first day and nearly 3 million as of this writing. That’s about $45 million in cash! And considering that the company didn’t have to worry about video game retailers like Gamestop (GME), Walmart (WMT) and Target (TGT) and the logistics of distribution and shipping, you can bet that a big chunk of that is going directly into the ATVI vault.

This is a huge game changer for the video game industry, because it shows that physical video game copies don’t need to be sold for a successful sequel. “Virtual” sequels can be created through online expansions like this one executed artfully by Activision with Call of Duty: Modern Warfare 2. You can expect other video game stocks to jump on board with this model.

Electronic Arts (ERTS) just made a splash last week with an online Tiger Woods golf video game with free gameplay. If the Electronic Arts experiment wins broader appeal, you can bet that the video game company will find a way to monetize the idea — and boost ERTS stock.

There is a risk, however, of turning off gamers if software firms just start cranking out useless add-ons in the pursuit of a few extra bucks. The big success of Activision Blizzard with its Call of Duty franchise is the fact that video game sales were built on great gameplay, a good story and a connection with loyal gamers. Burning that bridge just for a brief boost in ATVI stock would be a fatal mistake, because it would turn consumers off of the online add on model.

But as long as Activision Blizzard is committed to providing quality add-ons online, they may be able to get a longer shelf life out of their successful titles and keep down production and shipping costs. That could really pay off for ATVI stock, and change the way its competitors do business.

And as an added bonus for consumers, maybe Take Two Interactive will stop cluttering the shelves with so many Grand Theft Auto video game sequels and start just selling the latest reinvention online. That would keep GTA addicts happy as well as satisfy TTWO stock owners.

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