A veteran’s view on marketing games

Electronic Arts infuriate me. In John Riccitiello they have one of the most perceptive, incisive and lucid managers in the whole of video gaming. Yet as a company they continue to underperform. The value of shares in a company is decided by just one factor, sentiment. So it is instructive to look at the share price of Electronic Arts over the last five years. Basically it has been going nowhere, fluctuating between around 40 dollars and around sixty dollars then collapsing to 22 dollars in the recent turmoil. So for five years investors have seen no improvement in the value of Electronic Arts at a time when the gaming industry has been booming like crazy.

Other big global publishers, like Activision and Ubisoft, have performed much better.

There are two things, and only two things, that have value for a gaming publisher and which build profits and growth. The first is having the right people and the second is having the right IP. If you have these then everything else follows. Yet many times EA have spent fortunes buying companies only to squander the IP and lose the key staff. The new mix and match, user chooser, approach to corporate acquisitions should serve them better. But where is the organic growth? By making the best of what you already have and know well you can generate far more profits from a given investment.

I also wonder about the nature of much of EAs IP. Madden, Tiger, NHL and FIFA may well be cash cows but they are going nowhere and EA doesn’t even own the rights, they just rent them. Even with Warhammer they are borrowing someone else’s IP. But times have changed, we live in the age of Wii Fit. The market is now everyone, not just the narrow niches that gaming historically served. EA have moved with the likes of Rock Band and Spore. But they could move a whole lot further.

One thing EA are doing better than anyone else is gearing for the future. They got into casual gaming big and early. They are pushing microtransactions and subscription business models. And they lead the direct to consumer charge.

Over the last year they have been trying to buy Take Two primarily in order to get the IP of GTA and also to get a virtual monopoly on sports games. This involved billions of dollars. Instead they could have done a Saint’s Row making their own game to compete with GTA and could have grown their existing sports business organically.

And if they really wanted to take someone over then they would have done better buying the huge storehouses of IP that are EIDOS/Sci, Atari/Infogrames and Sega. All three of whom were available very cheaply.

Now EA have announced further disastrous results. Last year they lost $454 million, so far this year the losses are $310 million. You would wonder how they manage this on such strong sales. Their response is a 6% in their workforce. This seems strange to me. In an efficient organisation their surely isn’t that much dead wood. So aren’t they limiting their potential for future organic growth. Surely they would be better knocking the $50 million saving off the marketing budget and forcing the marketeers to make up the difference by being creative. That’s what they are paid for.

If staff really have to go I hope that means every executive assistant, secretary and PA before a single development person goes. And I presume that every executive is handing their frequent flyer rewards back to the company.

I still think that EA are a good long term proposition. But more than that, with a market capitalisation of under $9 billion, they are a ripe takeover target.

Seems like I got it wrong yesterday. The players are the same: Harmonix, MTV and the Beatles. The story is somewhat different. Rather than just featuring as another band in the game Rock Band,  there will be what Harmonix CEO Alex Rigopulos describes as “a new, full-blown custom game title production built from the ground up”.

So this is massively massive. The biggest music band in all of history are coming to video gaming. These immense icons of popular culture are deigning to allow their IP to be reprocessed for our newer and vastly superior media.

So what is in it for the two Beatles that are still with us and the widows of the two that aren’t? Well firstly the Beatles work is quite old now. Forty yearsish. So this will revitalise it and bring it to a whole new audience. Keeping the momentum of the IP going with the current, and potentially future, generations. Thus helping to further cement the position of the Beatles in history. It will increase sales of their music. And make them money.

And what is in it for the gaming industry? A lot of publicity. A chance to get taken more seriously by an older generation. A further proof of the extension of gaming towards becoming an all pervading entertainment and educational media. An opportunity to make money.

The downside is that a lot of effort will be put into an old IP from a different media, just like games made of James Bond films. When the potential and capabilities of gaming are such that we should be forging our own IPs.

Sir Paul McCartney said: “The project is a fun idea which broadens the appeal of The Beatles and their music, I like people having the opportunity to get to know the music from the inside out.” Ringo Starr said: “The Beatles continue to evolve with the passing of time and how wonderful that the Beatles’ legacy will find its natural progression into the 21st century through the computerised world we live in. Let the games commence.” Yoko Ono said: “It’s cool, I love it and hope it will keep inspiring and encouraging the young generation for many decades.”

There is obviously a huge weight of responsibility on the shoulders of Harmonix. They are tampering with a big chunk of our heritage. And the outcome could have huge repercussions for gaming.

• Sony go “open platform” with their PS2 in that there is now no need to get content approval. They are also going for a global approvals system and allowing developers to deal directly with them. All good stuff that should have been done years ago and which they have presumably been forced into by their dire showing in the current console war.
• Hellgate:London fails (though new owners might try again) whilst Codemasters pull the plug on RF Online. Two example how even after you get up and running with an MMO it can still go pear shaped. And the numbers involved are much bigger than with non MMOs. This is a risky space to work in, but the upside can be massive.
• Teenage video game pirates graduate to hi tech crime such as phishing and credit card fraud. No surprise here then. Didn’t the militant feminists once have a theory that if you locked every male up until he was 25 it would get rid of most crime? However I have nothing but admiration for the teen who took down Scientology.org, that was a job well done.
• The UK’s first official national video game archive has been set up and needs your help to preserve the history of gaming. A very worthwhile concept and one that many reading this will be able to help with.
• ELSPA play round with how to display age ratings in an attempt to have the awfulness that is BBFC imposed upon them. I really do hope that ELSPA win this one. The game industry does not want or need BBFC.
• UK anti piracy legal action catching innocents. This is not good any way you look at it. The publishers need to assert their ownership of their IP and to reduce the impact of stealing, especially now the Xbox 360 piracy genie is out and running amok. However it is terrible to persecute innocent people. Let’s hope they get this quickly sorted so they are only zapping the thieves.
• Sony game division revenue up 10% year on year. But it still lost $405 million in Q3. When Microsoft and Nintendo are making profits and expanding their revenue even faster. This is a dire situation that Sony have got themselves into after having dominated the previous two home console generations and with gaming booming like never before. Historically many dominant platform owners have fallen from grace: Atari, Sinclair, Commodore, Amstrad and Sega spring immediately to mind so it is obviously not easy staying at the top.
• The Beatles have licensed some of their tracks to the Rock Band game. This is massive for MTV and it is a massive indicator of where gaming now stands culturally. Even two years ago nobody would have believed this news, just remember how long the Beatles spurned Apple and ITunes. These guys don’t need the money, they are more concerned with protecting their heritage. So this is a proud day for gaming.

Over 7 years ago now I was involved in the global marketing of the game Operation Flashpoint for the PC at Codemasters. This game had a couple of expansion packs, Red Hammer and Resistance, that were very interesting in their impact on the market. This, along with several other PC games we published at the time, such as Prisoner of War and IGI2, taught me a number of lessons. These I distilled into the concept of the Registered Player Service.

The idea was to release the game when it was incomplete but playable. Imagine a Formula One game with 6 tracks and ten cars. Each customer would then provide us with an email address linked to the unique serial number of their copy of the game. So for every game sold we would have an email address. The rest of the content of the game would then be available in a series of downloads over a period of time. Remember most people were still on dial up then so each download would have to be manageable in size.

Here are some of the advantages that this would have given:

• We could sell the game and generate cash flow far earlier. Before the game was fully finished. It would have been for sale on the shelves whilst the development team were still working on it.
• The unique numbering and connected email addresses would have enabled the implementation of a number of non obtrusive anti piracy mechanisms.
• We would have been in one on one interactive communication with every customer. So via newsletters, blogs, forums and other community marketing we could have built the game up to be a far bigger event. Each gamer would have had a far more immersive experience.
• The content of the game could be driven by what the customers wanted. For instance we could have a vote: Do you want more cars or more tracks? Development could then interactively follow demand. All different genres of game would have benefited from this feedback loop.
• We could very easily integrate user generated content into the service. Giving the game infinite possibilities.
• After a few games we would have had millions of email addresses of known, active PC gamers. The marketing upside from this would have been massive. Being able to directly and individually speak to so many potential customers for each new PC game.
• To start off, and for maybe the first year, with Codemasters would have been in a very powerful position of wielding a great USP.

The idea was to start with say 20% of content of a game being delivered in this way, gradually increasing the percentage with each successive game as we climbed the learning curve. As you can see there were many advantages both for the publisher and for the customer. But Codemasters didn’t do it. Looking back at some earlier articles here you can understand why. Politics mainly. This was a great pity as it had the potential to have helped prevent the subsequent destructruction of the boxed PC game market by piracy, which has benefited nobody.

Of course the idea now looks old and clunky. But we can see the ethos of it in Steam and in games like Spore.

This is the first time I have ever mentioned the Registered Player Service to anyone not a current Codemasters employee. Like so much that you know when you work in publishing it is essential to maintain confidentiality. Only now do I feel that the industry and technology have moved on so much that secrecy is no longer necessary.

(btw I am one of the characters in Operation Flashpoint, or at least my likeness is. The producer, Richard Blenkinsop, took the photographs. So I ended up on millions of computers around the world.)

I don’t usually put much effort into reporting company results, but these Ubisoft ones help to illustrate a few points. They show how global publishers are these days, the degree to which the industry is booming and how good management makes a game publisher hum.

Firstly globalisation: “Ubisoft is present in 28 and has sales in 55 countries around the globe.” It has taken a lot of work to build that up and to keep it well managed. However it is part of what makes Ubisoft so successful. It gives them huge competitive advantages of scale. And it is something that is very difficult to compete with from scratch. Which gives the existing, entrenched, global publishers immense value.

Next, turnover: “Sales for the first half of 2008-09 came to €344 million, up 31.5%, or 38.3% at constant exchange rates, compared with the €261 million recorded for the same period of 2007-08.” Wow, the industry is booming. And Ubisoft are making hay whilst the sun shines. What other industry can show growth like this in mature, established companies? Especially at a time when the wheels are falling off all over the economy.

Yves Guillemot, CEO, is cautious and yet confident in his statement: “Going forward, we are confident that the video game industry will be able to continue its dynamic growth in 2008 and 2009, buoyed by the increase in the installed base for consoles coupled with the steady influx of new consumers.” Not many CEOs in the world are fortunate enough to be in this sort of position. He continues: “We believe that thanks to the diversity and quality of Ubisoft’s games line-up – which caters to both hardcore and casual gamers – we are ideally positioned to continue to win market share in the coming years.” Which shows his concern to deliver what the market wants and to avoid shipping poor games. Points which John Riccitiello of Electronic Arts also frequently makes.

Which brings us to the full year targets: “Based on solid first-half sales performance combined with a more favorable dollar impact and the positive third-quarter outlook, Ubisoft is raising its targets for full-year 2008-09. The fullyear sales guidance is now around €1,050 million compared with the previous figure of around €1,020 million, and the guidance for current operating income before stock options has been revised upward to at least 13% of sales versus the previous target of at least 12%.” That is over a billion Euros of turnover and 130 million Euros of net profit. This is precisely what a powerhouse publisher needs. Those big numbers are needed to provide the platform to take the business forward. To exploit opportunities and to weather difficulties.

As you can see Ubisoft are an exemplary company with good management. The sort that are going to take this industry forward in spectacular, but well considered, fashion.

Obviously Microsoft know the answer to this one because they have already decided their manufacture numbers. We can only guess. So lets look what happened in the last two years. In 2006 they shipped just 1 million units in Q3 and then 4.4 million units in Q4. So over a fourfold increase for the holiday season quarter. Then in 2007 they shipped 1.8 million units Q3 followed by 4.2 million units Q4, so just over doubling this time.

This year Microsoft have just announced a 2.2 million unit Q3, their best yet. Can they recreate that fourfold plus increase from 2006? It would give them a quarter of 9.68 million units. I think they can and here’s why:

• The massive price drop to $199 now makes the 360 a casual impulse purchase. People will just put one in the trolley as they walk round Walmart, Carrefour, Tescos etc. Also critical is that it is now cheaper than the Wii so the very many people who buy on price alone could well switch their purchase.
• Sony is now very widely perceived to have lost. And the PS3 is still very expensive and is a far weaker buying proposition. Lots of people are going to switch their attentions to the 360. Especially keen gamers who already have a PS3 and who can see how much they are missing out. There are going to be a lot of households with two current generation consoles.
• Japan. The Xbox 360 has really taken off. It is selling far faster than Microsoft expected and they are suffering shortages as they struggle to keep up with demand. If the 360 become “must have” they could sell the entire 9 million units here. Seriously. The Japanese market is very fashion led and frequently winds itself into a frenzy.
• Major revisions to Live. Pundits continually underestimate Live yet to Microsoft it is the main event. The consoles are just an enabling tool. This revision is seen by Microsoft as reinventing their whole offering. They are making the jump from gaming platform to being the most capable multimedia device on the market. With 14 million members the Live service now has massive momentum. But still nothing compared with what it will achieve as it becomes the essential entertainment hub.
• The recession. A lot of people will see this Christmas as their last chance for a good time before the economic realities hit home. An Xbox 360 also makes sense in a recession as it is very cheap very high quality entertainment. So bad economic times may well actually help Microsoft.
• Piracy. There has been a massive recent increase in Xbox 360 piracy whilst the PS3 is still largely pirate proof. The reality is that there are a huge number of thieves out there who like to steal their games for free. They see no need to contribute towards the cost of making their entertainment. So for this audience the Xbox 360 becomes the game console of choice.
• The games. Quite simply the Xbox 360 has by far the best catalogue of games out of the current generation platforms. And playing games is what these machines are about. And when games are cross platform they generally play better on the 360. Till recently people were hoping that the Wii and PS3 would compete or even catch up with the 360 game catalogue. But now it is blatantly obvious that they won’t, the 360 is just too far ahead, Microsoft have tied up too many exclusives and it is a far better business proposition for publishers.

Looking at this I can see a potential for Microsoft cracking 10 million units Q4. Lets hope they are geared up to do it.

HMV (His Master’s Voice) was a large British record label that morphed into becoming the largest high street entertainment retailer in the UK. Their annual turnover is around £2 billion and they have 379 stores in the UK (they also own Waterstones with 313 UK stores). With a long corporate management structure they make slow decisions so their approach to gaming has moved in fits and starts. Over the last few years they have seen many other areas of income, such as recorded music, collapse, so they have racked up their games offering to compensate. And now they are moving into secondhand under the Re/Play moniker.

This is unparalleled and unprecedented. No other high street retailer of this magnitude deals in secondhand product. The management and infrastructure for them to do this well will be horrendous. But you can see why they are doing it. It is immensely profitable and it differentiates HMV from the supermarkets, who have rapidly become major game retailers.

Two groups are going to suffer from this. Firstly specialist game stores. They are losing their differentiator, which will have a huge impact on their ability to generate profits. They were always doomed by the ongoing move to online content delivery. All this does is to bring forward the date of their demise.

The second group to suffer is the whole gaming development and publishing industry worldwide. They get zero income when a game is sold secondhand, thirdhand, fourthhand etc. This is obviously very wrong and I have asked the question before as to whether it is worse than piracy. Publishers are now even more highly incentivized to remove high street retail from their business model. And these days they have the technology to do so.