Wednesday, June 27, 2012

Futures (part one)

Let's try to figure something out today.

First off, let's look at a few stock charts. Electronic Arts:

That's right: 60 to 12 in less than five years.

Next, Take-Two:

That's 27 to 9 in four years.

Now, THQ:

30 to .56 in five years.

Finally, the big gun, the company that's absolutely killing it compared to everyone else: Activision.

Wait. 18 to 11 in four years? But Activision is the company that's had mega-hits like the Modern Warfare series and an unending money printing press with World of Warcraft!

Yes, that's true, but it's also true that the stock has lost over one third of its value in the last two years, and has been flat for the last four and a half.

I've mentioned this more than once, but I have a very good friend in the industry who said (prophetically): "We need to find a model that works, and none of them work."

He did say that before the rise of free-to-play games, although I don't know if that is--in any way--an answer. COO of Electronic Arts Peter Moore, though, said some provocative things in a recent interview with Kotaku. For example:
Kotaku: "How do you balance the effectiveness of any microtransaction-based game design or business model with the anxiety a gamer might feel that they're being nickel and dimed?"

Moore: "I think, ultimately, those microtransactions will be in every game, but the game itself or the access to the game will be free. Ultimately, my goal is... I measure our business in millions of people have bought our game. Maybe when I'm retired, as this industry progresses, hundreds of millions are playing the games. Zero bought it. Hundreds of millions are playing. We're getting 5 cents, 6 cents ARPU [average revenue per user] a day out of these people. The great majority will never pay us a penny which is perfectly fine with us, but they add to the eco-system and the people who do pay money—the whales as they are affectionately referred to—to use a Las Vegas term, love it because to be number one of a game that like 55 million people playing is a big deal."

Kotaku: "You're saying inevitably all games are going to be that model?"

Moore: "I think there's an inevitability that happens five years from now, 10 years from now, that, let's call it the client, to use the term, [is free.] It is no different than... it's free to me to walk into The Gap in my local shopping mall. They don't charge me to walk in there. I can walk into The Gap, enjoy the music, look at the jeans and what have you, but if I want to buy something I have to pay for it."

Okay, let's ignore for a moment that comparing games to The Gap is the WORST ANALOGY EVER and completely nonsensical. Just the fact that Moore is willing to say this is a clear indication of where things are headed--for EA, at least. A COO isn't going to drop that kind of bombshell by accident.

Certainly, I believe the "we only put out AAA games that need to be mega-hits" era is ending. It's a Catch-22, really, and here's why. Oftentimes--Guitar Hero, for example--breakout hits happen in underserved genres, or even entirely new genres. Yet the basic strategy of only putting out AAA games and established franchises means that studios have significantly cut back on developing new IP. The original Guitar Hero, seemingly, never would have been released by Activision in this era.

Without that, companies have resorted to copying each other's hits as closely as possible. That guarantees genre saturation. Well, over-saturation.

Who has been successful using Activision's strategy? Anyone? I'm not even sure Activision has really been successful, unless you simply compare them to their peer group (a low, low bar financially). And even Activision rests on a very, very shaky precipice. I recently saw an article (sorry, can't remember where) that mentioned there are currently FOUR different studios involved in the Modern Warfare games. Does anyone think that can be managed successfully over the long term?

Here's one other issue, and while I don't see it mentioned often, it's still serious. Stock options are an important method of rewarding performance at technology companies--particularly for managers and executives--and anyone who was given stock options in a gaming company in the last five years is probably underwater. Performance bonuses for company performance? Can't be much, if anything.

Did you wonder why everyone left for Zynga? Stock options. Of course, if they haven't already been cashed in, they're underwater, too.

It's very difficult to retain talented people when their compensation doesn't meet their expectations, and it's difficult to meet their expectations when a company is hemorrhaging money.

Tomorrow, we're going to discuss how decentralized distribution has played a role (perhaps major) in all of this, and what the gaming industry might look like 10 years from now.

Site Meter