Activision Blizzard is to become an independent company as CEO Bobby Kotick leads an investor buyout from Vivendi worth $8.2 billion.
The publisher of World of Warcraft and Call of Duty will buy 439 million shares from Vivendi for $5.83 billion. In addition, an investment group lead by Kotick and co-chairman Brian Kelly, will purchase 172 million shares worth $2.34 billion.
With Vivendi no longer a major stakeholder, Activision Blizzard becomes an independent company led by Kotick and Kelly, whose investment group also includes Chinese operator Tencent, Davis Advisors and Leonard Green & Partners.
“These transactions together represent a tremendous opportunity for Activision Blizzard and all its shareholders, including Vivendi,” said Kotick.
“We should emerge even stronger-an independent company with a best-in-class franchise portfolio and the focus and flexibility to drive long-term shareholder value and expand our leadership position as one of the world’s most important entertainment companies. The transactions announced today will allow us to take advantage of attractive financing markets while still retaining more than $3 billion cash on hand to preserve financial stability.”
Kotick added, “Our successful combination with Blizzard Entertainment five years ago brought together some of the best creative and business talent in the industry and some of the most beloved entertainment franchises in the world, including Call of Duty and World of Warcraft. Since that time, we have generated over $5.4 billion in operating cash flow and returned more than $4 billion of that to shareholders via buybacks and dividends. We are grateful for Vivendi’s partnership through this period, and we look forward to their continued support.”
Kotick’s investment group will hold around 24.9 per cent of the company, with Kotick and Kelly investing $100 million combined of their own cash. Vivendi will continue to hold around 12 per cent of shares.
IO Interactive made the surprising announcement that they have cancelled all other projects that the developer had in development. The studio will be only focused on Hitman going forward, and because of this the developer has cut its staff in half.
The developer claims the decision was necessary for the studio to focus on the next version of Hitman in a changing market space. To that , IO has also taken the very bold and difficult step to cancel all other projects that the studio had in development; but other than a new Kane & Lynch title, it isn’t yet clear what else they were working on.
The studio is going to try to relocate staff if possible to other studios within the group. It isn’t clear how much of a role Square Enix played in this decision, but it is possible that IO’s IP could end up with another developer down the road; but in the meantime at least work on Hitman will continue. No official word yet on when we might expect the new Hitman title to be released.
It appears that the Ouya is going to be a bit delayed.
This is good news though, as it is being delayed because the console developers have more cash to spend on it, $15m more to be precise.
Ouya already raised around $7m on Kickstarter, and now, when it should be taking its last steps towards completion, it has had almost twice as much more injected into it by lovely venture capitalists.
We were expecting the console in early June, but that has slid back to 25 June. The time and money will in part be used to solve an issue with sticky buttons, something that usually only happens once consumers have taken some hardware home with them.
The money comes from venture capital firms and other companies including Kleiner Perkins Caufield & Byers (KPCB), Nvidia, Shasta Ventures, and Occam Partners. KPCB’s general partner Bing Gordon will join the Ouya board of directors as a result.
“We want Ouya to be here for a long time to come,” said Julie Uhrman, Ouya founder and CEO.
“The message is clear: people want Ouya. We first heard this from Kickstarter backers who provided more than $8 million to help us build Ouya, then from over 12,000 developers who have registered to make an Ouya game, next from retailers who are carrying Ouya online and soon on store shelves, and now from top pioneering investors.”
Gordon is in charge of digital investments at KPCB and is a veteran of the games industry, having started at Electronic Arts in 1982.
“Ouya’s open source platform creates a new world of opportunity for established and emerging independent game creators and gamers alike,” he said.
“There are some types of games that can only be experienced on a TV, and Ouya is squarely focused on bringing back the living room gaming experience. Ouya will allow game developers to unleash their most creative ideas and satisfy gamers craving a new kind of experience.”
Ouya consoles should start arriving in living rooms on 25 June. If you want one, you are going to have to come up with around $100 dollars, plus another $50 dollars if you want two controllers.
Ouya, the open Android-based console designed by Yves Behar, is being shipped to its Kickstarter backers today, and the company officially announced this week at GDC that it will hit retailers in the US, UK and Canada on June 4. Ouya is promising “hundreds” of titles for the June 4 release and the $99 console will be available at Amazon, Best Buy, GAME, GameStop, Target, and the store on OUYA.tv. Additional controllers will be sold for $49.99. And for digital purchases, consumers will be able to get pre-paid cards with redeemable codes at retail if they wish.
The company said that over 8,000 game developers worldwide are currently developing games, including both up-and-comers and more well known game makers like Square Enix, Double Fine Productions, Tripwire Interactive, Vlambeer, Phil Fish’s Polytron Corporation, and Kim Swift’s Airtight Games. “The majority of devs so far are experienced devs who’ve never built an Android game before. About 1 out of 5 have never even built a game before,” Ouya CEO Julie Uhrman said that at the GDC unveiling. She boasted that Ouya “already has more titles a couple months before launch than any console has ever launched with.”
The Ouya hardware itself is even smaller than we had previously thought (think Rubik’s Cube or smaller), and its sleek design and brushed aluminum is pleasing to the eye. Uhrman, however, stressed the controller more than anything else. “What we spent the most amount of time on is the controller. We really want this to be our love letter to gamers,” she said, adding that Ouya focused on the ergonomics, the weight, the feel, and wanted it to be a precise, accurate controller. “This is one of the pieces of Ouya that evolved a lot based on early supporter feedback,” she continued.
Apparently, the feedback led to numerous changes on the controller in terms of button placement, and the style of d-pad. The team found out that many preferred a cross-style d-pad than a disc because it’s superior for fighting games. Also, the engineers retooled the tension of the analogs and the design of shoulder buttons. And Ouya even made the responsiveness and speed of the center touch pad customizable. In this journalist’s hands, it felt comfortable and familiar while playing a few titles.
After showing off the hardware, Uhrman dived into the user interface of Ouya. The whole UI is incredibly streamlined, with four categories and an apps-like layout. The four categories are Play, Discover, Make, and Manage (which is for settings). Play is simply where anything you’ve downloaded – games or music or video apps – will be placed. Discover is the store, and it’s been designed to encourage people to “find the best games.” For example, sub-selections in Discover include featured channels like Go Retro, Hear Me, Genres, and Sandbox. The plan is to offer more descriptive names for games within genres.
“The way games get exposed in the genre list is based on what we call the O-rank, which is our fun algorithm. It’s how we rank great games. A lot of app platforms today use downloads as a metric or they use revenue as a metric and we don’t think that’s a good way to say if it’s a good game,” Uhrman said. “You could download a game and never play it again. And with the free-to-try model, revenue isn’t necessarily the best model either. What is [a good metric] is what proves that the game is fun, and that’s engagement. So things like how long you have played a game, how many times you’ve played that game over a certain period of time. How quickly from the time you boot up Ouya, which is an always-on device, do you play that game… It’s those types of engagement metrics that we think prove it’s a fun game.”
Another interesting area within Discover is Sandbox, which offers developers an opportunity to put builds up and ask people to thumb it up. The idea is for great games to get out of the Sandbox and be searchable and merchandized. It encourages developers to market their games and promote them to fans. Once you get out of Sandbox you know the people next to you have great quality games, Uhrman explained.
The Make channel is an area that appears to still be in flux. Uhrman said the goal is to serve two audiences, gamers and developers, equally. While Make is a place where a developer can upload early builds, over time it’ll be a place for devs to communicate with fans. “We also can grow it to be, what if you want to make a game, here’s how to market a game, etc. We’ll look to devs and gamers for feedback on how to evolve the section,” Uhrman said.
A console that’s as open as Ouya should have a fairly simple submission process for developers right? Uhrman confirmed that it’s not overly complicated and should be something most can complete within an hour. “It’s something we thought a lot about given that we’re an open platform… but we wanted to make sure that there are good quality games, at least to the extent that it was optimized to the television and for the controller. So the guidelines isn’t necessarily a quality review, but it checks if there’s malware, does it break or freeze often, does it use our controller schema in the right way, we need to make sure there’s no IP infringement, no pornography, does it elicit real-world violence, you are who you say you are kind of thing – that’s the review. We try to keep it under an hour. Developers can choose to go live immediately or they can choose a certain time,” she detailed.
Curiously, there’s been no partnership reached with the ESRB to rate the games in North America. Right now, the games will be self-rated by devs and community reviewed. Given that Ouya is being sold in mainstream retail, however, we do have to wonder if this will pose potential problems for the company in an atmosphere where some people are still pointing fingers at violent video games. “We’ll take it as it comes; right now we want to expose great content from any type of developer and we do have the thumbs-up/like feature or the report if this is abuse on the system,” responded Uhrman, adding that “We basically say that we can change the rules at any time and we can reject the game for any reason that doesn’t fit our content guidelines – we want everybody on Ouya to have a great experience.”
Ratings aside, one of the big questions surrounding Ouya is whether or not it can truly carve out a market for itself in the console space as industry veterans Sony and Microsoft prepare to launch their respective next-generation systems. The games we saw on Ouya are not graphically intense and are very indie in nature. Can Ouya handle high fidelity triple-A releases? Or does it even need to in order to get noticed?
Ouya does has a partnership with OnLive, so that’s one way to get triple-A games. “That’s one solution. We also support 1080p, hi-def… and we have a USB port so someone can add an external hard drive, so for games that are heavy you could absolutely use that. We have a max download size of 1.2GB for the first download, but as a developer if you want to add and send additional content from your servers you can,” Uhrman said.
“Traditional games take longer to develop, and we have some of those in development that we’re really excited about. Ouya is not about the number of polygons on the screen,” Uhrman acknowledged. “That’s not where we went. We wanted to have innovative and creative exclusive content, and we’re already starting to see that.”
Exclusive content plus a very appealing $99 price point is what could make the system an easy impulse buy for many gamers Uhrman believes. Moreover, Uhrman noted that most core gamers tend to purchase more than one console, so Ouya is likely to be something they’ll want to buy even if they are getting a PS4.
“Ouya offers something different; every gamer has a different expectation depending upon the platform and we believe we’re going to have innovative, creative games and exclusive games to Ouya… And the barrier to entry at just $99 where every game is free-to-try, I think opens up the opportunity for a number of gamers, even core gamers. Core gamers on average own more than one console. We don’t really think it’s an either/or situation. We’re offering something different – I think they’re going to want Ouya too,” she said.
A number of traditional consoles in the past have launched selling at a loss. Since Ouya is built with off the shelf components, it may be easier to contain costs, but Uhrman wouldn’t confirm that each unit is sold at a profit. “We’re really comfortable with our business model,” is all she would say.
That said, if things go the way Uhrman would like, this is only the beginning. Ouya will continue to evolve its software and hardware, and the hardware is likely to get refreshed quickly.
“We’re like any other software platform that iterates and grows over time, and we’ll have a hardware refresh rate more similar to a mobile refresh rate than a console refresh rate because we want to take advantage of the best chips out there and falling commodity prices. We will certainly make sure that there’s enough content that’s optimized for that chip and we don’t push on higher prices to the consumer,” she said.
Does that mean some Ouyas in future will not be compatible with certain games? Uhrman is looking to avoid that scenario. “We have a plan where all content will be compatible with future Ouya systems; we don’t want to fragment our own market for developers, and we always want gamers to have a great experience,” she commented.
Ouya will be interesting to watch. It’s a bold move for the industry and everything we’ve seen so far is completely unconventional. Whether or not that will pay dividends in the long-run is hard to judge at this point in time. “The market is calling us the ‘un-console’ and we like doing things the ‘un-way’,” Uhrman remarked.
It was a better than expected quarter that capped off a record year for Activision. The fourth quarter brought in $2.6 billion in revenue, compared to analyst estimates of $2.44 billion. The company came within spitting distance of $5 billion in revenue for the year ($4.987 billion, to be precise), which is amazing for a company that’s not manufacturing console hardware. The downside of this performance: Activision is already telling us it won’t happen again in 2013, with the company projecting results substantially lower for this year (at $4.175 billion). Will the company see growth again, or was 2012 the highest point it will ever reach?
CEO Bobby Kotick praised the company’s performance: “We achieved record fourth quarter and annual results. And in 2012, on a non-GAAP basis, we generated approximately $5 billion in revenues, a 34 per cent operating margin and EPS growth of 27 per cent over the prior year. We increased our operating cash flow by 41 percent.” It’s extremely impressive; Activision continues to manage its properties well in a horrible retail environment.
Kotick also provided some other info to show Activision’s dominance. “In the US and Europe, we were the #1 video game publisher at retail, we’re the #1 title overall, the #1 console title and the #1 PC title.” Kotick also threw in the following: “We’re also the #1 independent Western Digital game publisher and had the #1 subscription-based MMORPG.”
Notice the exceptionally careful phrasing here, to conveniently exclude Chinese, Korean and Japanese publishers, as well as Russia’s Wargaming.net. And being the #1 subscription-based MMORPG isn’t saying much, given that almost every other MMORPG these days is free-to-play. The lily is already pretty damn impressive; there’s really no need to add gilding.
The rapid growth of Skylanders was given some special attention. “Skylanders, our newest franchise, which is both toys and video games, has life-to-date sold in excess of $100 million toys and generated revenues of approximately $1 billion. This week, Activision Publishing revealed the third game in the Skylanders franchise for holiday 2013. And while there are new entrants in the category and challenges from slower than expected adoption of the Wii U, we remain enthusiastic about Skylanders’ future prospects.”
First we had EA’s CEO saying the Wii U wasn’t a next-generation console, and now Activision’s CEO is calling out the Wii U for slow sales. Nintendo doesn’t appear to be getting much love from third-party publishers in the West.
Kotick then sounded a cautionary note: “We recognized that 2013 is a transition year, as we enter the ninth year of the current generation of console video game systems. We encounter new threats from unproven business models, and we compete against new category entrants. We aren’t immune to unfavorable market dynamics, but we have navigated through the transitions many times before, and we are well prepared to do so again.”
If a business model is unproven, how is it a threat exactly? Isn’t it a threat if it’s doing really well, which in some sense proves that it (or at least that instantiation) works, doesn’t it? Perhaps what Kotick is saying is that there are business models (like free-to-play) which are working damnably well, but unfortunately Activision hasn’t used those models, so they (to Activision’s experience) are unproven. Let’s simplify this: If it’s working well enough to be a threat, shouldn’t Activision at least be experimenting with it?
CFO Dennis Durkin looked ahead to this year’s prospects: “Our product lineup is expected to be anchored by 4 of our top franchises: Call of Duty, Skylanders, World of Warcraft and StarCraft. It will also be a year of significant continued investment in several new properties with long-term potential that are not factored into our 2013 financial outlook, including Activision Publishing’s new Bungie universe, Call of Duty Online for China and the new Blizzard MMO.” That could mean none of those new titles will ship this year. Or perhaps one or more might ship, but Activision isn’t sure, and doesn’t want to count revenue that may not materialize.
Durkin went on to say: “For the full year 2012, Diablo III contributed more than $0.20 of EPS on a standalone basis. This year, our outlook for Blizzard includes the release of the StarCraft II expansion pack, Heart of the Swarm, in March and one additional title. For Call of Duty, consistent with our past practices, we are planning for the mainline release in Q4 to be down versus 2012.”
Activision reached peak sales of Call of Duty two years ago, and expects this year to be lower once again than last year. When you’re coming out with a new version of the game every year, it’s hard to keep posting record numbers. New consoles might help, but they will probably be too late in the year to matter much even if Activision does have a version of Call of Duty ready for them.
Why won’t new consoles matter much for 2013? Let’s look at the numbers. Assuming a new console ships in November, it’s unlikely to sell more than a couple of million units by the end of the year; let’s say it’s an amazing success and sells 5 million. Selling a game to half of those buyers would be incredible; that would be 2.5 million units. When a Call of Duty title can sell nearly ten times that amount, you can see why it’s not reasonable to expect new consoles to help Activision’s numbers significantly. Sure, they might, if absolutely everything goes well. But companies like to be a little conservative on their projections to give themselves a good chance to beat the numbers. Investors like it when companies beat their numbers.
Blizzard CEO Mike Morhaime then gave some color on his products: “World of Warcraft added more than 9.6 million players, down slightly from the previous quarter. The majority of the decline came from China, while subscribership in the West was relatively more stable.” Later, Morhaime added: “With respect to China, in spite of the decline in subscribership, it is important to note that the engagement levels of the core items did increase with the launch of the expansions and I think that, that suggests increased engagement by our core players.”
So WoW subscriber numbers are shrinking, but the remaining players are more engaged. To some extent, this is acceptable if overall revenue can remain constant or even rise if virtual goods sales are high enough among the remaining players, and they stay subscribed longer. At some point, though, if subscriber numbers keep falling overall revenue will drop. The key information here is that World of Warcraft has apparently already burned through the boost it got from Mists of Pandaria, and is back to losing subscribers (at least in China), but the rate of erosion isn’t too alarming. Yet.
One of the analysts asked whether development costs will rise for titles destined for next-gen consoles. Kotick was straightforward: “This is my 22nd year doing this, and in every single console transition, we’ve seen an increase in development costs.” Margin improvement for next-gen titles is going to depend on selling more DLC, not on reducing development costs. Until next-gen consoles are in tens of millions of households, revenue from next-gen titles will be lower than current-gen titles – and development costs will be higher. That’s not a good combination.
Activision’s stock has mostly hovered between $10.50 and $12.50 for the past several years, though after yesterday’s report it’s shot up to $13.41, a gain of over 11 per cent. Wedbush analyst Michael Pachter has a long-term target of $19 for Activision stock, which is above the stock’s high point five years ago. It’s difficult to see how the stock gets there unless gaming stocks in general become more well-received by investors. Perhaps if new consoles launch strongly, and Bungie’s new game is a smash hit, and everything goes well…
Meanwhile the general message of this earnings report is that Activision is being careful with major strategy moves. Activision is still merely dabbling in mobile games, and doesn’t expect them to be a significant contribution to the company in the coming year. So far, the company is resisting moving World of Warcraft over to a free-to-play model; that may be wise given that such a changeover doesn’t always work well. Where’s the chance for major growth? Bungie’s new title, the new Blizzard MMO, and Call of Duty in China, that’s where. There are questions about all of them, of course. Will Bungie’s title pull in a significantly different audience than Call of Duty, or will it cannibalize that game’s players? Will Blizzard’s MMO merely move players over from World of Warcraft, or will it attract a significant new audience? Will Chinese players really turn out in big numbers for Call of Duty Online?
Looming over all of these questions is the long-term viability of the console market, and whether the new consoles coming from Sony and Microsoft will revive the console game business to the heights of 2008. Activision is in great shape right now, with billions of dollars in cash and four great brands that generate amazing sales. Of those four brands, three are getting pretty long in the tooth; can they perform at their current levels, or will they continue to decline slowly? The success of new consoles may be critical to Activision’s future. The company may choose to diversify with acquisitions, or it may keep the cash tucked away for a rainy day or a larger strategic acqusition.
Activision’s had a great 2012, and 2013 looks pretty good. The company’s longer-term picture depends mostly on how the console market continues, and how the MMOG market evolves along with Activision’s products in that area. Mobile doesn’t appear to have big potential for Activision yet. The other potential big mover for Activision is a major acquisition, like, say, Take-Two. Activision has enough cash to make such a purchase, or some other large strategic move. We’ll have to keep watching to see how that strategy game might play out.
For now, at least, Activision expects to have sales lower than last year’s level. Growth is only going to happen in 2014 and beyond if Activision’s new projects can do well, and new consoles do well, and existing brands don’t fade too quickly. When you’re at the top of the mountain, climbing higher is difficult. Perhaps the Skylands offer a path higher…
It appears that Activision, too, is suffering from a leak before its planned release. The Xbox 360 version of Call of Duty: Black Ops 2 has started showing up in all of the usual places in advance of the title’s upcoming official release. The title’s leak onto the Internet is similar to what we saw with Halo 4; and once again, we can expect Microsoft to come down hard on those who are playing the game early.
As with Halo 4, we are also seeing live streams of Black Ops 2. While Activision isn’t talking, sources tell us that the company is actively engaged in seeking out who might have been responsible for the leak. In addition, word of early sales of the game has also been talked about, with consumers saying they have been able to purchase the game ahead of its release in Slovakia.
Last month, Activision Blizzard unveiled its new Activision Mobile publishing label in partnership with analytics firm Flurry. While that announcement was mainly geared towards third parties, today the publisher announced a new effort to boost its first-party mobile offerings: a partnership with Swrve New Media, which has expertise with in-game behavioral analytics and A/B testing in mobile applications.
Activision will utilize Swrve’s proprietary testing platform in the company’s mobile games in order to test, tune and optimize its games in real-time. The Swrve technology is not new to Activision, as it was integrated into the top-selling iOS title Skylanders Cloud Patrol.
“Using Swrve’s analytics platform we are able to seamlessly balance and optimize our games in real time to offer a better experience to our players,” said Greg Canessa, vice president of Mobile at Activision Publishing, in a press release. “We are also able to offer engaging and personalized experiences to an unlimited range of players. The Swrve platform has been designed by an experienced team with long-standing success in gaming industry and we are very excited to be working with them.”
Canessa and Hugh Reynolds, founder and CEO at Swrve, spoke more about the partnership and Activision’s evolving mobile strategy.
“We’ve got two separate but related efforts going on under the Activision Mobile umbrella,” Canessa explained. “We have our first party offering and we’ve been hard at work building a technology platform and staffing up our core gaming capabilities to pursue a suite of mobile games with a micro-transaction focus around our IP. Whether that’s around Skylanders, Call of Duty: Zombies or some of our other franchises or IP, we are going after the mobile space in the best way we know on the iOS and Android side.”
“Flurry of course is our third-party effort where they act as business analytics partners as well as just publishing partners so we can utilize Flurry analytics to identify indie game developers that could show potential and then provide funding, technology resources, branding and so forth, which we’ve talked about previously.
“Swerve is the partner we’ve selected for our behavioral analytics for the Activate Mobile Platform, which is a platform that will power all of our first party games now and in the future. So these guys are long-time industry veterans who have had a great deal of success in partnership with Activision Blizzard in the past of course from Havok; these guys were the creators of Havok. This new start up that they’ve created, Swerve, is what we believe to be the premier behavioral analytics solution out there. So we are happy to have them and have them power our game design analytics for our micro-transaction games on the first party side.”
Reynolds added, “We are very unique in that we are action oriented first, so we are very much into beta testing and we believe that a key way to continue polishing it is to have the business team involved. We want to push new versions out, run different userbase and then deliver a new app that is optimized for specific users. So it is very test-driven first for analytics. We’re turning the traditional model around and letting it work for business and game designers.”
Activision hasn’t exactly been known for its prowess in the mobile gaming sphere, but the company is looking to change that. Canessa stressed that these moves, like the Flurry and Swrve partnerships, are just the beginning for the company.
“You are seeing this announcement as well as a few others of late really focus on our serious intention to get into mobile in a fairly significant way,” he said. “When you take a look at our Activision Mobile publishing announcements, we look at our first-party stuff and then at our Swerve relationship, you see us taking the steps to bolster our internal platform capabilities around mobile, our data analytics capabilities and of course launching Skylanders Cloud Patrol as our first effort. This is the beginning of a lot more you are going to see from us in the mobile space.”
Canessa was reluctant to discuss what Activision Mobile is working on. The new studio in the UK has been growing and is no doubt working on some top IP in the mobile space for Activision. Don’t assume, however, that just because Call of Duty is Activision’s top property that its mobile efforts will be equally core-focused. If anything, Activision wants to attract as broad an audience as it can on mobile.
“We have a wide variety of IP and the market for iOS and Android is very broad. There is lighter touch and then there are more and more immersive experiences. All of those are interesting to us. Without going into specifics, you can see Skylanders is more light hearted which appeals to a broader audience. I think you are going to see us do more of that. To a point, we have more core games on different platforms and we can go into that as well. I think we’re interested in all sorts of entertainment experiences,” Canessa said.
This time last week, nobody had heard of Ouya; we might have guessed that it was an approximation of the sound of a polite grandmother dropping a hammer on her toe, or the carnal grunt of an Old Etonian. Seven days later, it’s soared past its funding target on Kickstarter and has become one of the hottest topics in the industry. Yet it’s been fascinating to speak to a variety of different people about the proposed console and gauge the reasons for their support, because doing so has revealed vast fractures in terms of what people actually expect from this console.
For most – especially those at the lower end of the pledging scale, I expect – their support is a reflection of pent-up demand for a smart TV device. An all-digital console with the same development philosophy as mobile and tablet games is seen as filling the gap which has been created, conspicuously, by years of talking about a Google, Apple or even Valve led Smart TV revolution which has thus far failed to materialize. Ouya hitches a lift on a variety of related trends in a pretty overt way – the rise of indie (and of the superstar indie developer – witness the quotes from the likes of Mojang and Jenova Chen on the Kickstarter page), the rise of crowdfunding, the sense of inevitability about mobile and tablet gaming making an impact on the TV screen.
Then there’s the controller – a conventional joypad. No touch screen, no movement controls. Among the traditional gamers who have voiced hatred of such things for years, not a dry eye in the house. Could it be? Could this be the device that’s going to reclaim these brave new worlds of gaming – F2P, mobile, tablet, digital – from the hordes of arm-waving, song-singing, touchscreen-molesting not-proper-gamers who have infested them? Shut up and take my money!
If you’re detecting a hint of cynicism here – well, I think that’s natural. Here we have a device which clambers atop a rickety tower of trends and waves its arms for attention. Think about it – it’s an open platform, for indie developers, crowdfunded, all-digital, “disruptive” (maybe), hacker-friendly, free-to-play… It’s painfully hip, like a console built after a brainstorming session consisting exclusively of words cut out from the headlines of Boing Boing posts. This console wears heavy non-prescription glasses and patterned cardigans, has a dreadful beard, drinks chai lattes outside pop-up cafes in Shoreditch and listens to the latest unreleased music demos on an old tape walkman “ironically”. It couldn’t have been more guaranteed the Kickstarter success it has ultimately achieved.
I don’t begrudge it that. It has played to a crowd beautifully – perhaps even unconsciously – and indeed, it’s a thing of beauty in many ways. Like the trends which have birthed it, the Ouya is a lovely idea. Cheap, open, hackable, filled with content from talented indie developers. It’s a beautiful idea and in fact, it has the potential to become a beautiful little community – a creative incubator filled with new ideas being tested and trialed, welcoming fledgling developers to dip in and show what they can do, while giving more established developers a platform on which to trial new ideas. (Of course, PC advocates might point out that Windows and indeed OSX have been doing exactly that for years, but while there’s substance to that argument, the point remains that console gaming and hence console development is intrinsically more attractive for some players, so there is theoretically room for an “open console” of sorts.)
The real problem is one of expectation. Ouya’s creators asked for $950,000 and at the time that I’m writing this, they’re hovering around the $4 million mark. Exceeding their target by such a margin has created immense excitement around the platform, and that’s led to a lot of the fractures in terms of expectation that I alluded to earlier. Some people (outspoken Android advocates, mostly, which can’t be an easy position to take and thus deserves our sympathy) view this as a final piece of the puzzle for Android, completing a platform comprising mobile, tablet and now console offerings and thus ushering in an era of dominance for their chosen OS. Others, more sanely but equally questionably, view it as a full-scale introduction of F2P mechanisms to the console space which will prove disruptive to the console business at large.
Those two are marginal viewpoints, certainly – but they can be found easily enough within many discussions around Ouya this week. Much more common is the viewpoint that this has just become a major battleground between “open” and “closed”. Consoles are, unquestionably, “closed” – it’s insanely expensive to develop a title for the Xbox 360 or the PS3 and you need permission from a platform holder, probably via an equally restrictive publisher, to do so. At the other end of the spectrum, Ouya is open; buy one, build something, release it. (In the middle, you get all manner of things being labeled “open” or “closed” based on rhetorical convenience rather than any truly useful definition – witness iOS and WP7 being labeled “closed” despite occupying a space at the “open” end of the spectrum so close to Android’s own policies that most consumers couldn’t make a meaningful distinction between them.)
So poor Ouya, now, is going to be a stalking horse for the hopes and dreams of the “open” crowd. This beautiful, well-intentioned, achingly hip piece of technology is going to go out into the world with the expectation of actually winning over a meaningful audience of consumers who will knowingly choose an “open” platform over the “closed” ones currently on offer – who will buy into the Ouya vision of a future where entertainment exists without gatekeepers or curators.
Let’s put this in a little bit of perspective. First, hard numbers. Ouya, as I write, has raised $4 million from around 31,000 people. That’s a big number of consumers to some people. If I wrote a book on Kindle and sold it to 31,000 people for a fiver each, I’d be very happy. For a console with an F2P business model, though, it’s barely even a test market, let alone a viable consumer base. Remember that even the most successful console games rarely sell to 10% of the console installed base (misfits like Wii Fit aside) – even if we assume that F2P ensures a wider group will sample the game, remember that only around 1 in 20 people who play F2P games actually pay (the figures fluctuate and are tough to pin down, but that’s not a bad ballpark). Now, Ouya will hopefully sell to a lot more than the 31,000 people who backed it, but the point remains – what we’ve seen so far is a sliver of a fraction of a niche, not a workable market and not an indication of guaranteed success.
Secondly, a brief exploration of why consumers buy consoles. One word – games. Consumers buy consoles because those consoles have games they want to play. A handful buy consoles due to platform loyalty, and go on to make a lot of noise about them on the internet, but they’re not an important market overall (even Nintendo’s consoles sell, ultimately, because of Nintendo’s games, not because of the Nintendo name itself). I doubt that any human being in history has ever walked into a games store and bought a console because they like the market philosophy behind it (“an Xbox 360 and a copy of Atlas Shrugged if you would please, shopkeep!”), although if someone has, I’m sure they’ll pop up in the comments below to prove both my wrongness and their own loneliness in the world. On mobile, a handful of noisy Internet types choose Android specifically because of the open/closed debate, but again, they’re not a particularly important market segment – one of Android’s greatest problems is that most people who choose Android phones do so simply because they’re cheap, and go on to spend no money whatsoever in the Google Play store.
This is the reality facing Ouya. You convince consumers to buy a console by having top-flight software available for it. You convince developers to create top-flight software by either paying them (first party), or by convincing them that there are going to be tons of consumers around to buy their software at launch. The way you achieve the latter is by injecting enormous amounts of money into both first party software and launch marketing. Ouya, which is launching a console on a budget less than that of most console software releases, let alone hardware launches, cannot afford to do that – and all the Boing Boing posts and Kickstarter magic dust in the world doesn’t change that.
To me, the saddest thing about this situation is that Ouya is brilliant. It’s a great idea, and I think it’s going to do something really interesting in terms of creating a community that’s very small, very rough and tumble but utterly buzzing with creativity. I’ve backed it (not least because in a week when people seem to have decided that throwing money at an existing, profitable publication through Kickstarter is a reasonable use of the site, giving some money to an actually innovative, creative project seemed like the best riposte) and I’ll buy one, and I’m intrigued to see what comes of it. But it’s sad, because Ouya is going to be judged a failure. Those creating huge expectations for the console are going to be disappointed; the internet opinion machine will take that disappointment and turn it into failure. Ouya will do some great stuff, but it’s not going to disrupt the console business (which is already pretty disrupted already) or initiate a revolution against closed platforms. I fear that the hype will make it impossible to enjoy the platform for what it is – an idea that’s simply too lovely to survive in the real world.
Vivendi chief executive Jean-Bernard Levy stepped down last month amidst growing concerns about the company’s debt and flagging share price. One of the rumored ways that Vivendi could bolster its financial position is to sell off its 60 percent stake in video game behemoth Activision Blizzard, and today more fuel has been added to that fire, as Reuters has reported that Vivendi is now actively testing the waters.
“It’s nothing official yet, but they’ve asked a bank to go and talk to possible buyers for Activision,” said a source close to the Vivendi board, according to the report.
The idea is that by selling Activision Blizzard the French media conglomerate could raise about $10 billion. Those who may be interested include cash-rich firms like China’s Tencent, media giant Time Warner, Microsoft, as well as private-equity heavyweights KKR, Providence and Blackstone, according to banking sources.
There already is an existing relationship between Tencent and Activision as the two recently announced a partnership to offer Call of Duty as a free-to-play online game in China. The report notes, however, that buying Activision outright may not make sense for Tencent and its very different business model.
“They have two big franchises, Call of Duty on the console side and World of Warcraft on the MMOG (massively multiplayer online game) side. And China is not a big market for console businesses; online games are much bigger for various reasons,” said a banker.
Microsoft, on the other hand, may want to add some more blockbuster IP to its arsenal on Xbox, and making Call of Duty 100 percent Xbox exclusive is likely appealing, but the company may not want to invest so much when it’s gearing up to launch a next-gen console in the next year or so.
“They probably don’t want to distract themselves too much, but they are the ones who, if they want to stay in games, would think about owning some of these big franchises, not just providing the consoles,” a banker source said.
Wedbush Securities analyst Michael Pachter recently said that Vivendi is more likely to spin off Activision than selling the gaming firm outright.
The Wii U is coming off E3 with a lot to prove. While some core third-party titles were shown, the level of support probably isn’t where it should be yet. One game that could make a big splash on Wii U is Black Ops II, which Sterne Agee analyst Arvind Bhatia believes is coming to the new console this holiday and “should contribute to incremental sales of the title and also the Wii U console.”
Activision has never been one to throw its support behind new platforms right away, Activision Publishing boss Eric Hirshberg reminded us. “We take out time to get our ducks in a row before pulling any trigger. We don’t have announcements today but we will be supporting Wii U,” he said.
It’s certainly easy to imagine how Call of Duty on Wii U could add in some extra functionality for checking maps and weapons among other things on the Game Pad touch screen.
Hirshberg was reticent about diving any deeper into Wii U discussion, but he wanted people to remember that “we were there with second screen enhancements with Call of Duty Elite last year and one of the primary uses we’re finding comes through the tablet and through the smartphone.”
He continued, “People are using it as that sidecar as they’re playing… People are using it in that between games way that I think now you’re seeing that kind of rhetoric with the controller from Nintendo as well as the SmartGlass presentation from Microsoft. So it’s great that others are jumping on board and enhancing that idea but it’s something we were doing last year with Elite.”
In our meeting with Treyarch studio head Mark Lamia, it was apparent that Treyarch is looking at Wii U at least, if the company isn’t already developing for it. Lamia was deliberately coy.
“I think it’s interesting to think about all the platforms. Just in general, that’s part of my job as a studio head, working with Activision on assessing where our creative can live. How can people experience it? We obviously have been a Nintendo developer for many years and have created many Call of Duty games on the Nintendo platform. [Wii U] is clearly a more powerful platform than its predecessor and… they have obviously a unique controller and interface,” he said.
Lamia added, “And they announced a Pro Controller which appears to be a controller that would be really good for first person shooter games. It just so happens that’s what we specialize in. So that’s an interesting development and then they have that touch display device and you think about the kinds of things you might be able to do and – without getting into specifics – I absolutely have given it consideration and thought. We’re game developers and it’s a new piece of hardware and technology, so we’re always thinking about that stuff.”
As we pressed Lamia, he fully admitted, “It’s difficult to say because it’s something we’re not talking about. I’m intentionally being elusive because we’re not talking about it!”
While recent headlines such as “Game sales crash” and “Games retail collapses” don’t paint a rosy picture, we believe the report of the death of console games is an exaggeration. Yet an uncertain future faces those console games companies that choose not to evolve rapidly.
The great games market split: the Big V revisited
In early 2010 there was strong reaction to our views that some console games publishers were “going down a very risky path… in the long term… they run the risk of becoming like traditional media companies. Cash generative, but declining and cost driven.” So we were not surprised by the even stronger reaction last year when we said that “the games market had fundamentally split into Value and Volume markets, both by sector and geography. The two speed market this is creating may have more rapid and profound effects on the games market than it did on the media market, with meteoric rises for some and slow going for others.”
In the last 12 months there has been significant growth in the Volume markets in terms of revenue, profit, investment and M&A, but we’ve also seen many Value market companies trying to pivot towards Volume through both acquisition (eg EA/Popcap) and organic growth. If the number of requests we’re receiving from console games companies to conduct strategic reviews (usually as a precursor to investment or M&A) is an indication, then some of the best in the business are trying to evolve as quickly as possible.
So it seems like a good time to look at both the opportunities and challenges facing great console games companies in the brave new world.
New order, new opportunities
The balance of power in the games market today has fundamentally changed, with games companies nobody had heard of 5 years ago coming to dominate profits, investment, M&A and headlines. In our Global Games Investment Review 2012, online and mobile games are forecast to take 50 per cent games software revenue share at $41 billion by the 2015 financial year (14% CAGR 11F-15F).
Yet as discussed in our Console Games Review, console generated 48 per cent of global games industry software revenues and 62 per cent of total games industry revenues including hardware in 2011.
Nonetheless the console games industry faces clear challenges (declining revenues, user cannibalisation by online/mobile games, “blockbuster” investment risks, long hardware cycle etc), which the coming 8th generation console cycle might not fix.
One hurdle is that where casual games were a significant driver for the 7th generation console market (>95 milion Wii, >10 million Kinect, >150 million DS sold), today many great online/mobile games are either free or cheap on increasingly capable mass-market platforms (iOS, Android, Facebook, QQ, GREE etc). This creates a potentially significant hurdle at the casual end of the market on the basis of price/convenience. Cloud gaming (OnLive, Gaikai) is still relatively early stage, but also holds promise as a platform in its own right. So while console games might remain a large long-term niche market, the next hardware cycle might not herald a return to mass market growth.
Despite these challenges, the best console games companies have great core strengths which could enable a successful pivot to online/mobile:
- Strong brands
- Large installed user bases
- Strong cashflow
- AAA games design quality
- Genre dominance
But perhaps the greatest advantage they possess is players trained for decades to pay for fun. This is a specific advantage which many free-to-play games companies can only dream about.
Whales are not an endangered species
In free-to-play games (social, mobile, mobile-social, free-to-play MMO) a core part of game design is the focus on user acquisition, upsell and retention. While the numbers vary from game to game, it helps to think about ≥80% of revenue coming from ≤10% of users:
- ≤1% of users are “Whales” who will buy every virtual item no matter how expensive to show off to their in-game friends
- 5-9% of users are will buy one or more virtual items to speed up their achievement of specific game objectives
- 90-95% of users will never buy anything, but add value for other users and advertisers
In the revenue breakdown (below) from our Social Games Review – and again these figures vary from game to game – Whales are the most important player group commercially.
Looking at the opportunity through this lens, console games companies swim in a sea of Whales, where players will pay $60 for a game they haven’t even played yet. Epic Games is a great example of a console games company that took advantage of the opportunity with Infinity Blade for iOS (over $30 million revenue and which Mike Capps tells us is “still selling strongly and on top of the sales charts”). They also showed that there is still money on the table for high quality paid games despite the success of free-to-play.
So does how does Moby Dick catch Angry Birds?
The tools which great console games companies have for turning their businesses towards online/mobile games fall into three broad areas:
- Cross-promotion: for user acquisition, upsell, retention and organic user growth. A strong core audience of organically acquired users might play longer, pay more and serve as evangelists to increase virality, lower user acquisition costs and become the bedrock of a strong online/mobile player community;
- Game design: to cater to Whales and payers for whom game quality is a determining factor in their willingness to pay for their fun; and
- Barriers to entry: strong brands and high quality are hard to replicate, enabling category dominance in ways which might not otherwise be possible.
Looking at console games companies this way, there is much that can be leveraged to pivot from Value to Volume markets.
A journey of a thousand miles begins with a single step (and a few questions)
While potentially attractive, the online/mobile pivot is not easy to plan or deliver. Before starting down that path, you might think about a few things:
- Brands: are your brands strong enough to migrate players to online/mobile platforms?
- Games: how could your games adapt to become great online/mobile core, mid-core or casual games?
- Uniqueness: how might your games stand out in a market of hundreds of thousands of apps?
- Accessibility: could your core games be made accessible enough for a mass market audience?
- Genres: could you leverage your basic game mechanics to other game genres popular on online/mobile platforms?
- Platforms: which online/mobile platforms could work for you, and does your team have successful experience on them?
- Users: could your games attract millions or hundreds of millions of users?
- Business model: could your games be adapted for virtual currency, virtual goods or advertising?
- ARPU: could your business model work with ARPU in cents rather than dollars?
- Costs: do you have the right cost/revenue model for online/mobile markets?
- Development: could you reduce development cycles and costs by an order of magnitude?
- Marketing integration: how could you integrate user acquisition, upsell and retention into game design and development?
- Live team and community management: how might you manage a user community of millions of players in real time?
- Geography: could your games operate across geographies and cultures?
- Value to Volume transition: how do you bring your team with you? Who stays focused on console? How do you balance different internal cultures under the one roof?
- Scalability: how do you become a business platform with scale advantages, rather than a string of hits?
- Buy vs build vs partner: what do you need to succeed in online/mobile, and how do you get it (organic growth, investment, M&A, partnerships)?
- Investment: how much financial runway do you have left, and how do you finance everything you need to do?
- M&A: could you deliver your pivot by merging with a leading online/mobile games company?
We’re having a lot of fun helping folks with these and other questions, and suggest that you don’t let the grass grow under your feet before answering them. The clock is ticking…
Valve says they are not working on a platform of their own, they do seem to want to promote an open platform for both the living-room and mobile space. It would now seem that Valve is developing this “open platform” to be a blueprint for manufacturers in both the living-room and mobile space.
Moving in this direction would eliminate the problems of proprietary hardware; but it is unknown if manufacturers would actually view this as a good thing or not. It seems to us that eliminating the hardware uniqueness could lead to fewer differences between manufacturers and lessen the amount of innovation on the platforms.
Valve does not see it this way, but they have yet to make a final decision of the design of the hardware or what role Valve would play in these open platform standards. Valve does continue to say that work in this area does not signal that the company is getting into the hardware business.
Sales of boxed product in the US in July were the lowest since October 2006, according to data from NPD.
The industry as a whole was down 26 per cent to $707.7 million, with software down 17 per cent to $336.2 million and hardware down 29 per cent to $229 million.
Accessories were also down 8 per cent to $127.8 million, in a month when only EA Sports’ NCAA Football sold significant figures.
The Xbox 360 was the best-selling console during the month with 277,000 units according to Microsoft, although NPD pointed out that it was the first time the system suffered a year-on-year decline since December 2009.
“There is no getting around the fact that video game sales in the new physical retail channel suffered its lowest month since October 2006,” said Anita Frazier, NPD analyst.
“Despite the very rough month, new physical retail sales are down just 4 per cent year-to-date and based on seasonality trends observed over the last 10 years, which have been remarkably stable year-in, year-out, industry sales in this particular channel are poised to land in the flat to -2 per cent range once the total year is completed.”
The poor sales were in-line with expectations, with August likely to be another bad month before a more healthy fourth quarter.
The top ten US sales for July follow:
- 01 NCAA Football 12 (Xbox 360, PS3)
- 02 Cars 2 (DS, Wii, Xbox 360, PC, PS3)
- 03 Call of Duty: Black Ops (Xbox 360, PS3, DS, Wii, PC)
- 04 LEGO Pirates of the Caribbean: The Video Game (Wii, DS, Xbox 360, PC, PS3, 3DS, PSP)
- 05 Just Dance (Wii)
- 06 Major League Baseball 2K11 (Xbox 360, DS, PS3, PS2, PSP, PC)
- 07 Zumba Fitness: Join the Party (Wii, Xbox 360, PS3)
- 08 Fallout: New Vegas (Xbox 360, PS3, PC)
- 09 New Super Mario Bros. (DS)
- 10 Mortal Kombat 2011 (Xbox 360, PS3)
The aim is to streamline the publishing process and provide the service’s worldwide users with better download rates.
“The maximum aggregate bandwidth of the system will be greater than the current system; this will help us satisfy spikes in demand when there’s a big release,” Valve said in a statement.
“We will also be able to send content from more places, to better serve people all around the globe. All the content on the new system is sent via HTTP; this is more firewall-friendly than the current system, and will automatically take advantage of web-caching proxies installed at ISPs.”
The overhauled Steam will also require users to download less data for game updates. At present, when an individual file on disk is modified it is necessary to download the whole file again, but the new system will be able to deliver only the difference between the old and new versions.
In addition, the new system will be able to download game updates during play, and apply the changes when the user exits the game.
“These changes have given us an opportunity to write new tools for game developers and content publishers that simplify the process of both publishing and updating a game on Steam. Simplifying the publishing process means it takes the partner and us less time to ship each product, so we can ship more stuff to more users.”
Valve is also adding a number of new features in response to requests from its clients. New releases will benefit from bandwidth throttling, download scheduling, and users will be able to prioritise which purchases begin downloading first.
Currently, the only content available through the new system is a high-definition trailer, but Valve will apply the system to more content over time, including the forthcoming Dota 2.
Courtesy-GI.biz by Matthew Handrahan
The sad news for June is that sales of new video game consoles dropped 10 percent according NPD, even with new video game software releases.
Total sales were $1.03 billion, with hardware sales down 9 per cent to $366.6 million and software down 12 per cent to $469.5 per cent. Accessories were also down 11 per cent to $158.9 million.
Please note, NPD does not report on digital downloads, PC or second hand sales.
The best-selling game for the month was Team Bondi and Rockstar’s L.A. Noire, followed by Take-Two’s Duke Nukem Forever and Sony’s Infamous 2.
Following the NPD data, Microsoft revealed it sold 507,000 Xbox 360 units, giving it a 48 per cent share of hardware sales during June. Total spend on the Xbox 360 format reached $350 million.
“Xbox 360 maintains its lead in the US console market, selling more units in the US than any other console for 12 of the past 13 months,” said the company in a statement.
“Even while console and software sales across the industry have slowed, as often happens in the summer, Xbox 360 continues growing, staying on track to have the biggest year in Xbox history in the sixth year of its lifecycle.”
Sony and Nintendo have not revealed sales figures at the time of writing.
The best-selling console games for June in the US follow:
- 01 L.A. Noire (PS3, Xbox 360)
- 02 Duke Nukem Forever (360, PS3, PC)
- 03 Infamous 2 (PS3)
- 04 LEGO Pirates of the Caribbean: The Video Game (Wii, 360, NDS, 3DS, PS3, PSP, PC)
- 05 Legend of Zelda: Ocarina of Time (3DS)
- 06 Call of Duty: Black Ops (360, PS3m Wii, NDS, PC)
- 07 NBA 2K11 (360, PS3,Wii, PS2, PSP, PC)
- 08 Mortal Kombat 2011 (PS3, 360)
- 09 Cars 2 (NDS, Wii, 360, PS3, PC)
- 10 Just Dance 2 (Wii)