Activision Blizzard has bought King Digital Entertainment for $5.9 billion, marking not only one of the largest acquisitions in videogame history but one of the largest deals ever made in the entertainment business. Comparing this to previous entertainment deals highlights just how extraordinary the figures involved are; the purchase price values King at significantly more than Marvel Entertainment (acquired by Disney for $4.2 billion), Star Wars owner Lucasfilm (Disney again, for $4.1 billion) and movie studio Metro-Goldwyn-Mayer (acquired by Sony for almost $5 billion). The price dwarfs the $1.5 billion paid by Japanese network SoftBank and mobile publisher GungHo for Supercell back in 2013 – though it’s not quite on the same scale as the $7.4 billion price tag Disney paid for Pixar, or in the same ballpark as the $18 billion-odd involved in the merger that originally created Activision Blizzard itself.
How is $5.9 billion justified? Well, it’s a fairly reasonable premium of 20% over the company’s share price – though if you’ve been holding on to King shares since its IPO in 2014, you’ll still be disappointed, as it’s far short of the $22.50 IPO price, or even the $20.50 that the shares traded at on their first day on the open market. The company’s share price has been more or less stable this year, but Activision’s offer still doesn’t make up for the various tumbles shares took through 2014.
A better justification, perhaps, lies in the scale of King’s mobile game business. The company is a little off its peak at the moment. Candy Crush Saga, its biggest title, is on a slow decline from an extraordinary peak of success, and other titles aren’t growing fast enough to make up for that decline, but it still recorded over half a billion monthly active users (MAUs) in its recently reported second quarter figures. In terms of paying users, the company had 7.6 million paying users each month – more than Blizzard’s cash cow, World of Warcraft, and moreover, the average revenue from each of those users was $23.26, far more than a World of Warcraft subscriber pays. King took in $529 million in bookings during the quarter, 81 per cent of it from mobile devices – a seriously appealing set of figures for a company like Activision, which struggles to get even 10 per cent of its revenues from mobile despite its constant lip-service to the platform.
In buying King, Activision instantly makes itself into one of the biggest players in the mobile space, albeit simply by absorbing the company that is presently at the top of the heap. It diversifies its bottom line in a way that investors and analysts have been crying out for it to do, reducing its reliance on console (still damn near half of its revenues) and on the remarkable-but-fading World of Warcraft, and bulking up its anaemic mobile revenues to the point of respectability. On paper, this deal turns Activision into a much more broad-based company that’s far more in line with the present trajectory of the market at large, and should assuage the fears of those who think Activision’s over-reliance on a small number of core franchises leaves it far more vulnerable than rivals like Electronic Arts.
That’s on paper. In practice, though, what has Activision just bought for $5.9 billion? That’s a slightly trickier question. The company is, unquestionably, now the proud owner of one of the most talented and accomplished creators and operators of mobile games in the world. King’s experience of developing, marketing and, crucially, running mobile games at enormous scale, and the team that accomplished all of that, is undoubtedly valuable in its own right. Those are talents that Activision didn’t have yesterday, but will have tomorrow. Are those talents worth $5.9 billion, though? Without wishing for a moment to cast doubt on the skills of those who work at King, no, they’re not. $5.9 billion isn’t “acquihire” money, and when that’s the kind of cash involved we simply can’t think of this as an “acquihire” deal. Activision didn’t pay that kind of money in order to get access to the talent and experience assembled at King. It paid for King itself, for its ongoing businesses and its IP.
Open the shopping bag, and you might struggle to understand how the contents reach $5.9 billion at the till. King has one remarkable, breakthrough, enormously successful IP – Candy Crush Saga, which still accounts (not including heavily marketed spin-off title Candy Crush Soda Saga) for 39 per cent of the company’s gross bookings. No doubt deeply aware of the danger of being over-reliant on revenues from this single title, King has worked incredibly hard to find success for other games in its portfolio. But even its great efforts in this regard have failed to compensate for falling revenues from Candy Crush, and it’s notable that a fair amount of the “non-Candy Crush Saga” revenue that the company boasts actually comes from Candy Crush Soda Saga. Other titles like Farm Heroes Saga and Pet Rescue Saga are no doubt profitable and successful in their own right, and King would be a sustainable business even without Candy Crush. But it would be a much, much smaller business, and certainly not a $5.9 billion business.
Despite being generally bullish about King’s prospects, then, it’s hard to avoid the feeling that the company has done incredibly well out of this acquisition. The undoubted talent and experience of its teams aside, this is, realistically, a company with one IP worth paying for, and unlike Star Wars or the Avengers, Candy Crush is a very new IP whose longevity is entirely untested and whose potential for merchandising or cross-media ventures is dubious at best. King has done better than most of its rivals in the mobile space at applying some of the lessons of its biggest hit to subsequent games and making them successful, but it shares with every other mobile developer the same fundamental problem: none of them has ever worked out how to bottle the lightning that creates a mega-hit and repeat the success down the line. Absent of another Candy Crush game, the odds are that King’s business would slowly deflate as the air escaped from the Candy Crush bubble, until the company’s sustainable (and undoubtedly profitable) core was what was left. Selling up to Activision at a healthy premium while the company is still “inflated” by the likely unrepeatable success of Candy Crush is a fantastic move for the company’s management and investors, but rather less so for Activision.
Perhaps, though, the whole might be more than the sum of its parts? Couldn’t Activision, holders of some of the world’s favourite console and PC game IP, work with King to leverage that IP and the firm’s reach in traditional games, creating new business at the interaction of their respective specialisations? That’s a big part of what made Pixar so valuable to Disney, for example; the match between their businesses was of vital importance to that deal, and the same can broadly be said for Disney’s other huge acquisitions, Lucasfilm and Marvel. (SoftBank’s purchase of Supercell, by comparison, was rather more of a straightforward market-share land grab.) What could this new hybrid, Activision Blizzard King, hope to achieve in terms of overlap that enhances the value of its various component parts?
Certainly, Activision has some properties that could work on mobile (I’m thinking specifically of Skylanders here, though others may also fit); some Blizzard properties could also probably work on mobile, though I very much doubt that Blizzard (which retains a strong degree of independence within the group) is a good cultural fit for King, and is deeply unlikely to work with it in any manner which gives up the slightest creative control over its properties. King’s properties, meanwhile, don’t look terribly enticing as console or PC games, and conversions done this way would almost certainly defeat the entire purpose of the deal anyway, since the objective is to bolster Activision’s mobile business. The prospect of a mobile game based on Call of Duty or another major console IP may seem superficially interesting, but we’ve been down this road before and it didn’t lead anywhere impressive. Sure, core gamers are on mobile too, but they’ve by and large been nonplussed at best and outraged at worst by the notion of engaging with mobile versions of their console favourites. It’s genuinely hard to piece together the various IPs and franchises owned by King and Activision and see how there’s any winning interaction between them on the table.
This is what makes me keep returning to those other mega-deals – to Star Wars, to Marvel, to Pixar – and finding the contrast between them and Activision / King so extraordinary. Each of those multi-billion dollar deals was carried out by Disney with a very specific, long-term plan in mind that would leverage the abilities of both acquirer and acquired to create something far more than the sum of its parts. Each of those deals had a very clear raison d’être beyond simply “it’ll make us bigger.” Each of those companies fitted with the new parent like a piece of a puzzle. King’s only role in Activision’s “puzzle” is that they do mobile, and Activision sucks at mobile; there’s no sense of any grand plan that will play out.
In all likelihood, Activision has just paid a huge premium for a company which is past the peak of its greatest hit title and into a period of managed decline, not to mention a company with which its core businesses simply don’t fit in any meaningful way. King’s a great company in many respects, but its acquisition isn’t going to go down as a great deal for Activision – and we can expect to see plenty of that $5.9 billion being frittered away in goodwill write-downs over the coming few years.
Project Orleans, the cloud engine that powers Xbox hits Halo Reach and Halo 4, is being taken open source.
The engine, which has also played a vital role in the development of Microsoft’s Azure cloud computing platform, will be released under an MIT licence next year by Microsoft Technologies after being trailed at this year’s Microsoft Build Conference.
This is the latest in a long line of open-source announcements by Microsoft this year as the company tries to reinvent itself for the age where its stranglehold on the market has reduced and a wide variety of non-proprietary alternatives exist.
At the same Build conference, the company also announced that it will open source the .NET framework, on which most Windows applications depend.
The project, as described by the team itself, is “an implementation of an improved actor model that borrows heavily from Erlang and distributed objects systems, adds static typing, message indirection and actor virtualisation, exposing them in an integrated programming model”.
The team added that, whereas Erlang is a pure functional language with its own custom virtual machine, the Orleans programming model “directly leverages .NET and its object-oriented capabilities”.
One example available to try is an analysis of Twitter sentiment gauging reaction to a given hash-tag based on the language around it and creating visual representations of the mood of the web.
The code will be available as an extension to Microsoft Studio 12 or 13 with samples and supporting documentation already available, including for the Azure implementations. Non-Azure users can grab a free trial version before they buy.
When Titan first came to light in 2007, most people assumed it would be Blizzard’s next big thing, ultimately taking the place of World of Warcraft which was likely to see further declines in the years ahead. Fast forward seven years, WoW clearly has been fading (down to 6.8 million subs as of June 30) but Blizzard has no MMO lined up to replace it, and that fact was really hammered home today with the surprise cancellation of Titan. In fact, the developer stressed that it didn’t want to be known as an MMO company and one may not be in its future. Cancelling the project this late in the game may have cost Blizzard several tens of millions of dollars, analysts told GamesIndustry.biz.
“Development costs for Titan may have amounted to tens of millions, perhaps $50 million or more. This is not an unusual event, however. Blizzard has cancelled several games in various stages of development in the past. Costs for unreleased games can be significant, but launching substandard games can harm the reputation of a successful publisher such as Blizzard. Expenses for development can be considered R&D, and benefits can include invaluable training, IP and technology that can be applied to other games,” explained independent analyst Billy Pidgeon.
Wedbush Securities’ Michael Pachter estimated an even higher amount lost: “My guess is 100 – 200 people at $100,000 per year, so $70 – 140 million sunk cost. It’s pretty sad that it took so long to figure out how bad the game was. I expect them to go back to the drawing board.”
Indeed, the market has changed considerably in the last seven years, and while MMOs like EA’s Star Wars: The Old Republic struggle to find a large audience, free-to-play games and tablet games like Blizzard’s own Hearthstone are finding success. Blizzard has no doubt been keenly aware of the market realities too.
“As far back as 2013, they had already stated Titan was not likely to be a subscription-based MMORPG. This is consistent with a market that is increasingly dominated by multiplayer games that are either free to play or are an expected feature included with triple-A games such as Call of Duty. Titanfall and Destiny sold as standalone games supplemented by paid downloadable add-ons. Blizzard maintains very high standards of quality, so expectations will be steep for new franchises as well as for sequels,” Pidgeon continued.
DFC Intelligence’s David Cole agreed, noting that after seven years of development in an industry where trends and technologies change at a rapid pace, Blizzard simply had to pull the plug on Titan.
“They realized that unless a big MMO is out-of-this-world unbelievable it won’t work in today’s market where it competes against a bunch of low cost options. If they felt that it just wasn’t getting to that point it makes sense to cut your losses,” he noted. “Also, you see games like League of Legends and their own Hearthstone which are doing very well on a much lower budget.”
“For Blizzard, I am expecting to see them continue to focus on high quality products but also focus on products with shorter development cycles and less cost. The market is just not in a place where you can have games with 7+ year development. It is changing too fast.”
For most developers, junking a seven-year long project would instantly spell turmoil, but thankfully for Blizzard, it’s part of the Activision Blizzard behemoth, which has a market cap of over $15 billion and, as of June 30, cash and cash equivalents of over $4 billion on hand. It’s a nice luxury to have.
Sources are suggesting that Activision is planning to launch an entertainment division that would be responsible for creating movies and TV shows based on Activision intellectual properties. The move might leave many scratching their heads if true since so many others have failed at trying to turn video game IP into gold.
Word is that CEO Bobby Kotick is taking to folks in an effort to secure the right talent to make this happen. Kotick has to be aware that this has not gone well for its competitors, but he apparently thinks that Activision IP is different and they will have no problem giving the people want they want.
Our take on this is that we will wait and see what happens, but it will not be easy to be successful, regardless of the IP that you have in your stable. The bigger question might be is it really worth the money and effort to try and make it work?
Activision Blizzard reported its financial results for the quarter ended June 30 today, revealing an unprecedented reliance on digital revenues.
The publisher reported revenues of $970 million in sales on a GAAP basis, 49 percent of which came from digital channels. On a non-GAAP basis (excluding the impact of changes in deferred revenues), the digital percentage was actually 73 percent of the company’s $658 million in sales. Activision attributed the digital strength to Blizzard’s lineup of titles (World of Warcraft, Hearthstone, and Diablo III), combined with digital sales for Call of Duty.
However, not all of those digital sales drivers posted strong numbers for the quarter. World of Warcraft in particular lost about 800,000 subscribers over the period, and as of the end of June was down to a paying player base of 6.8 million gamers. However, Activision Blizzard characterized this decline as a “seasonal” dip in advance of the next expansion, Warlords of Draenor, which is set to launch later this year. The publisher likened the downturn to the subscriber losses that happened in 2012 ahead of the Mists of Panderia launch.
On a GAAP basis, Activision Blizzard revenues were down nearly 8 percent, with net income down 37 percent to $204 million. However, the publisher still beat its previous guidance. On a non-GAAP basis, revenues were up about 10 percent to $658 million, while non-GAAP net income was reported at $45 million, down 50 percent year-over-year.
The quarter’s performance gave Activision Blizzard enough confidence to update its previous guidance for the full year. For calendar year 2014, the publisher had previously forecast total GAAP revenues of $4.22 billion, but moved that up to $4.24 billion today. The company also projected earnings per share of $0.91, up from $0.89.
The Samsung Gamepad is compatible with all Android phones running Android 4.1 Jelly Bean and above, though Samsung said that it is specifically optimized for Android 4.3 Jelly Bean and above. It features an eight-way D-Pad, two analogue sticks, four action buttons, two trigger buttons, a Select button and a Play button.
The Play button is a link to the Samsung App Store selling console optimized games at “reasonable prices”. The Gamepad uses Bluetooth 3.0, but can also pair via NFC and even cast gaming onto the big screen using Samsung Allshare. Although there are a number of Chinese imports available, this is the first time a major player has brought an Android game controller to the table.
Samsung said 35 games are available through the Play button at launch with more to come in 2014. Launch titles include Need for Speed: Most Wanted, Asphalt 8, Modern Combat 4, Virtua Tennis Challenge, and Prince of Persia. These are in addition to existing games from Google Play.
Samsung is keen to tout this new device as an alternative to buying a more expensive console such as an Xbox One or Playstation 4 (PS4), and while we’re not really sure if it can match them, we can certainly see the advantages of a device like this over Android game consoles such as the Ouya or Gamestick.
The device is already available for pre-order at Expansys for $125.99. At present there is no date attached to it, and Samsung is only committing to “the coming weeks” as the time-frame for availability.
As it’s a device with a steel casing, Samsung clearly is not aiming this at the budget market, and if its functionality matches its specifications, it could be one to watch in 2014.
The Delaware Supreme Court has overturned a preliminary injunction preventing Activision Blizzard from buying Vivendi’s stake in the company. In September, the Delaware Court of Chancery blocked the sale due to a lawsuit filed against Activision by shareholder Douglas Hayes. Hayes argues that the sale requires the approval of shareholders to proceed. Vivendi filed an emergency appeal against the ruling in late September, attempting to remove the injunction before the October 15 termination date on the agreement.
The Delaware Supreme Court agreed with Activision’s assertion that the sale was a stock repurchase and did not require the approval of minority shareholders.
With the injunction gone, Vivendi and Activision expect the deal to close by October 15. The deal will have ASAC II, an investment group led by Activision Blizzard CEO Bobby Kotick, buying 172 million shares from Vivendi for $2.34 billion and Activision Blizzard buying 429 million shares for $5.83 billion. The two transactions would give Activision control over Vivendi’s 61 percent stake.
Wedbush Securities expects Activision’s stock to outperform once the deal is completed, with a 12-month price target of $22 per share.
“While some investors may have concerns about declines for the company’s core businesses, we remain fans of Activision Blizzard. The company communicates clearly, executes well, and its management appears to truly understand how to make money,” said Wedbush is a recently released note.
Activision Blizzard’s moves to separate from its parent company Vivendi has been put on hold. The move, which surprised many, angered one shareholder that he sued to prevent this from happening.
Delaware Chancery Court was told that the whole move is a huge waste meant to cover a power grab. But now the court has put the move on hold until it can be argued in court. In order for the separation to continue, either the injunction must be modified on appeal or a majority vote by non-Vivendi stockholders must come down in favor of continuing the process.
Activision Blizzard said it was exploring options to ensure it still takes place. Vivendi has been trying to get rid of Activision Blizzard for nearly a year now in hopes of boosting its shares.
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…
There is no “perfect answer” to doing business with video games. Let’s call a halt to the pointless “zero-sum” debates that blighted 2012
A day in which you learn nothing is a day wasted; by which standard, a year in which we learned nothing would be a pointless waste of time indeed. It’s worth, as 2012 draws to a close (all that’s left now is the few days of indulgence before the year, in harmony with our waistbands, croaks its last), thinking about what we’ve learned. What did 2012 teach us that we did not before? Never mind, for a moment, the money we earned or lost, the games we played or made; did we grow? Did we advance? Did we learn?
From a business standpoint, certainly, we learned a great deal. 2012 cemented the place of mobile in the gaming ecosystem, forcing all but the most ardent refuseniks (so Nintendo and… er… that’s about it) to recognise mobile as an important part of their business – and even those who were slow to react to the rise of mobile gaming seem determined not to be left behind as tablets gain steam, with 2012 having shown us pretty clearly that the iPad and its myriad imitators are on track to become the primary data device of many consumers in the coming years.
We also learned some things – although not enough, I reckon – about where price points are heading. Freed of the artificial barriers to entry which define console platforms and physical retail, the App Store and Google Play have shown us where prices for digital content will inevitably trend towards – zero. In 2012, more entertaining, successful games than ever before launched at the princely price point of absolutely nothing. Plenty of others didn’t debut at far above 99p, and several of my favourite games of the year would have given me change from a £10 note. Free to play, with all that it entails, remains in its infancy, but is clearly going to be with us for the long haul; hopefully 2013 might be the year when the industry stops having ill-tempered hissy fits about this fact, and starts engaging with making F2P work better rather than loudly and pointlessly damning or exalting it at every turn.
That, perhaps, is a reasonable lead-in to something that I don’t think we learned this year, as an industry – we didn’t learn to stop being afraid of zero-sum games that don’t really exist. Discussions about mobile gaming, even among supposed professionals and experts, often descend into abject ridiculousness due to an insistence that mobile games will come to replace all other kinds of games, or that they are doomed to be a cynical, low-quality niche – neither of which position stands up to the slightest moment of intellectual scrutiny. The same applies to the vitriolic arguments about free-to-play which have washed over and back across 2012 like a stinking, polluted tide – when one side insists that everything will eventually be F2P, and the other insists that F2P is intrinsically evil and wrong, you’re no longer dealing with professional debate, but with dumb fanaticism.
I’m not saying, by the way, that we should all be cautious fence-sitters – there’s no virtue to sitting on the fence simply because it’s comfortable. Strong beliefs are good, but meaningless unless tempered by reason and fact. The fact is that cinema did not kill theatre, television did not kill cinema, video games have yet to viciously murder books, home recording did not kill music and video did not kill the radio star. Media and entertainment industries are ecosystems that accommodate an extraordinary range of different kinds of product and different business models – and that is not ever going to change. The idea that one form of entertainment, one form of business model or even one form of distribution will emerge to Rule Them All, is simply an idiot’s fantasy.
I say that with absolute confidence, not just because it is supported by countless years of history and the sheer wealth of culture and entertainment they have bequeathed to us, but because I recognise where the belief springs from. It’s the unique curse and blessing of the games industry that it teems with “left-brained” people – logical, analytical, mathematical, and quite different from the “right-brained” people who often dominate other creative industries. Video games were born with both feet firmly in the sphere of technology, only gradually moving to straddle the worlds of both technology and art – a marriage which is superbly creative but often fraught, as evidenced by the hissing recoil of many gamers and industry types alike when presented with the (stonkingly obvious) fact that games are an artform.
Left-brain people (yes, modern psychology dismisses this terminology, but it’s so much more polite than grouping you all as “geeks” and “arty types”, isn’t it?) love perfect answers. They like problems which have a correct solution, and see the world in those terms. In many industries, they’re perfect business leaders – there absolutely is a single most efficient way to extract oil or metal from the ground, to build an aircraft, to lay out a road or rail network. In entertainment, though, the idea of a “perfect” solution runs into a huge set of problems which utterly stump the left-brained – sentiment. Emotion. Irrationality. Sheer outright bloody-mindedness.
The fact is – nobody needs entertainment. Not really. If video games, films, books, music, plays, TV shows, paintings and sculptures all disappeared tomorrow, we’d be a much diminished species, but nobody would die. People need shelter, food, clothing, transport, protection, fuel – but entertainment is “discretionary”. It says so right there in your accounts. It’s spending at your discretion – and what that means is that it’s spending guided not by optimisation, but by sentiment.
Is free-to-play the most efficient way for money and experiences to change hands between developer and player? Is mobile or tablet gaming the most cost-effective route for consumers to engage with video games? Yeah, maybe – but what so few of us seem to really grasp is that this doesn’t actually matter. Is MP3 music the perfect balance of quality, convenience and file size? Probably – but vinyl shops thrive and specialist services offering “lossless” quality music files are on the rise. Is Kindle the best way to consume books? Yes, undoubtedly – but I don’t think of myself “consuming” books. Some books I just read; some I own; some I treasure. Sentiment; emotion; irrationality. I went to a shop and bought a leather-backed volume of a book I already own in paperback and Kindle alike. I’ll probably never read it. I love it. Am I an idiot, failing to see that this is not the optimal consumption path and bound to realise the error of my ways eventually? No, because this is my discretion; this is how I choose to enjoy and to spend on my pastime.
That’s why the zero-sum game will never come to pass – not as the strident debaters of 2012 believed. A very large number of consumers will still want things like dedicated gaming hardware, expensive full-price releases and physical products, not because this makes “sense” in an economic or logical way, but because they love those things and because, beyond straightforward questions of affordability, “economic sense” isn’t a welcome guest in deliberations about your hobbies and your passions.
The industry evolves and changes – never as rapidly as it did in 2012, though 2013 will probably make our heads spin just as fast – but little is truly lost. We don’t sell petrol, or sliced bread, or concrete, or train tickets. We sell experiences and emotions, and people will choose to consume those in the way that makes them feel best, not the way that is most coldly, mathematically efficient. Nobody fears that releasing Shakespeare adaptations on DVD will shut down theatres, or that allowing buskers onto the streets will eventually lead to concert halls being demolished. It’s time that we, too, learned that the expansion of the games business leads to more opportunities and more diversity, not to an existential threat to things we love – or worse, a chance to gloat over the imagined demise of things we hate. If you’ve got one new years resolution to make for 2013, make it this one – no more zero-sum arguments. Mobile won’t kill console. F2P won’t kill full-price. Cloud won’t kill local. The forest grows ever bigger; the old tree doesn’t block the sunlight from the new trees, the new trees do not strangle the roots of the old.
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.