By James Brightman
We’re back with yet another instalment in our monthly Q&A column with Wedbush Securities analyst Michael Pachter. With GDC in the rear-view, there’s been a lot to discuss. Top of mind is Nintendo’s attitude towards the mobile and social sectors. We talked with Pachter about Nintendo’s views, EA’s attempt to topple Call of Duty with Battlefield 3, THQ’s risky Homefront bet and more.
IndustryGamers: What do you make of Nintendo’s constant dismissal of mobile and social games as content that devalues games overall?
Michael Pachter: I think that Nintendo is right that mobile and social games generally provide a less immersive and less rewarding experience than most console and handheld games. However, when compared on a price-to-value ratio, mobile and social games are a bargain, and they allow access by many people who may otherwise not be inclined to purchase console or handheld games.
Obviously, anyone with a cell phone or a PC can access mobile or social games, while access to handheld or console games requires the purchase of a console or portable gaming device. The dedicated purchaser of gaming devices is Nintendo’s core customer, but there is a lot of overlap with PC owners and mobile phone users, and when a young person spends time playing a mobile game or an older person spends time playing a social game, there is less time to play a Wii or DS game (or any other type of game, for that matter).
As a parent of 11-year-old twin girls, I see this first hand, as my kids each have a cell phone, and we have both an iPad and a Galaxy Tab in the house, along with every current gaming device. My kids spend more time playing mobile and iPad games than they do playing console and handheld device games, and that’s a departure over the past two or three years. I think that the all-in cost of mobile and social gaming is sufficiently low to pose a threat to Nintendo’s dominance in the handheld area, although they will certainly survive and thrive with their superior product offering. They just won’t sell quite as much software as in the past, since consumers have so many other choices that present a fair price-to-value proposition.
I’m not sure that Nintendo can do much to stave off competition from mobile and social games; I view Mr. Iwata’s presentation to game developers at GDC last month as analogous to a record company president speaking to recording artists 10 years ago and lamenting that Apple’s iTunes store would lead to their demise, as it cheapened the value proposition of music CDs by offering $1 downloads. This would have been a true statement at the time (to my knowledge, it didn’t actually happen), but such a plea wouldn’t have had any impact on Apple at all. Like the music analogy, Mr. Iwata’s plea to developers won’t stop Apple, and the success stories of developers like Rovio and Zeptolab will encourage further development by people hoping to launch the nextAngry Birds or Cut the Rope.
IG: Battlefield 3 and the Frostbite engine looked hugely impressive at GDC and EA is hoping to overtake Call of Duty. Do you think Battlefield 3 will be good enough to top the next Call of Duty and put EA back on top of the shooter market?Pachter: There is no prayer that Battlefield 3 will top the next Call of Duty, silly question. EA is trying to gain share incrementally, and I’m sure that if it is a great game, Battlefield 3 will sell 25 – 35% more copies than the last version. It would have to sell around 300% more than the last version to topple Call of Duty.
The question you didn’t ask is whether Battlefield 3 will take share; based upon the growing installed base of CoD multiplayer players, it’s possible that BOTH games will see higher sales in 2011, so I wonder whether EA will actually “take” share.
IG: What’s your opinion on Homefront and THQ’s stated need to sell 2 million on games like that just to break even? How can THQ and other publishers survive with that approach?
Pachter: I think it’s fair for a publisher to spend a lot on developing a proven franchise, but far more risky to spend a lot on a new franchise. This statement begs the question of whether anyone can ever produce new IP, since it’s always so risky. Nobody would argue that spending $50 million on the next Call of Duty or GTA was worth it; it is far more risky for THQ to spend that kind of money on an unproven concept likeHomefront, and given the barely average review scores, it doesn’t appear that they made a good decision.
The other consideration is the risk to THQ itself, as spending on Homefront was around 20% of THQ’s overall R&D budget. It’s one thing for Activision or EA to spend $50 million on a game, given that each spends close to $1 billion on R&D, and given that each has over $3.5 billion in revenue. It’s quite another thing for THQ, which has an R&D budget of only around $250 million, and revenues of under $1 billion. That’s the main reason that THQ stock reacted so negatively when Homefront reviews started to come in, as investors appreciated that a game with low 70s review scores was unlikely to sell significantly more than the 2 million necessary to break even.
IG: EA’s continuing to insist that they’ll take significant share from Blizzard in the MMO spacewhen they launch Star Wars: The Old Republic. Do you see this actually happening? How many ofWoW‘s subscriber base do you think will migrate over, and if they do will they stay or just go back to WoW?
Pachter: The number of beta testers for SWTOR is an impressive 1.5 million; it’s hard to know whether these people are all new to MMOs, or whether some came from the ranks of WoW, but I’d bet on the latter. SWTOR will appeal to science fiction fans, and I presume that a meaningful percentage of WoW players prefer science fiction to fantasy. Thus, early on, I expect SWTOR to attract some WoWsubscribers. If SWTOR is only an average game, these subscribers won’t stay long; if it’s a great game, some of them might stay a while. Thus, it really depends upon the game, and given BioWare’s track record, it’s pretty likely that the game will be great.
With all that said, not many MMOs have the staying power of WoW, and the network effect (you stay there because that’s where your friends are) will be difficult to overcome. Without knowing about game quality, I’d guess that SWTOR will attract 500,000 – 1 million WoW subscribers, and will keep around half of these over the longer term, but that is only a guess.
IG: Xbox 360 hardware sales were a good deal better than PS3 in the U.S. the past couple months. PS3’s got a great lineup coming out this year, however. Which console do you see faring better over the remainder of 2011?
Pachter: It’s really hard to argue that console sales are tied to release schedules, now that we’re in the sixth year of the console cycle. I doubt that many hard core gamers have held off purchasing a PS3 while they waited for Killzone 3 to come out. At this point in the cycle, the only people who have waited are those who planned to buy a console at a price point under $200, and while I think that there are a lot of those people, pricing remains stubbornly high. Microsoft gained an advantage with Kinect, and a 4Gb Kinect bundle costs the same as the entry level PS3, allowing Microsoft to maintain its sales advantage (I know that the 4Gb bundle doesn’t “do everything”, but cost-conscious consumers appear not to care). Sony can retake the advantage if it can afford to lower price and attract the cost-conscious consumer, but I think that they will wait to see what Microsoft does first, then merely match them on pricing, so I expect Microsoft to remain ahead in 2011.