The video game business is changing rapidly and it seems like several leading companies have lost their vision of why they do what they do.
The perfect storm of technology change, an economic downturn, and the explosion of social media has paralysed many stalwart companies who have been leaders. So what’s next and what does this mean for all of the people who work in the business?
First, video games as a business has been hard to understand for people not in the business. Wall Street has paid little attention to the sector relative to other technology areas. A top executive shared with me his thoughts recently that the business is “opaque” and “hard to understand.” A recent string of inexplicable statements and terrible decisions by Activision’s CEO Bobby Kotick has got to make us all wonder how the biggest player in the industry can be so out of touch with the new realities (more about that later).
Second, the market has evolved rapidly over the past 30 years and even more radically over the past 5 years with the latest console cycle. It’s important to understand the DNA of many of the early game companies – they started as arcade coin op vendors, some even as providers of pinball and other entertainment machines to restaurants. They then discovered their digital elixir’s power over their audience, burned the code onto a disc or cartridge, put it in a box, shipped it to retail and hoped it sold through.
The fact is the video games business has more in common with a consumer package goods (CPG) business like Gillette than it does with a modern technology business. Is there really a difference of business models between selling cheap razors and refill blades in order to calculate life time client value and selling money-losing consoles and games to generate licence royalties? A key problem is that many companies share a vision of stuffing the channel with product to amortize their commitment to a particular platform, licensor or franchise. (In 2006 I wrote about how the games business was a media business, not a product business).
This leads to the third problem – many game companies are afflicted by risk aversion bordering on paranoia. Many companies have stuck their heads in the sand for years hoping stuff like digital distribution, direct consumer purchase and most recently, online items and social games just go away. They are still worshipping at the alter of the almighty retailer and will do what’s best for them to avoid “channel conflict” while not venturing into “risky” or “low margin” areas such as mobile, social games or direct to consumer online products. They care most about kissing up to buyers, paying for shakedown-style co-op programs and focusing on sell through.
The tough question for game publisher CEOs – why are you in business? To delight your customers, to provide amazing user experiences, to build leading brands and entertainment franchises, to create a profit machine built on rationalizing? The answer to this big “why” should be transparent to your customers, partners, studios and everyone else who matters. The only leader I know of who publicly “gets it” is Peter Moore, President of EA Sports, who is walking the line of growing massive retail-centric franchises while building value in both social, mobile and web platforms (See details of his future vision here.)
So why am I picking on Activision? It’s nothing personal and Bobby Kotick has achieved incredible success over the years. He’s very fortunate to have Blizzard and Call of Duty delivering stellar results, but he seems lost in a time machine perspective of a past business model that will never return.
First, he dismisses social, mobile and apps as a viable business. He said, “The place where you have the opportunities for growth is within the communities of franchises we control. We (Activision) don’t view the App Store as a really big opportunity for dedicated games. It’s a different question assessing [social games] as a business opportunity. Right now we don’t see an opportunity for us to participate in that market.”
Really? Not an opportunity in social games? Facebook has over 600 million users and has a private market capitalisation 5 times greater than Activision’s. Zynga’s market cap is now 150% that of EA even though Zynga is still private. The Apple App store has sold over 1 billion apps. People like those experiences, business models. The iPad and tablets are real competitors to Nintendo’s DS and Sony’s PSP product lines.
Whether we like it or not, all of us (including executives) and our customers are spending much more time on mobile and social experiences. Time is the one commodity of which we all have equal amounts. If our customers now spend more time doing something they didn’t do 2 years ago we must adjust to that reality and meet their needs. Some video games execs say Facebook games may “be lower quality”, “not be artistic or engaging” or may just “suck.” That may all be true but what are they doing to engage their customers on that new platform?
If this weren’t enough bumbling, last week Activision quietly announced it was killing the Guitar Hero franchise. There is no doubt music games have declined dramatically; however, GH has sold over $3 billion since launch and it’s a monster ENTERTAINMENT franchise. Does Activision not have the creativity, intelligence or business sense to find a way to monetise the millions of fans of the franchise in new ways? What options exist for the intellectual property beyond just selling discs and plastic guitars at retail? Where is Activision’s board and executive management team on this or did they all agree to destroy an iconic brand? Brand equity, growing businesses and responding to disruptive changes (these are the issues that have kept my consulting practice busy lately) are vital for any company to grow in a competitive market place.
Think about if Disney killed Mickey Mouse after the Mickey Mouse club TV show ended in 1959? The company and the entertainment world would be radically different today. Instead Disney innovated, tried new things, brought back the TV show in several incarnations and grew with the times where Mickey today lives in virtual worlds, video and online games, licensed on physical and digital products.
The video game industry faces a major hurdle, specifically the DNA of video game company leadership is thinking about shipping plastic boxes, not building media brands. It’s time for new thinking, strategies and new executive blood with Internet and media DNA if these traditional game companies are to survive and prosper.
Mark is publisher of IndustryGamers. You can contact him with questions or comments at this e-mail.
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