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Analysis: Do Big Investments In Innovation Hurt Publishers?
Analysis: Do Big Investments In Innovation Hurt Publishers? Exclusive
February 6, 2009 | By Leigh Alexander

February 6, 2009 | By Leigh Alexander
More: Console/PC, Exclusive

Is the path to profitability truly "more of the same?" Alongside the economic downturn, it's become more and more common for publishers to report big losses -- even when revenues are up.

Electronic Arts is one such company, and after its holiday portfolio fell short of expectations, CEO John Riccitiello is now admitting that the company needs to get its operating costs way, way down.

THQ's story is strikingly similar to EA's -- the company invested heavily in diversifying its product line and in making meaningful improvements to its quality scores, and like EA, it achieved both goals. CEO Brian Farrell sounded similar to Riccitiello when, on the company's results call to investors, he cited the improvements in THQ's Metacritic scores.

And few of either publisher's new marquee titles sold outright poorly, either. EA's Need For Speed: Undercover, which for a time many pegged as the last gasp in an embattled franchise, sold 5.2 million units, for example; THQ's quality-boosted Saints Row 2 and WWE Smackdown vs. RAW 2009, have shipped 2.6 and 4 million units, respectively.

Clearly, both publishers outspent their earning power and overestimated the return on investment that new change efforts would yield. THQ in particular was between a rock and a hard place; many analysts say its stable of franchises is "declining," and yet it's lost cash trying to diversify, too.

So is innovation really the straight path to financial losses, at least in a recession?

Stick To What You Know

"The companies doing the best are the ones who have stuck to what they know how to do," says Wedbush Morgan analyst Michael Pachter.

Activision is one publisher that analysts expect to resist the recession well and to report strong profitability with its results next week. "Activision does two things: packaged goods and MMO, and it merged with the MMO," says Pachter.

Most publishers agree it's crucial to explore new business models; EA's Riccitiello recently said he'd invest over $100 million in the long-term potential of online businesses, and Take-Two Board chairman Strauss Zelnick has also stressed that connected, multiplayer gaming must become an increasing part of the publisher's business.

But the success stories seem to happen when publishers find a way to move in that direction without themselves making the investment.

Don't Spend On Online?

Activision gained its entire online business in one fell swoop when it added Blizzard to its lineup in the Vivendi merger.

"They didn't spend a penny on MMOs, casual online, cell phone games, microtransactions delivery, etc. over the last few years, and focused all of their efforts on making blockbusters," Pachter says.

Although Nintendo's often criticized for its relative slowness to create and support multiplayer gaming opportunities on its platform and in its first party titles, it stands as one of the current climate's few strongly profitable companies right now, even with "zero investment in online," as Pachter says.

"On the other hand, EA and THQ both were trying to build cell phone games businesses, and both have invested a ton in online," the analyst observes. "Neither of those businesses have generated sufficient revenues for the two companies to justify the level of spending."

Overspending On Owned IP

And yes, both THQ and EA were too ambitious with their owned IP, Pachter says. "EA probably spent more on Spore than it was worth, and put a lot of resources into Mirror's Edge and Dead Space with only modest results."

THQ tried against mounting odds to haul new franchises Stuntman and Juiced to life, wasted effort it ultimately abandoned. The publisher also put its back into Saints Row, Darksiders and Red Faction Guerilla.

"Saints Row is probably good enough to justify the expenditure, but the jury's out on the other two," says Pachter.

The weak economy means that hits from risk-taking become more pronounced. Electronic Arts tried launching three new brands over just a few months, while THQ tried to follow two 2007 failures with two modestly successful new properties in 2008.

"EA is doing it again with Saboteur, Dragon Age, Dante's Inferno, Tennis, Mass Effect 2 and EA Sports Active, while THQ is doing it again with Red Faction: Guerilla and Darksiders," Pachter says.

"Few companies perform well when they are focused on so many new games," he adds. "We haven't seen Activision introduce that many new brands over the last few years."

This will change in the coming year, however, as Activision will try its hand debuting Singularity, Prototype and Bizarre Creations' new racing title. "We'll see if they have the same problem," Pachter says.

"Companies that invest in growth ahead of the revenues from that growth are more exposed to small shortfalls in revenue, because their costs are so high," Pachter concludes.

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Mark Harris
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The semi-good news for EA is that they have enough cash reserves to take chances on unproven IP even during relatively rough economic times. Shareholders may suffer in the short run on decreased profits or loss, but hopefully the value of these IPs in the long run bring a higher and broader reward. When a company like EA starts really investing in high quality original titles, it's hard to fault them, even when they're taking moderate losses. Perhaps further iterations of Mirror's Edge and Dead Space will bring better ROI, and hopefully some of the coming games (Dragon Age, ME 2) will be more profitable. Saboteur is promising, in theory, so that might be a surprise platinum hit.

It's hard, especially in today's society, to accept the short-term pain for long-term gain view. I hope for the sake of gaming that these efforts toward originality end up paying off in the mid to long term for EA. I'm not ready go give up on the creativity of this medium for the constant rehashes and copycat games.

Josh Neff
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The problem with innovation is, do the gamers really want the offered/suggested innovation in the first place?

THQ and EA both have a nasty habit of not listening to their consumer base. The game companies that innovate and do well almost exclusively are the ones in solid communication with their customers.

Joseph Carrier
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Dead Space wasn't really innovative. It was just a good new IP. Nintendo put a big risk on innovation and it paid off but they took a huge gamble and it could have gone horribly wrong.

Kahn Jekarl
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It's unfortunate that EA's attempts at introducing new IP burned them so bad this past fall. Trust me, I'm no fanboy, but I think it's pretty silly when all these folks point fingers at EA for introducing new IP in the current economic climate. It's as if you can just decide to launch a title any time you want. These launches were planned for months, years ahead of time. Everyone is banking on these releases to happen and bring in revenue. You just plan the best you can and hope for the best.

Once the releases are planned, delaying a title until the spring (like many have suggested) means there's a great big hole in revenue for the holiday season. And no one likes holes in revenue.

But the consumers have spoken, EA gets it, and we can expect less new IP, for better or for worse.

Mike Lopez
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It seems like Mr. Pachter is suggesting EA only invest in new profitable IP like The Sims - great if you can predict the future. He has no idea that for every successful IP probably 20 have been initiated and 18 of those have died prior to launch (most probably early in concept or pre-production).

Christopher Shell
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"Few companies perform well when they are focused on so many new games," he adds. "We haven't seen Activision introduce that many new brands over the last few years."

That is exactly what makes me sick.

Responding to what Josh Neff said: I do, but I'm feeling increasingly like I'm in the extreme minority. If sales are a true indication, I guess perhaps not.

I personally hate browsing store shelves and seeing titles of form X 3, Y 4, Z 5 dominating what is available. I really don't care too much for "more of the same" (even it is refined), I'm much more passionate about "what haven't I done yet".

That is a fundamental difference between a publisher like Activision and a publisher like Atlus USA. With it, there is a fundamental difference in appeal.

Christopher Plummer
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Why are we comparing EA and THQ? Because neither of them were Nintendo or Activision? That's just ridiculous.

EA overspent on licensing in all areas and as I hear it have [had (??)] huge management issues. They have seen firsthand the benefits of long platform lives and are investing in that. It's a lot easier and costs less to significantly improve upon Dead Space than it does to significantly improve upon Madden or the Sims. They are making a sound business decision in diversifying their products with growth titles.

And the no online investment is a bit premature no? Activision's top products have huge online components. Would Call of Duty really have become a household name if it didn't have the online portion?

Bob Stevens
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Activision has at least 2 or 3 new IPs in the cooker. Singularity from Raven, Prototype from Radical, and the mysterious "unannounced" one they keep talking about from the VU merger.

I think the people who hate Activision for making money are the same people that start hating bands as soon as they release a mainstream album. Doesn't matter if it's good... it's popular so they have to hate it now. Same thing was happening to EA a couple years ago.

Christopher Shell
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@ Bob Stevens:

Just to be clear in case your comments were at least somewhat directed at me (as I'm the only one so far to name Activision explicitly), I don't hate Activision. I don't "hate" any publisher.

Again, yes, I do hate seeing a market so focused on sequels/franchise depth, but at the same time I see the sales figures that correlate. Activision is a business and those are high priority, I know that. You have to expect a publisher to prioritize production on products that will likely sell. IMO, that implies that it is really consumer base that drives what those priorities are. And based on sales figures, the consumer base largely just wants to sit in a comfort zone of familiarity, often hesitant to step outside their box. That is what I am unhappy with. I can't blame publishers for taking advantage of that and I won't. But at the same time, I don't have to like it, either. That is just a part of my personality.

It has absolutely nothing to do with having some sort of absurd non-conformist sentiment.

Just wanted to make that clear.

Bob Stevens
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Christopher, I'm making a generalization, not calling out anyone specific.

Ken Nakai
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Actually, I would've liked to have heard about smaller publishers. Technically, a larger publisher with (ideally) deep pockets should be hedging bets left and right. A good mix of existing franchises along with some original IP and maybe a little R&D spent on new techs (3D, or whatever). Putting all their eggs in one basket is just plain stupid.

To me, the challenge is how do smaller publishers who put out a handful of games and can't really take serious chances (or rather, shouldn't be despite the fact that they are) succeed? For instance, how is Stardock doing? They pushed out two major (alright, maybe one major--Sins--and one minor--Political Machine 2008) releases with a third (DemiGod) coming out ideally in a month or so. I know they're private and their customer report didn't talk numbers but I can't imagine they've got the cash on the books to withstand too much risk. Even so, they only stuck with two franchises (GalCiv II even though it's released it's still obviously getting maintained and PolMachine which is a 4-year cycle type of and two new ones. Sins didn't do half bad (according to the Wiki, 500k units sold). But, it wasn't that it was innovative (was it?) served a market that wanted it.

I've been saying it for years...the game industry's been starting to look a lot like the movie industry (a handful of big players tossing out "safer" products despite unpredictable responses). It even has an indie segment! I'm not sure you can expect a whole lot out of larger public companies at this point. They're always going to think short term (quarterly) and whoever's helming them has to think about their job. It sucks but unless a board is willing to take chances or a CEO has shown their longer term decisions have paid off, it won't change. Thus, the indie segment takes over when it comes to innovation and creativity (new IP, new ideas in gameplay, etc.) leaving the big fish to buy the indie studios up to innovate rather than spending dollars on internal dev.

Maurício Gomes
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I think that the problem is not of using new IP, it is their managing strategy, first, they have TOO many managers, this EATS moeny easily only in salaries, manager wars then are another story...

Also speficially EA released their games on a HORRIBLE schedule, people in recession do not buy 3 games in a holiday, specially 3 expensive games (in fact even without the recession this is still true), this is something that they should learn from movie studios, that move the launch dates of their movies to avoid 'collisions'.

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Maurício Gomes
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That is another issue too, each single game that was deliberately made to reach a "larger" audience usually even if accomplished this goal, ended being a mediocre (or worse) game, when it does not damage a franchise.

Rainbow Six is a example, it was a tactical shooter that required much intelligence and less twitch, Lockdown onwards the tatical part was removed, and the game became linear (the series had linear level progression, but not linear levels), and much more based on shooting... Altough indeed a lot of people prefer it that way, it closes the door on its original fans.

Or spore, I saw a lot of complaints that it is too unbalanced, it was made too easy on the start to reach that "larger" audience, and in the end the enemy empires already not really dangerous are really annoying since they keep attackign you and not allowing you to fiddle with the tools that you have on that level.

Unfortunally this list go on, games that would have been better if they had a clear audience set, instead of the audience being: "everyone"

Removing blood from violent games to allow more children, or simplify mechanics of traditionally complex games like strategy games (both real-time and turn-based) or add action elements to everything (like on several of the lastest games, some that are just a mess of several games fused) results in poor games.

John Ingrams
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Then brain washing continues - once again we hear that 'new ISP's' haven't done well, and then Dead Space and Mirror Cracked are trotted out again. There is never any mention of them both being around a dozen hour gameplay games? No mention that gamers may be getting more and more switched off with how short games are getting for their $50! When you look at what sells and what doesn't, with just a couple exceptions, you see games with 30 hours plus do well (Spore, Fallout 3, GTA IV, etc) and games with less than 15 hours do poorly.

10 years ago you never saw games with less than 30 hours,and 5 years before that hardly less than 40! If you could buy a 30 hour shooter game in 2005 for $50, doesn't a 15 hour shooter game actually cost $100 in those terms? Gamers are buying game now they can finish in a weekend, and while they wait for the next game they like, they play their currently owned games, or go to the various LIVE services or and buy them cheaply. Either way, with modern games having little content, more and more gamers are finding themselves playing, and liking, retro games more.

When you consider last year DOSBox announced it's TEN MILLIONTH download(!) and the online console services with their ever expanding range of retro games are getting more and more attention, I would say the content of modern AAA gaming, on PC and console is what I going to decide who does well. It's not going to have a lot to do with whether it's a new ISP or not!

Charles Forbin
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"games right now cost too much for what they offer in entertainment value when compared against a movie."

Is that in one of those curled up dimensions described by superstring theorists? A 30 hour game that costs $60 comes in at $2 per hour. Movies at a theater cost me $5 an hour without snacks. An epic RPG is less than one dollar per hour. A good game is also far more immersive and engages my brain more. I guess I'm not sure what you mean by value.

David Aiken
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I don't like the emphasis on "playable hours". I would rather play one hour of Portal or COD 4 than 5 hours of some other AAA titles which have been stretched (i.e. lengthening routes between goals) to increase play time. In any case, many games now have an online component for multi-player and user-added content - which is a much better way IMHO to increase value and playability than imposing a metric.

Jacek Wesolowski
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Plus, ten milion downloads isn't that much. I'm sure I've dowloaded DOSBox at least ten times on various occasions.

However, I'm worried that some people should doubt the merit of "original" games by making the comparison between them and "non-original" bestsellers. This leads to not taking into account that the original game in question may have any flaws other than being original. Frankly, some design decisions made for Mirror's Edge surprised me. They didn't seem to be made with either playability or accessibility in mind, and that may have had a much bigger impact on sales than theme.

Jamie Mann
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Companies have to invest in new IP, as old IP is not guaranteed to stay profitable - and the games industry is far more vulnerable than most to failure, given the low volume/high cost nature of the goods (i.e. a development house will generally have just one or two games on the market at any given time. If these fail to make money, there's no other income streams to make up the shortfall)

The only question then is how you generate the new IP. The two main routes are 1) you develop it inhouse and 2) you buy it from an external source.

Activision have effectively gone for 1), while EA have made a stab at 2). There's pros and cons for both techniques: 1) is lower risk, but relies on IP being available: with the increasing cost of game development, there's fewer and fewer blockbuster-candidates to snap up. There's also the issue that games are likely to be assessed purely in financial terms: over time, this attitude is likely to result in a loss of creative talent and the tendancy to always produce also-rans as a result of chasing a successor to the Last Big Thing.

Conversely, 2) is higher risk and may carry longer timescales, but can reap higher rewards and has intangible benefits as well: it acts as a training ground for new staff and helps boost internal morale and public perception.

It's a difficult tightrope to walk - Sega and Capcom are two companies which had their fingers badly burned when experimenting with new IP.

The best approach would seem to be to accept that the first iteration is unlikely to be a blockbuster: even with an infinite marketing budget, there's going to be limited awareness of the IP outside of the hardcore/professional games industry. Instead, use the first iteration to build the brand awareness and use the information gathered from its reception to build a better targetted sequel.

In many ways, EA is perfectly positioned for this with Dead Space and Mirror's Edge: both reviewed well and gained EA positive feedback from the press. As such, I'd expect the sequels to do much, much better.

Conversely, they poured too much into Spore - though this was partly because the game was viewed (or at least targeted) as a successor to the Sims, rather than new and unique IP. This was never too likely: the Sims was effectively based around creating stories (my Sim does this, my sim does that) where Spore is more around creating content (I choose to give my creature 4 arms). Even without the visual differences (humanoid dolls in a dollhouse versus aliens in an alien environment), the former activity is far more lightweight than the latter.

Herein lies the next lesson: if you're creating new IP, make sure you target the correct audience!