Electronic Arts reported a fiscal 2nd quarter 2008 net loss of $310 Million yesterday. SCI of Tomb Raider and Hitman fame reported a $220 Million loss for their most recent Quarter ending in September. Midway just reported a loss of $34.8M for their latest quarter, almost double the loss from their previous quarter. Move through the list of the rest of major publishers and the red keeps flowing.
As a long observer of these and many other big game publishing companies including sitting across the conference room table from some of their executives in partnership or investment talks and even the occasional job interview, it seems clear to me that they have much bigger problems than high development costs, a weak game title or two, and a pending recession.
Most of the major video game publishers are saddled with outdated business models- that generate huge revenues but no profits, caught up in the Hollywood business culture, and perhaps most critical – lack know how when it comes to building strong online communities and online businesses through innovative services.
By innovative, I mean in the broadest sense of the word. These companies need to embrace the culture of Silicon Valley’s best consumer Internet companies, make big outside the company venture style investments in the next generation of Internet services (not just games), and dig deep internally to create entirely new business models from the ground up that will – if done right – prove massively disruptive to a large part of the video game food chain today.
This goes way beyond a few partnerships with an Asian online game company, or an investment from a movie studio, or even a few major acquisitions. The new reality, for anyone trying to build a business on a generation of consumers that has embedded the Internet into their DNA, is that you are either changing your customer’s life or you are heading for the economic dustbins that have swept up newspapers, Yahoo, and CompUSA.
The reason that Google, Amazon, and Apple are doing so well and that Facebook, LinkedIn, and Twitter are likely to join them, is not that they set out to create a product with good gross margins that they could push on the public with a $20M dollar marketing blitz, but that they had a vision to improve the lives of the people who have embraced the Internet and the wealth of data, entertainment, and social connectivity it delivers.
A video game can be great fun and a few have came close to changing my life (Starcraft almost cost me a bride), but think about a fun video game that lets the gamer have real time communication with his non-gamer friends, that allows the gamer when they put down their game controller to continue the fun with their mobile phone or with a web browser when they have a boring 15 minutes at the office to fill, or even play against one player on a PC, one on a cell phone, and another who just has a TV and a remote control.
Then kick it up a notch and include the ability for the gamer to make some real money for his gaming efforts or by referring some friends or by selling his spare TV to non-gamer who happens to be connected through a non-gaming related channel and then allow that newly enriched gamer find his next date for the Friday movies, manage his work calendar, and take phone calls all without leaving his game of choice. I will not even go into all the valuable data collection and back office services a company should be building to properly manage this new breed of customer and fully monetize the relationship.
Sounds like a lot, and it is.
The core problems the large video game publishers face are right out of the acclaimed book The Innovator’s Dilemma: The Revolutionary Book that Will Change the Way You Do Business by Clayton Christensen. The Innovator’s Dilemma is a tech business best seller first published in 1997 and is a Silicon Valley staple – that seems to have missed the cities that game companies live in. An in-depth study on the failure to innovate, the book explains how good companies, regardless of the type of technology their business depends on, with good management who consistently make good decisions given the data at hand, almost always fail to survive when technologies, that their upstart competitors embrace fully, reach critical mass.
The heart of The Innovator’s Dilemma is an inability of existing management to drive the organization in a timely fashion into a new business model that will cannibalize their current gross margins, disrupt their ecosystem of suppliers and resellers, or force the company culture to change dramatically all before turning a profit that appears to be worth the trouble. Which leads to many market dominating companies, seeing the ripples in the water just ahead, failing to turn the ship until competitors seize the new course and change the economics so drastically that the former market leader is trapped in a whirlpool of shrinking customers and profits. The book highlights several important reasons for companies getting trapped in an old business model, and provides well documented success stories that show a clear path on how to escape the trap if you read the follow-up book The Innovator’s Solution: Creating and Sustaining Successful Growth.
Some of the big game companies may make it through the current cycle of disruptive change, however a review of several of these companies corporate info section of their website paints a gloomy picture.
Several companies have executives that have been with the company since before the rise of the first generation of Internet services that arose between 1997 and 2002. Which means they missed participating, in a focused business way, in the entire history of the modern Internet, focusing instead on the profitable business of selling a 50 cent CD for $59.99 in the brick and mortar world and marketing video games like big Hollywood releases (it was great while it lasted). Many companies are lucky to have one out of sometimes a dozen senior executives who will have any consumer oriented Internet business experience, and most of those executives who do have Internet on their resume, only have it in the first generation of Internet services, missing the crucial familiarity of the latest Web 2.0 services which is needed to leverage the social network dominated world today.
Most of the other executives that are not long time company employees or lawyers or accountants tend to have significant backgrounds in major food companies, health care, big media advertising, and even a sprinkling of the big enterprise software vendors in the 90’s who create products that make more money the more pain to the business customer they cause.
Several of the big game publishers have stated goals to invest tens of millions of dollars in “online distribution efforts”. Unfortunately, it appears that almost all are ill prepared to create and sell products to a generation of gamers who spend more money and time online either at their laptop or on their cell phone than they do playing games and lots more time than they spend shopping at the mall. If the management in lower levels in these companies are also tied to the brick and mortar business model and the console game development model, then these companies can continue to expect to keep beating their head into the wall.
One can make the argument that plans to invest tens of millions of dollars in online distribution is itself a symptom of the problem. With $100 Million dollars, a company could easily fund the creation and profitable operation of 5 to 10 independent major social network centered gaming portals that market and operate entire game catalogs. Any of these startup portals would outshine the best of what the major publishers currently offer in terms of consumer engagement, conversion of visitors to customers, and fun experience. Let’s see how many of the big publishers will try (I predict very few, if any).
Again, the few companies mentioned at the start of my post are not alone, I can rattle off a decent list of other large game publishers and even non-game businesses like eBay who are in the same boat. It is amazing how many game executives I run into that are not Facebook, LinkedIn, YouTube, or even instant messaging users. Once you start looking for their iPhone, or mention Twitter is something that should be an important part of their user experience – and then get the “Twitter is hype” comment or much more commonly – a blank stare, it becomes clear that an entire group of smart leading industry executives are out of touch with their core customer base – and a lot of their younger employees.
Not out of touch in terms of what retail console or PC game a gamer is likely to buy, but disconnected from how these customers share information with each other, disconnected in how the fast paced communication inherent in the Internet has greatly diminished the ability of massive expensive marketing campaigns to drive sales while overcoming bad game design, and most importantly the disconnect on how to create the most fulfilling experience for today’s gamer – it is not just game play, story, and great cut scenes and it is definitely more than casual versus hardcore.
