The EA Store?

I really don’t think the big game publishers would get into retail any time soon because they need to focus on making games that sell, but I do think it’s a potentially interesting strategic direction. And when I say strategic, I mean “money-makin’, money money-makin’”.

I offer two reasons why.

For one, current retailers like GameStop and Best Buy take about 20% of the retail price. So out of your $60, they make $12. Well, if you had your own retail store, guess what? You take that $12 for yourself! That’s a real bump to your profit margin. Heck, you could even try to price your titles a few dollars cheaper than GameStop, and still improve upon your existing margins. But, nobody likes a price war so let’s stick with $60 like everyone else.

Reason two: become a player in the bountiful used games market. Currently, GameStop is the place for buying and selling used games, and they’re pretty much running a racket. They buy your used game for an insulting amount, say $12 for a brand new title, and then sell it in their enormous Used section for $55. (FYI, GameStop gets 100% of that revenue) Sounds crazy, right? But they do that because they can, and no one is providing any other options for game sellers (this just in: Amazon is making a run at this market). Let’s say you’re EA. You could pay “just a little bit more” for used EA games to get people in the store, but then could sell more EA games to them, used AND new! That’s a lot of sales just for EA.

And the timing might be right to do this soon. Commercial real estate is not in the best shape, so you could get a lot of retail space for not a whole lot of cash.

Who could actually do this? I think only EA and Activision could pull this off. They have large game libraries, and their brands are pretty well-known. The rest of the publishers either have smaller libraries or are in rough financial shape so it would be a difficult task.

Of course, it wouldn’t be easy for EA or Activision either. Launching a retail store is an expensive and complicated exercise, but maybe there will come a time, when the “business needs to grow”, and retail becomes an attractive option.

T.G.I. Wasn’t a Transition Year

Some have remarked how resilient the game industry has been. Year on year, the industry did demonstrate double-digit growth in 2008, which is somewhat of an achievement given the economic turmoil the world has found itself in during the last 6 months or so. The question is “Why?”

I can point to two good reasons.

For one, the price of games is not terribly painful, especially given the high replay value for many of today’s games. Some games like Fallout 3 and Oblivion provide 80-100 hours of gameplay for your $60. That’s less than a $1 an hour. Movies are probably in the $5-7 an hour range (depending on your consumption habits), so that’s a pretty good deal for gamers. I think people inherently “get” this idea, so they continue to buy games.

But my first point relies on my second: fortunately for the industry, there are truckloads of consoles already in homes (almost 100 million according to wikipedia). People bought these consoles, and they want to enjoy them. Since Microsoft, Sony, and Nintendo released their current generation of consoles in 2005 and 2006, they’ve had a few years to build up an installed base of console owners – and the industry should be thankful that they did so. Imagine if 2008 was a year of transition! Things would have been real ugly. (To be clear, transition years are when new consoles are released and console manufacturers do their best to convince consumers to purchase the new system. They do this by launching big, super-awesome, platform-exclusive titles like Halo 3 or Super Mario Galaxy.)

Imagine if Sony tried to launch the $600 PS3 last fall! What a massacre. Even the Xbox 360 would have had a rough go of it in the $350-400 price range. A $60 game as a Christmas gift is palatable, but a $400 console amidst this economic downturn? No way Santa is dropping off many of those.

So despite a collective concern for 2009, for those in the industry, be thankful that there are millions and millions of consoles out there, hungry for more games!

Guitar Hero vs Rock Band

The dust is finally starting to settle now that Rock Band and Guitar Hero have had two holiday seasons to go head to head. Despite my love for Harmonix's work and Rock Band, the sales numbers speak for themselves. According to vgchartz.com, as of February 2009, the Guitar Hero games have sold 23 million units compared to Rock Band's 8 million units. That's a 3-to-1 trouncing. (The Guitar Hero numbers include GH III, GH: World Tour, and GH: Aerosmith. The Rock Band numbers include Rock Band 1 and 2, RB: AC/DC, and the RB Track Packs.)

Now the Rock Band fans would say, hey, Rock Band is a more polished game, we're probably over 30 million song downloads, and there's new songs every week! All of these are true, yet despite the polish and the expansive content library, Rock Band has not sold nearly as well as Guitar Hero. Roughly speaking, 30 million downloaded songs is $60 million in revenues, and that's plenty for MTV/Viacom to be happy about (they own Harmonix). Yet think about what these revenues could have been if more units of Rock Band had been sold. Let's do some quick math. Combined, about 30 million "band" games were sold since holiday 2007. If Rock Band sold twice as many units as they did (effectively splitting the market with Guitar Hero), it's quite feasible that they would have sold twice as many downloadable songs - that's 30 million more songs and another $60 million in revenues. That's a nice bump to MTV's earnings. (Although Sony and Microsoft take a cut of downloads on to their consoles)

But enough with hypotheticals, let's take a hard look at why this came to pass. If I had to put my finger on one thing, it would be marketing. I believe Activision won the marketing battle against MTV. Celebrity-laden commercials, Guitar Hero releases throughout the year to keep the brand fresh, and a constant stream of PR announcements kept GH on top. On the other hand, I've only seen two different ads for Rock Band 1 and 2 combined. Two ads!!! Where's the news about the superior metacritic ratings? Where are the announcements about the WEEKLY stream of killer songs? What about getting one or two rockstars to help promote a game about Rock and Roll? I really just don't know. And I think it's a shame, because the Rock Band games are good stuff, and the Harmonix folks have rock 'n' roll in their blood.

It's not all bad marketing news though. EA, MTV's distribution partner, did a pretty good job in filling up Best Buys and Gamestops around the country with Rock Band gear. I have to say that the space given to Rock Band versus Guitar Hero was pretty even, and that is an accomplishment for an admittedly bulky product in a tightly-controlled retail space.

But overall, I think the message is clear: in a hyper-competitive market such as games, the company that gets the clear, consistent (yet fresh) message to the consumer, is the company that wins.

I'd be angry if I was AC/DC...

You know why? Because I'm one of the Rock Gods, eagerly sought after by the Rock Band and Guitar Hero folks, and when I finally DO agree to license my music with Rock Band, my exclusive title doesn't sell for $#*@!!! According to vgchartz.com (I'm digging this site for its free sales info), less than 300,000 units of the AC/DC Rock Band game were sold! (Nov 2008 - Feb 2009 across all platforms)

Compare this to Guitar Hero: Aerosmith, which has sold 2.25 million, and I would be very ticked off. I would be thinking, "Man, I like Steven Tyler, but Aerosmith is NOT eight times more bad-ass!" And truth be told, they're not. For as much as AC/DC rocks, justice has not been served.

One contributing reason to lackluster sales is the exclusive arrangement with Wal-mart. You could only get this game at Wal-mart. No Target. No Best Buy. No Gamestop (which owns Electronics Boutique). I really don't understand the logic behind this deal. Why cut out so many channels? Unless AC/DC got a sick upfront deal, I don't why this would get greenlit as is. Because I'm sure they're unhappy with royalties off of sales.

Sorry AC/DC, maybe we can make a game for you that garners the success it deserves down the road...

My MIT Sloan Video Game Case Study

While I was pursuing my MBA at MIT Sloan, I authored a case study on the video game industry. The Strategy group was using an extremely dated case on the video game industry to highlight the importance of establishing installed bases in various markets, so I talked to Professor Sterman about updating it and wrote a brand new case!

The case highlights the various strategies of MS, Sony, and Nintendo up to 2006. It also goes into a brief history of the industry, from the old Atari days and the first incarnation of Activision, through the rapid consolidation of the industry around the turn of the century, up until the current generation of consoles.

Enjoy! Comments most welcome!

MIT Sloan Video Game Case Study

(FYI, this case is the property of MIT Sloan and cannot be re-distributed without the school's permission. Please contact the school if interested in using the case. This case will soon be available on MIT's Open Courseware website so it is free to read.)

Spore won't come close to The Sims

Spore was making big news this fall for flirting with the 2 million mark as 2008 came to a close. Unfortunately, when compared to Will Wright's previous EA franchise, The Sims, Spore won't even come close. The Sims franchise sold over 100 million units!!! 100 MILLION UNITS!!! All the sequels and expansion packs dominated the PC charts for years and years. You just couldn't avoid The Sims.

But Spore won't come close. Not that hitting 100 million units is an easy feat, far from it, I just wonder what EA's sales expectations were for Spore. When I heard that Spore was Will Wright's next franchise, I knew that it would have a real struggle to emulate Wright's previous success.

The reason? Aliens. Spore is about aliens. And when you start talking about aliens and spaceships, you've just shut out most of the population. Gamers and sci-fi fans will eat Spore up, but that enormous population of non-gamers that The Sims appealed to won't give Spore a second glance.

The Sims was about human beings. They were on the cover, they were in the game, the entire concept was extremely easy to understand. Humans like humans. Humans relate to humans. Humans know humans. The concept, at its core, was appealing to practically everyone. On the other hand, Spore is about aliens. And, by definition, humans don't know aliens, so from its inception, Spore didn't have a chance to rival The Sims.

I saw a similar trend with Pixar's movies. It was easy to see that Cars, with *ahem* CARS as the main characters, wouldn't touch the success The Incredibles achieved, which featured an All-American family of superheroes. Again, humans relate to humans. With The Incredibles, Pixar really hit the nail on the head by appealing to *every* member of the family, so of course everyone wanted to see it! In the case of Cars however, that universal appeal was lacking, and it showed in the worldwide box office numbers: Cars pulled in $462M, The Incredibles raked in $635M. (source: www.the-numbers.com/features/cars.php)

What's the bottom line for game publishers? Having a mainstream title in your portfolio is a very good thing. Having sci-fi titles in your portfolio is a good thing too, but replacing a mainstream title with a more niche product can only lead to tears.

Unemployment Rising in the Game Industry

Before we all proclaim how recession-proof the game industry is, I think that we should keep in mind what's been going on in the publishing and development community. Publishers and developers have been laying off staff left and right, and a number of studios have just closed their doors entirely. Factor 5, Aspyr, Free Radical, and Turbine have all cut staff in one form or another. Midway's Austin studio has been closed and EA will have 1,000 jobs gone by April 2009. As a rough estimate, there are 2,000 more unemployed game industry folks now. As of 2007, there were almost 50,000 game developers in North America, so that's a 4% increase in unemployment! All of a sudden, the game industry isn't looking so recession-proof.

What does this mean? Risky or new franchises won't get funding. Publishers are bracing for a rough 2009 and will fund the titles with the highest priority, i.e., the titles with the highest rate of financial return. Guitar Hero, Madden, and Call of Duty will all move right along, but those "riskier" projects will get shelved. The portfolios will be lean and only the guaranteed hits are safe. Best of luck trying to get funding from a publisher right now - I imagine it to be nigh impossible right now unless you have a super-experienced team and rights to a well-known franchise. My 2 cents? Go grab a team and make iPhone games....

I almost feel bad for EA though (trust me, I'm no fanboy). They finally give new IP a chance with games like Dead Space and Mirror's Edge, and then the economy goes to tatters right when they launch. I applaud them for finally diversifying their portfolio, but unfortunately, their timing was just terrible. I wonder how much the development teams working on the sequels will get affected. Dead Space is working within a proven genre (comment dit-on Resident Evil?) so they probably won't get hit too hard. But who knows with Mirror's Edge and Dante's Inferno.

Overall though, since most consumers like the big titles anyway, the portfolio slimming won't hurt the industry in 2009 too much. It's just those people who are looking for something fresh and new in gaming that will get squeezed out. But really, that's been happening for a long time already..........

One hope is that there are just too many Wiis out there for publishers to ignore and they'll be forced to think of something appealing AND innovative to keep their shareholders happy.