Clash of the Titans

I thought I had a pretty clear understanding of how valuable the Guitar Hero brand was to Activision before the launch of World Tour, but I realize now that I had been lowballing it. Guitar Hero is to Activision as Madden is to Electronic Arts; it is the foundation on which the publisher is banking everything. Seeing Guitar Hero logos on the side of boxes filled with chicken-like food stuffs at KFC, I finally realized that this is not just a game, it is an integral part of a strategy aimed toward domination.

If you look closely, and at just the right moment, you may actually see the changing of the guard.

As Electronic Arts struggles with public relations nightmares, DRM conflicts, lowered profit expectations, stock prices in disproportionate freefall and layoffs, Activision is set to leverage Guitar Hero and a World of WarCraft expansion into the vanguard of a brave new world in which it is Activision that leads the industry.

Riding High Toward Defeat

It’s been a surprisingly rough year for Electronic Arts, and it’s hard to explain exactly why. Looking back only a few months, the traditional megalith was set to do what they do every year, maintain through the first six months only to unleash swarm of products that fly off the shelf in the crucial third and fourth quarters. With Madden’s anniversary season, Will Wright’s Spore and Rock Band 2, it would have been hard to bet against the Redwood City publisher, particularly considering second tier titles such as Warhammer Online, Dead Space, Red Alert 3 and Mirror’s Edge that were strongly positioned as a reliable safety net.

But underneath initiatives aimed at bolstering quality and moving new IPs into an eager gaming market, an undercurrent of dissatisfaction has been festering among EA investors who have had to endure lagging stock prices and underperformance even before last week’s 18% drop. Loose lipped CEO John Riccitiello has been hinting in whispered shouts for months that investors were growing restless, and even though these lead titles have performed relatively well in a tough economy, we find EA revising forecasts, sloughing off stock prices and laying off employees.

Now, how safe is it to start drawing long term conclusions about the health and future of a company in this kind of economic climate is, admittedly, a question for someone far more educated in the ways of money than I. I suspect no one wants to look at stock prices right now and make blanket statements with any certainty, but bloggers and commentators seem universally concerned at best and frustrated at worst by EA’s overall performance, not just pointing out that the company has shed more than 40% of its stock value since August, but more importantly questioning how the industry giant seems caught in conflict with itself, building visible and mostly successful properties, but at extraordinary expense.

Gamers have long considered EA to be a company so caught up in meeting the needs of its investors at the expense of consumers, that they may not have noticed that recently EA investors have been complaining almost the exact opposite. One gamesindustry.biz article quotes a financial analyst, echoing countless others who all seem to complain that, “Management’s indifference to the needs of its shareholders is striking, especially in an environment where almost all stocks are depressed, presenting compelling investment opportunities elsewhere.” And, perhaps putting it as bluntly as possible, “[…] management has demonstrated an uncanny ability to snatch defeat from the jaws of victory in the eyes of investors.”

Yes, Spore sold very well for a PC game, but it isn’t putting up a Sims level of numbers, and with the investment EA put into the game, that was the unstated goal. Yes, Rock Band 2 is performing fairly well, but Activision is already doing an equal or better job of marketing Guitar Hero World Tour and there are quietly whispered concerns about whether EA’s rhythm game is living up to expectations. And, while Warhammer has been a critical and commercial success, its 800,000 player base pales in comparison to World of WarCraft’s recently boasted 11,000,000 leaving little doubt about the commercial significance of the coming Wrath of the Lich King expansion.

The King is Dead, Long Live the King

This is not an article about whether EA will survive or even flourish; it simply has too many properties, too much talent and too strong a market position to even make that a concern. This is about being king of the hill, and whether Activision has the muscle and moxie to subvert and dethrone. It seems reasonable to ask at this point whether that even matters, and perhaps ponder the significance of a gaming industry where under new leadership and new initiatives of game quality Electronic Arts succumbs to a far more rigid and uncooperative Activision.

If you want a peek into the playbook that Activision fields as a strategy toward growth, simply revisit the heydays of EA under Larry Probst. The company was unapologetic and even arrogant in its approach to acquiring and digesting properties, tightly focused on minimizing costs to flood the market with recognizable IPs whether familiar gamespaces or movie related franchises. Consider that Call of Duty is only a five year old franchise, and has already seen as many releases, or that in only the three years since Guitar Hero's original release it has seen 2 outright sequels, two spinoff projects (GH: Rock the 80’s and GH: Aerosmith) and now a full band edition. Consider even that in the short time that Activision has influenced Blizzard the company has announced that Starcraft II will likely be highlighted by three separate releases and announced the long awaited Diablo II sequel.

If EA has abandoned the EA model that secured their throne for so long, then it was Activision that picked up the pieces, and the rest of the industry is watching carefully to see which philosophy is more successful.

Eyes on the Prize

It may not have been entirely obvious at the time, but on hindsight it seems pretty clear that the day Activision merged with Blizzard was the day they announced their intention to topple the king. There were a lot of folks focused on what an Activision merger meant for World of WarCraft, but the timing of the buy couldn’t have been better with the developer producing new content for all three of its prized properties. Blizzard is the gift that will keep on giving, set to put up the kinds of consistent numbers we haven’t seen since the height of the Sims craze where top ten lists were mostly a table of contents for Sims expansions. The Blizzard purchase is the crown jewel of gaming for the foreseeable future, doubly so if the companies can find a way to monetize Battle.net.

On the rhythm gaming front, there’s no question that EA’s Rock Band proved a concept and made significant coin for both publisher and developer, but it was a very public experiment that never really competed with Guitar Hero III’s monster 2007 release. By January of 2008 Activision had moved five million units of Guitar Hero III and the game raked in $115 million in sales in its first week of release. Rock Band wasn’t even playing in the same area code.

Now, among the missing components as we begin to consider what all this means for 2008 and beyond is, of course, whether Guitar Hero World Tour can convert a significant percentage of those numbers into a bigger, more expensive box. While EA certainly had a stock slide last week losing 18% on the heels of more than a 40% decrease since August, Activision also suffered a much smaller but still notable slide. The lack of major announcements regarding Guitar Hero World Tour sales even a week later along with rumblings about peripheral quality suggests that Activision execs aren’t breaking out the champagne quite yet.

But, going back to some of the financial minutia, there is an undercurrent among investors and analysts that suggests Activision is making the right moves, or at least intelligent risks, to be top dog. Avoiding the pitfalls of uneducated stock analysis in a turbulent economy, the market seems to be holding its breath on passing the kind of judgment on Activision that it did last week and last month with EA. While the company has put a strong emphasis on Guitar Hero, the November release of Wrath of the Lich King proves a much better safety net than anything EA currently has in the immediate pipeline, not to mention a movie-tie in to Quantum of Solace and a new Call of Duty title.

There exists little question that Activision has put its eyes on the prize and is positioning itself to supplant the long standing king of video games. Electronic Arts seems to have all the pieces in place to protect its superior position, yet is having extraordinary difficulty converting well performing games into a foundation of fiscal stability and investor security. Activision, on the other hand, seems to be playing from former EA CEO Larry Probst’s playbook, relying heavily on pumping key franchises even at the expense of quality, making strategic partnerships and building a reliable library of sales from movie tie-ins and low-cost games aimed at the largest common denominators.

For all of EA’s faults, marked most notably of late by an almost hostile approach to customer communication as though they simply dare us not to buy their games, they have been surprisingly faithful to a mandate of improving game quality and exploring new properties. The most significant problems at EA seem not necessarily to be with game development but project and corporate management that seem to revel in development cost excesses only to sabotage launch by preceding key releases with openly hostile rhetoric. The industry may mistake any successes on Activision’s front as a validation of conservative business ideals when the real culprit is actually occasionally bungling mismanagement.

Comments

Interesting take, and I agree. Although I have to admit, I've been out of the game biz loop as of late, but I can see Activision taking on the EA mantle. Especially when you look at the blatant "wash, rinse, repeat" franchises they are spewing out cough CoD cough.

For all their slip ups and... awkward... customer service, it could be argued that EA is shifting into a more "indy" developer mindset, if anything as a response to consumers' complaints of that same business model that Activision is apparently taking up. Perhaps just testing the waters with a more liberal business plan? If so, they're sticking to their conservative guns when it comes to many of the issues that garnered complaints against them in the first place...

I just hope that after Activision runs through it's own cycle of top dog and finds that this is not a permanent foundation for a successful long-term game business, there will be some sort of epiphany in the "Hollywood" side of the industry (ie, the big guys like Activision and EA) that going out on a limb within reason isn't such a scary risk. Perhaps that will be the point where we won't see games like Wet, Brutal Legend, and Zombies Ate My-- I mean, Zombie Wranglers run the risk of getting swept under the rug simply because they aren't already established IPs (that is, guaranteed money makers).

/rant

From about second paragraph, I wanted to interject with a thought, but figured I'll at least finish the article. And then, there it was:

The industry may mistake any successes on Activision’s front as a validation of conservative business ideals when the real culprit is actually occasionally bungling mismanagement.

That is my biggest fear. EA seemed to get its development priorities straight when it comes to gamers, but completely bungled up its customer relations. There will be plenty of people, with too much power in their hands, drawing conclusions that EA failed because it attempted to cater to gamers, instead of failing because it alienated its customers.

Opinion: Is it time for Disney to buy EA??

Remember, just an opinion piece. An interesting article popped up on the WSJ Opinions column. Edge took snippets of info from it. WSJ material is for subscribers only right now. It would be an interesting play. Disney has kept pushing more and more into games with Disney Interactive. EA is a bargain to purchase compared to years ago. Why not make a play on EA now while they are in a slide?

DRM discussion aside, I get the sense that EA is floundering both in its products and in its fundamental customer service. Even as EA touts that it is trying to 'right the ship' development wise, investors are now probably seeing the cumulative effect of years of sequelitis, disposable titles and customer indifference

Money is tighter and even if gaming is expected to do well doing an economic downturn, people are probably being more selective in where they spend their gaming dollars.

Even this week, we have an example. I couldnt believe it when I read EA's official solution to the missing final digit of some C&C 3 Red Alert cd-keys, which I may have read on this very board. For those missing the final digit, during the install, attempt the letters A-Z, and 0 - 9 until the install program accepts it. Apparently after 3 attempts your install is cancelled and you must restart the process. That is just not acceptable customer service, though on the surface from a corporate perspective, its very cost efficient. Customers have full responsibility to invest their time to figure out the code for their non-returnable product.

Maybe the investors should take their money and get the hell out of our hobby if it results in customer service impotent behemoths like EA. The gravy train has left the station and it no longer tastes like bacon.

I'm curious to know if the NFL deal has had any positive impact on sales.

Have the Madden games sold more since EA has the exclusive rights?

If not, then hopefully EA will drop its exclusivity and we'll finally get some competition in the field

as a sidenote, somehow EA has managed to earn my respect. I don't give a flying f-word about their shareholders, they're doing much better than Activision in my book. Activision has a severe case of sequelitis and I can't remember of any original IP they've published in the last 3 years. (maybe it's just me).

match that with the fact that they're messing with Brütal Legend and if they continue down that road I may end up boycotting Activision altogether like I did with EA the last 3 years (when they got exclusive NFL rights)

Have the Madden games sold more since EA has the exclusive rights?

Yes, significantly so.

Great article. I believe that EA's stock wouldn't be in such dire straits without the whole debacle over Take Two. I think, and i may be wrong, that their stock price was artificially inflated due to their overtures and as soon as it failed the associated rush of people to make their money back dragged the stock down - which in these troubled times for stock markets has the probability of being exaggerated as investors overreact.

Had EA not tried the take over or succeeded then we'd be hearing different tunes - even if there was no change in the performance of their games.

As long as the excellent Jeff Green keeps his job at EA........

Irongut wrote:

Even this week, we have an example. I couldnt believe it when I read EA's official solution to the missing final digit of some C&C 3 Red Alert cd-keys, which I may have read on this very board.

To be fair, that wasn't their official solution. Their official solution was to fax or scan and email the back of the manual, and they would supply the missing number. The other option was an unofficial solution, and since your cd-key input is the first thing you do during the install, it literally took me under two minutes to discover my missing digit.

Which I think also highlights another problem: EA has already been written off as "evil" by the majority of hardcore gamers that I doubt they can ever recover. While I agree that their PR isn't exactly as smooth as it could be, I also think there is still a kneejerk reaction to respond to everything EA does that is positive with intense cynicism, and everything they do wrong into a much larger outrage then is usually deserved. One need only look at Mercenaries 2 as an example, where the online world has accused them of releasing yet another unpolished mess in exchange for cash, when the reality is they gave the company an extra two years of development time and they still couldn't get it up to snuff. And if they did come out with a highly polished product, then the argument would probably be that it was all Pandemic's credit, not that of EA.

So basically they fail to gain kudos from gamers for funding something like Dead Space (it's pretty much even been accepted that it was started as a System Shock 3 game to cash in on the BioShock hype, even though there is immense amount of evidence that it was an original IPto begin with), and of course shareholders don't understand why they didn't give it half the budget and called it Medal of Honor: Space Wars and recieve better profit margins.

Which I think also highlights another problem: EA has already been written off as "evil" by the majority of hardcore gamers that I doubt they can ever recover. While I agree that their PR isn't exactly as smooth as it could be, I also think there is still a kneejerk reaction to respond to everything EA does that is positive with intense cynicism, and everything they do wrong into a much larger outrage then is usually deserved.

I do agree with you here, but I am fairly certain that if EA consistently behaved in a way that seemed to be in the interests of the customer, then they could regain their goodwill eventually.

It's no good producing a good product if you alienate the customer. There's an old saying in the restaurant trade; 'Good service can save a bad meal, but a good meal can't save bad service.' No matter how good the product is, if the company behaves like dicks to the people they are expecting to give them money, they are on a downward path.

I think if Dead Space hadn't released so closely in the footsteps of Spore, it would've given EA a bigger shot of gamer confidence. For such a light-hearted and anticipated game, Spore really under-delivered and caused so much consumer controversy on the web that I think it ultimately hurt their brand and any games that followed in its immediate wake.

Irongut wrote:

I think if Dead Space hadn't released so closely in the footsteps of Spore, it would've given EA a bigger shot of gamer confidence. For such a light-hearted and anticipated game, Spore really under-delivered and caused so much consumer controversy on the web that I think it ultimately hurt their brand and any games that followed in its immediate wake.

I'm a Spore fan, but I still think that spacing out games would really help them sell better, at least among the kind of folks that buy games regularly. If Dead Space had come out during a dry spell, I would have played it. As it is, I'll be buying it from the bargain bin next year.

How is EA tracking against the rest of the games industry? Might they be more prone to getting bonked because their head sticks up higher?

WTF, now you have me feeling sorry for EA, hehe. It seems that Activision is now the abusive spouse to the mate that is "the masses".