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.