An interesting story hit Bloomberg recently: Vivendi, the media conglomerate, is looking to offload its massive stake in Activision Blizzard.
Vivendi has a $US8.1 billion stake in the company, and it’s going to get rid of that 61 per cent stake in the company one way or another: if no one steps forward to buy the whole shebang, the company will simply sell the shares to the market, leaving Activision Blizzard with a whole heap of small shareholders.
Why is this happening? The Bloomberg report states it nicely:
“Moody’s Investors Service and Fitch Ratings warned Vivendi this past week that its debt ratings could be threatened if it doesn’t reduce liabilities. Fourtou on June 28 ousted Chief Executive Officer Jean-Bernard Levy, who had resisted major changes in Vivendi’s structure.
A shifting market for video games may limit Activision’s attraction to buyers.”
Let’s think about this for a moment: The world’s biggest publisher, with the world’s most valuable game property, is a liability.
People can point fingers at the myth of mismanagement as much as they like. The simple fact is that the games industry has become a high risk, low-margin business, and that’s not something anyone wants to be involved in.
I stand by my previous thought that the games industry is headed straight towards a crash.
Yeah, this is kinda random, but I think the second-hand games market could possibly help address this prevailing issue. Don't get me wrong, buying new games at the original MSRP prices is a very good thing, but game retailers like GAME and GameStop need to keep afloat to maximize profits. Without the used-games market, I'd think that they'll collapse since the percieved values of games have really inflated. Digital distribution is very promising, but it's still too early to fully embrace digitization of video games. Do you know where I'm getting at?
Yeah, it's a really good point, WierdoW, especially for Activision.
Activision hasn't really embrased mobile like, say, EA has. Its business model is very much about the big, high-budget, high-returns, yearly releases. That in itself isn't necessarily a bad thing – when it works, mega-profits for all.
But what happens when the retailers start struggling? GAME in the UK and Australia going belly-up would have costed the likes of Activision more than EA, because EA has a complementary revenue stream.
In other words, it's the "eggs in one basket" strategy, and it's high-risk.
Retailers need the second-hand market to stay afloat, and that's simple fact. I don't like anything that pulls money from the developer and publisher, but in Activision's case, the second hand market is indirectly beneficial, I agree.
I can't possibly agree with your assertion of used game sales and e.g. steam's sales. The bottom line is one thing, but one cannot deny the advertising merits of sales. If anything, Valve has proven this to be true.
Valve is a platform holder – it's not the one that really stands to lose out from game sales.
While I agree with you on the advertising merit of sales, it can be taken too far. Once a customer base learns to anticipate sales, and adjust purchasing behaviour to take advantage of those sales, there's a direct impact on the long-term sustainability of the vendor.
If you'd like to read up more about it, have a look into behavioural economics. Retailers in general (fashion, especially) have been struggling with trying to work out how to motivate consumers away from the discounting mentality.
Thanks for dropping by! 🙂
This news, on top of last week's EA stock report, mirror what we've been saying for some time (just see articles below). Three console manufacturers that refuse to innovate and prefer gimmicks over gaming are being left in the technological dust by companies like Apple and Google.
The games industry is about to be turned completely upside down and we say good riddance to the companies that monopolize, refuse to innovate and short change their consumers with Call of Duty after Call of Duty after Call of Duty.
Reap and sew, fellas.
Article 1: http://doubleplusgoodgames.com/?p=77
Article 2: http://doubleplusgoodgames.com/?p=86
Article 3: http://doubleplusgoodgames.com/?p=103
Yes, Valve is a platform holder, but they put their games up in this same fashion no less than other games. The reason why I disagree that it's been taken too far is the nature of today's gaming industry… Frankly, "Game Crash 2013" is inevitable, and companies like EA and Activision that strive to milk consumers of every last penny and releasing "Same Old Game Sequel Number++" are at the forefront of it. Companies like Valve, that actually built their foundation on loyal customers that actually want to give them money are the only counter-balance that currently exists, and after this hypothetical crash, Valve is most likely going to be the only one standing upright (also Nintendo, because well, Nintendo).
Second-hand sales are really a no-brainer for me, but perhaps I'm just old-fashioned… if I buy a game (physical medium at least), I expect to have the right to sell that game, as it is mine after I paid for it. I do believe this discussion will become moot very quickly due to the rise of digital distribution though.
Which on the other hand is currently hurting the industry more than it strengthens it… Production costs have decreased dramatically with digital distribution, as you don't have to print any discs, don't have to pack them nor ship them, and if you're releasing on your own platform (e.g. Origin for EA) you completely cut off retailer share. However, the price of the digital game isn't lowered in turn, which is just robbing the customer, no matter how it's sugar coated (devaluing the retailed box version).
As for the Steam sales (I talk about these specifically as this applies mostly to them, but transfer the whole thing to a more general sense if you wish), I must admit I don't have any numbers on me, but I do not really believe they affect the income figure that much, again due to the lack of actual production / shipment costs. A digital sale doesn't cost the developer / publisher anything…
If a publisher sells 100 games (digital downloads) in a week normally, but sells 1000 of them at a -75% sale, what is the issue? The publisher made a bigger profit with no cost increase and the only downside being the decrease of the sales / income ratio. Furthermore, the deals aren't announced up-front, and speaking out of personal experience, if someone wants a game, they do not wait for an uncertain period of months before it goes on a sale.
Lastly, we can't forget DLC, the publisher's newest tool for low-cost profit.
Obviously, I could be wrong on these points, but this is what my understanding of the topic lead me to believe. I do not honestly believe that Steam sales really affect the bottom line of any publisher / developer in a negative context, at all.
That first link tried to give me a root kit.
I don't have much sympathy for you or what you have to say, especially when your website tries to access my computer illegally.
Also, I would say that Sony took a pretty darn big risk actually putting money behind a game like Heavy Rain.
Someone doesn't understand how market crashes work.
The problem here is with Vivendi and it's own financial liabilities. They are a company stuck in the stone age, suing and condemning everything while others are embracing the digital age.
They're selling their share in Activision Blizzard to leverage their own problems. That doesn't change the fact that A B is still a huge money earner in the games industry.
Market Crashes can happen in a number of different ways – want to compete to list them 😛
As I said in my article, you can point the finger at mismanagement all day long, but if everyone is experiencing a difficult market, the whole 'blaming the CEO" bit falls flat.
When there is high risk and small margins, no one is going to invest in you, those kind of speculative investments are for good times, not recessions. High risk and small margins is one cause of a a market crash, BTW, so you can't count that one in our little competition 😛
This doesn't in any way mean Activision Blizzard is a liability, nor that the gaming market is going to crash.
Vivendi has liabilities (from other aspects of their business). By selling Activision Blizzard, Vivendi will have ~$8 billion in cash (possibly more if they can sell it for a premium). This $8 billion in cash can be used to cover the companies other liabilities.
Just wanted to address one final thing:
"There's a problem with this math – the cost of making a game is not the physical production and logistics – that's actually relatively small. The cost of making a game is largely tied up in the development costs, which the revenue from the game sales is meant to compensate for. If you drop revenue (ie. have a sale), then you're going to directly affect your profit (revenue – cost = profit). It's the profit that's the number that counts."
Didn't this just confirm what I said? If a digital sale ends up in a bigger profit over a given time period, how can it be bad? There is no cost in SELLING that game, and the development cost is there whether it got sold or not.
My issue is that people usually use it as an expectation the games should be cheaper.
The way I see it, developers and publishers are FINALLY able to earn fair return.
Otherwise, yeah, I think we agree 🙂
The problem with this line of thought, from my perspective,is this: you don't sell your top business units, especially in an economic downturn.
You may well be right, though. Let's see what Vivendi does with the money, and then analyse further from there.
Thanks for the input!
That's a heck of a post – thank you very much for taking the time to make it!
There's a lot there to work though – I think a lot of what you've said is a spot-on interpretation of the market (though I don't necessarily agree, a lot of business is simply different opinions and interpretations anyway, so agree to disagree!). There are a couple of things I would question, though:
"Which on the other hand is currently hurting the industry more than it strengthens it… Production costs have decreased dramatically with digital distribution, as you don't have to print any discs, don't have to pack them nor ship them, and if you're releasing on your own platform (e.g. Origin for EA) you completely cut off retailer share. However, the price of the digital game isn't lowered in turn, which is just robbing the customer, no matter how it's sugar coated (devaluing the retailed box version)."
This is a debate I often have, and it usually boils down to this: The price you're seeing for digital downloads is the fair price. Retail games are, essentially, too cheap, because thanks to logistical and production costs, they're shaving the margins too thinly.
Don't forget, the cost of making games has spiked dramatically. The high-end tools, development time, and sheer size of teams for mainstream games are so large now that publishers have to sell a *lot* of copies at retail to even break even.
A company is only healthy when it is profitable – and profitable enough to be able to make some mistakes and invest in R & D. Current retail prices don't allow that. The reason you see innovation in the download space is because there is greater margin in downloadable games, and so those who make/ publish downloadable games are making a healthy return.
"If a publisher sells 100 games (digital downloads) in a week normally, but sells 1000 of them at a -75% sale, what is the issue? The publisher made a bigger profit with no cost increase and the only downside being the decrease of the sales / income ratio. Furthermore, the deals aren't announced up-front, and speaking out of personal experience, if someone wants a game, they do not wait for an uncertain period of months before it goes on a sale."
There's a problem with this math – the cost of making a game is not the physical production and logistics – that's actually relatively small. The cost of making a game is largely tied up in the development costs, which the revenue from the game sales is meant to compensate for. If you drop revenue (ie. have a sale), then you're going to directly affect your profit (revenue – cost = profit). It's the profit that's the number that counts.
The good thing about Steam/ PSN/ XBLA sales is that the developer and publisher has more control over when things get discounted. I see new AAA games get discounted a week after release in Australia – this is self-destructive competitive behaviour. A game realistically needs to be full price for a month or so to realise its real profit potential. After that, discount away, as the customers that are likely to buy a game then would never have paid full price for it.
[quote]Lastly, we can't forget DLC, the publisher's newest tool for low-cost profit.[/quote]
Agreed. Conversion with DLC is something crazy-low (5 per cent, I think) – ie not many people that buy the full game buy the DLC, but it is nevertheless a new revenue stream that publishers badly needed.
So, I don't think you're wrong with anything at all. I do disagree with you on a few points, but my overarching argument is probably not so different to yours: I believe that to avoid a market crash the industry overall really does need to find a way to restore profitability to game sales. That's not going to happen under current business models.
Activision Blizz is in trouble
WOW is old
COD has some good competition now
not too long before the page is turned
nonsense, they are selling their most valuable asset. its a matter of short term gain vs long term gain, and vivendi choose short term, by selling activision.
is it the smartest thing? maybe, we will see in the future. they might sell it then buy out a few smaller companies, I am guessing THQ honestly. THQ stock is like .50 a share.
I blame this long, Awkward transition to the next generation. Its dividing up publisher and developer resources. There are much fewer quality software coming out this year and on top of no concrete info on PS4/720 the Wii U doesn't even have a launch date.
It's a good point, Jeffrey – the extended hardware generation has made it difficult for the third party publishers.
Buy low, sell high. That's all they are doing. And Activision/Blizzard has specific risks because of a lack of diversity. This is not a reflection of the industry as a whole but an example of shareholders maximizing there profits.
It should be noted that Vivendi CEO has stepped down , citing "divergence of views on strategy" with the board.
Interesting article and even more interesting comments.."Increasing production cost >>increase price " is the very very basic business policy. I think its high time for game developers, publishers to rethink the overall business. Game as a service is the next viable future.Selling a Big budget AAA game at $60+++ is NOT going to be the best bait for sustainability or profitable. Companies with focused product and robust service is going to rule.. Valve and Team Fortress 2 and the crazy hats are the best example
I'm a fan of iOS gaming, but these markets have put the "race to the bottom" price-points that are literally sucking the life out of the gaming industry today on a turbo charge. Of course, this doesn't apply to all mobile games, but the vast majority of them restrict things and want to continue paying to play. It's frustrating to say the least and the vast majority of iOS' games don't come close to offering the level of immersion found on gaming platforms, because of these ill-fitted payment methods.
Move away from the touchscreen only interface with a wireless controller for actual "games" and somehow (if it is even possible now) get consumers to understand that .99 USD can't support the development cost of a full game once there are more than a handful of great titles worthy of a premium $19.99-$39.99 USD price point. But, then you also run into space limitations, as iOS devices have limited memory.
I'm sorry, I don't buy into this idea that it's a given that Apple and Google are the new face of the gaming market. Yes, they're a part of it now, but just as we're seeing with Facebook, it's been overly hyped by a very few limited success and extremely over hyped when you add the millions of user/download counts that get/play the games for free — which somehow inflates the value of the game monitarily.
I think the crash will happen when the HD consoles move into the next generation. That's when the cost to produce is most likely become more than the very select few can gain back in sales.
There's absolutely no need for a PS4/Xbox 720 in the next few years. Global economy only gets worse and we've seen so many great developers fall in the current generation. I don't see how any of them can be excited for the next generation at the moment.
Hey this is pretty cool. Forbes has written a reaction piece to my little bit:
http://www.forbes.com/sites/erikkain/2012/07/02/vivendi-looks-to-offload-activision-blizzard-death-of-gaming-industry-greatly-exaggerated/
You know you've made it when Forbes tries to argue against you 😛
Attn: Chuck Norris BUY THIS NOW!
Blizzard will NEVER FAIL. Not when they keep comin out with games as awesome as Diablo III and W@W: Mists of Pandora
I guess selling $60 games with costly DLC with yearly rehashes/sequels isn't the most economically feasible strategy in today's market huh?
I think you're right there. The industry is decidedly leaning towards freemium and smaller-scale releases. The blockbuster is becoming a more and more difficult sell, for good or bad.
Thanks for the head's up, V8 Ninja. I'm not sure what has happened to our hosting provider, but we've had that problem for some time. We've asked them to move us to another server (we're on a shared server right now) but I'm not really sure what is causing that issue. Any insight into clearing that up would be welcome, and I'm sorry for any issues this may have caused.
It seems that the whole root kit thing was an advertisement problem. Sorry for sounding a bit cold and unwelcoming because of that. As for advice to give, I have nothing.
This is the dumbest shit i have ever read… Vivendi is in financial trouble and need cash. Activision Blizzard is one of there strongest assets. Vivendi needs cash and are selling one of there top properties. I do not get how someone would think this reflects on the gaming industry. Gaming industry is a little slow… ps3 and 360 are like 5 years old wtf do you expect? See diablo 3 sales??
I dont think the passion to play games will ever die, as far as large companies they do need to change the way they look at the consumers and decide what is more important before they do start to loose out. with the new streaming types of tvs and things like that we will all see some big changes coming and all the companies need to really think where they want to be when the dust settles.
A creative medium sold publicly would never work. Thats why the most successful business' in the medium are still private (Valve, Epic Games, Bethesda, and Bohemia to name a few) , and if they remain that way, will be around MUCH longer than the likes of EA and Acti-Blizzard.
That's an interesting perspective, Dan. Could you explain why you think that being private/ public affects the long-term financial viability of a developer/ publisher?
There are certainly some examples of successful, listed gaming companies out there: Sony, Nintendo, Microsoft, Namco Bandai, to name some.
Basic Accounting Knowledge is your friend Assets = Liabilities + Equities
Honestly, the MMO genre is getting really limited in growth. You see alot of people buying them, and then failing to dig in with any staying power. Warcraft is one of the exceptions, since the gamers have invested so much time in their chars. 9.1 million is a butt load. If that is active accounts, it's still 109 million a month in revenue, 1.2bln a year… If they think that they will get someone to pick it up for 8bln, they're mistaken. Mists will drop the user base (Domestic) by another 3 million, but they will pick that back up and more in the Asian market. I can see a foreign company picking up the brand for that. They know Mists will hurt the user base.. they've even gone so far as to hire forum trolls to flame users who gripe about the new content.
Blizzard has been beset with bad management for awhile. Warcraft once logged over 15million subscriptions, now down to 9m, and execs shrug their shoulders and suggest most of the loss was due to attrition to other Blizzard games like Diablo. That's just stinky corporate policy. The real problem began the precise second they nerfed a bg called Wintergrasp. What does this have to do with anything you might ask? Well, Warcrafts new content focuses too much on raiding. They should call it Raidcraft. Oh, you can pvp a bit in small battlegrounds, 10 vs 10 usually, but its boring. Wintergrasp was an open air bg where you would often see 4 full raids on each side, and there was no limit to how many additional players could be fighting in the zone. I saw battle-royals with over 200 players on each side, it was REAL WAR and it was FUN!
Slowly but surely Blizzard shut it down. Can't have people having too much fun! I could give a hundred examples of Blizzard being ran by ipso-facto sadists who love making their customers upset. They lost about 2 million subscriptions within a year and came up with a slew of excuses why it happened The entire corporate board should have been fired. This is what happens when you have programmers running a company, they don't know how to run a business anywhere except into the ground. Listen: there are 7 billion humans now. MMO's aren't going away. In fact, for the next 1000 years they will serve as the new gladiator arena's where nations can take out their angst on each other without bloodshed. Warcraft can be around for centuries if they would only bring in someone with the vision needed to build their subscription base. It should really be about 25 million by now with the goal of 100 million subscriptions.
BTW, my toon is "Zoog". Quite frankly, there are now thousands of gamers who have named their toons after mine. There are Zoog's in nearly every server, npc Zoog's in nearly every new MMO, gaming and gold-selling websites named Zoog, a slew of entries on Urban Dictionary, bands naming themselves Zoog. It's become an eternal meme! Why? I was one of the very first gamers. Think Atari and Pong and computer games programmed in C+ and Java before there were even video cards. I've walked 1000 miles down this road. I got the cred nobody else will ever have and I'm just sayin, this is about more than Vivendi needing some cash flow. It's about rats leaving a ship which, while it will never fully sink, will never do as good as it once did when Activision dominated the competition due to spectacular raid content like Ulduar and bg content like Wintergrasp. Luv ya Blizz! Wish they would let me help them…
Here's the thing, Blizz, most famous for WoW, is making most their money based on the 'pay to play' system.
Most companies don't do that. The industry is fine, maybe not the MMO industry, but gaming as a whole is fine.
I think your head is a little inflated.
stop game pirating!