Why I Don’t Own Stock In Game Publishers

I have been out of the stock market since 2003. It is a long story that involves Cendant fraud scandals, tech market meltdowns and greedy CEO’s stealing from their shareholders that pushed me to invest in myself and my own businesses instead of the market. In spite of those bad experiences investing in stocks, the latest “sale” prices in the equity markets have me nibbling in again. I have been buying GOOG, AAPL, GE, etc. on their way down to the current bottom.
EA Stock Performance
Stocks you won’t see on my list are Electronic Arts, Activision, Take Two, Ubisoft, or any other game company. Here’s why:

We have the biggest, most diverse world wide game market in history, but these companies are not making money. In addition, I think that these game companies are in trouble similar to industries such as music and newspapers. Add to this a General Motors kind of attitude for a couple of the companies, and I will not buy these stocks even though some of them are as cheap as they were in 1999. Let me explain.

As anybody reading this blog knows, gaming is exploding. Nintendo’s Wii is such a hit that even my 80 year old father in law plays Wii bowling. Games are available on any and every platform including downloads on computers, your phone, handhelds, Facebook or any other social network, the Internet, and, of course, game machines. Games have broken out of the box, and the world is ready for new games in different genres with different business models. The days of going into a retail store to pay $60 for a boxed, DRM’d disk full of standard 14-25 year old core gamer fantasies are numbered.

Big Problem Number 1: The boxed goods cash cow is running out of milk and will no longer support growth even though it will be around for a long time. We are not in a “transition year”, which is what industry and analysts call the years when consoles go from one generation to another, yet EA lost $315MM last quarter, Midway is nearing bankruptcy, Microsoft had to close down Ensemble, Take Two scales back, and on and on.

Game prices are going down, their delivery mechanisms are changing, and the type of content the mass market wants is different than what the publishers are giving them. What are the game companies responses? They adapt draconian DRM methods and complain that secondary sales are the root cause of evil in the industry. Or they use diversionary tactics like blaming the bad economy. “Hey, look over there! Don’t look at our root problems.”

Taken from a distance, doesn’t this scenario remind you of a blinded Detroit that wants to blame anything but their own misreading of what car buyers want for their current bail out predicament? How long do the game publishers need to see a changing market before they respond?

To be fair, Activision did respond by merging with Vivendi to get access to World of Warcraft’s >$1BB annuity/cash cow. That is a great property and a great move, but it will not continue to cover up their strategy of to pump out TEN versions of Guitar Hero in 2009, and that the vast majority of their additional titles will be sequels. All of these sequels will be delivered in the same boxed manner to the same crowd that they have always played to.

What are the other companies doing? Most have some form of MMO strategy, but, in reality, they are all making essentially the same game for the same audience with offerings such as Warhammer, Conan, Star Wars, etc. Instead of trying to expand the market and truly address the new audience that is buying these new games, they dip their toes into the water with small experiments such as Battlefield Heroes (which is very cool, but not enough), pump out more sequels to the same audience, and assume they can acquire their way to success as other companies such as Nexon address new audiences and sales methodologies. However, just as Google came out of nowhere to take the technical leadership from Microsoft, the company that figures this out will not be able to be bought.

Big Problem Number 2: Game companies are in a similar predicament to the music and newspaper industries. What they are good at is getting easier for anybody to do and the price consumers are willing to pay is dropping fast.

I have advocated for years that I think making a game is much more like making music than making movies. Movies cost up to $200MM and are mostly out of reach of the indie film maker. Publishers brag every time a new generation of consoles comes out that development prices will go up, there will be consolidation in the market, and making games will be more like making movies. This self serving rhetoric is meant to scare the smaller publishers and developers, but it becomes a self fulfilling prophecy with development prices for titles routinely approaching $30MM. All of the major publisher have built programming “factories” filled with thousands of developers in overhead laden offices with what appear to be tightly controlled schedules and development practices.

In more of a music like scenario, as opposed to the developer filled factories and movie-like budgets, a “band” of five great game makers supported by a world wide contractor market and readily available low cost technology can make an incredibly great game. They just need passion and creativity, and they can kick the ass of any of the big companies. Let’s say each of these developers were paid $100K per year, plus given an allowance for offices and an outside contractor budget of $800K, which would roll up to a total product cost of $3MM for a two year effort or ten bets for every one bet the big studios make.

Even more interesting is what happens when these same five guys eat beans and weenies, sleep at Mom and Dad’s, and make this great game with no funding. Once they have created their game, they are not going to take it to the closed off box channels, instead they will offer it through the Web. Without huge marketing budgets the first thing they do is drop the price, and this happens so often that the amount of free game entertainment on the Web is growing at a huge rate. It was crappy at first, but it is getting better by the day, and within a few years, I predict that most people will not be paying for games directly.

To wrap up, I believe the big game companies are so wedded to the box and retail channel that they will find it nearly impossible to make the transition to the new way of doing things. I don’t think they will go away, but I do think they will shrink. Already EA is predicted to go from $5BB or so this year to $4.6BB in 2009 according to analyst Colin Sebastian of Lazard Capital. I am glad I don’t have to run any of those companies because I don’t really have the answer. I just know I don’t have to buy their stock.

-Jeff Tunnell, Game Maker
Make It Big In Games

  • http://coderhump.com Ben Garney

    What do you think about the console manufacturers?

    The big game publishers are dependent on huge numbers of boxed units moving through the retail channels. But Nintendo makes profit on every console sold, licensing fees on every unit sold by the publishers, etc. Even if they went entirely to free online distribution via their hardware, it seems like they could make a tenable business out of it.

    Microsoft and Sony are tougher to discuss because of all the other stuff they do.

  • http://www.makeitbigingames.com Jeff Tunnell

    I think Sony was more interested in leveraging PS3 for Blue Ray than just making sure it had good games at launch. I can't fault anything Microsoft has done on XBox 360, but they are still losing money like crazy on the platform. In the future I think services like Instant Action are viable as consoles. Carve out an on-line audience, add some peripherals that plug in to the PC-like device add some unique content and community features and you have an instant console.

    Of course Nintendo has done a wonderful job with the Wii, and there will always be a market for simple, cheap, easy to use toy-like devices. I'm just not sure how many different offerings there can be.

  • http://www.instantaction.com Brett Seyler

    Great thoughts here as usual. A bit scathing for my taste :) , but the I think the message is correct…the titans of today will look like ants tomorrow if they don't act on what we all see happening.

    • http://www.makeitbigingames.com Jeff Tunnell

      It was not meant to be scathing, but I guess I'm not good at writing in a political manner. Don't get me wrong, these guys make great games, they are just stuck in a rut they may not be able to get out of. I am not saying they will go out of business, I am just saying their business models are not going to work in the future, and I would not buy their stock.

  • http://alan-noon.blogspot.com/ Alan Noon

    I completely agree with the music analogy. My stance has always been that game development is the new rock and roll. And much like the music industry of the early 90's, I believe we are on the verge of our own grunge era.

    From the mid to late 80's, rock music was the domain of the big label. Music was all about the hair bands and their formulaic, over produced, vapid, copy cat product. Then out of nowhere, bands like Nirvana, Soundgarden, and Alice in Chains brought the grunge and alternative rock movement with their no nonesense, meaningful, unique sound. Overnight, all of those big label glam bands looked ridiculous. The musical landscape of rock changed.

    We're just about there ourselves. Who will be our Kurt Kobain?

    • http://www.makeitbigingames.com Jeff Tunnell

      We already have him. ArmorGames. They make free Flash games.

      • http://www.facebook.com/profile.php?id=541862174 Jason Maskell

        Armor Games makes awesome stuff, but they've got some bad karma behind them, IP theft and all, at least alleged.

        • http://www.makeitbigingames.com Jeff Tunnell

          I've never heard that. I think AG is great, and I would hate to see unsubstantiated allegations get spread.

        • surfboards

          Armor game do make awesome stuff, I just love the stuff they have to offer!

  • James H.

    What advice would you give to existing third-party studios that are focused on consoles? The place I'm working for has survived from gig to gig for eight years, is led by a generally kind and well-meaning bunch, has plenty of tech, talent and experience, and is used to working on small projects with small teams, but their future is always in doubt, and from my vantage point, the business topics perpetually seem to revolve around securing the next pitch or making payroll. I personally agree that the console market won't last, but I don't know how I would convince my employers of that.

    • http://www.makeitbigingames.com Jeff Tunnell

      The developer treadmill is a hard place to make a living. Like you say, at a time when your current project is the most difficult, one or two of the main people in the company are out pitching to get the next gig. We broke out of the developer treadmill at Dynamix by using our profits and raising a small amount of money (which I don't recommend) to create our own IP's (project we owned outright). Today I would do that be creating some awesome Flash games that get millions of plays and viewers, then using those titles to leverage into XBLA, PSN, or WiiWare. You have to own your own IP to really make it. Also, don't get me wrong, consoles are not going away any time soon, it is just that when buying stock you have to look a long time into the future.

  • bigdog

    well i went with 2 years playing nothing but free games i am back to buying some games slowly but not that often $60 a game is to much i will never pay over $50 never don't care how good the game is or not there are good free games out there but there are so many sucky ones as well but you just cant beat these payed games graphics are real good and you just get allot more fun out of it.

    these big company's will go out of business sooner or later and i hope microsoft is the first one to go i like sony i just hope they can get there act together. microsoft has mess up on there computer and making it to where you have to buy vista no mater what just about when it don't even work. there system is crap people send it in for repair or replacements all the time they don't know how to make nothing last or even good anymore. for sony i have yet to have any problems besides with there ps2 it will die after 2 years of use but nothing else i have gotten has broken or anything of there's they work hard to get something people want and to make it last a long long time i will always vote sony you cant beat them they just to dang good.

    microsoft just need to leave this world and so something else with there money. they suck in every area of business.

  • bigdog

    well i went with 2 years playing nothing but free games i am back to buying some games slowly but not that often $60 a game is to much i will never pay over $50 never don't care how good the game is or not there are good free games out there but there are so many sucky ones as well but you just cant beat these payed games graphics are real good and you just get allot more fun out of it.

    these big company's will go out of business sooner or later and i hope microsoft is the first one to go i like sony i just hope they can get there act together. microsoft has mess up on there computer and making it to where you have to buy vista no mater what just about when it don't even work. there system is crap people send it in for repair or replacements all the time they don't know how to make nothing last or even good anymore. for sony i have yet to have any problems besides with there ps2 it will die after 2 years of use but nothing else i have gotten has broken or anything of there's they work hard to get something people want and to make it last a long long time i will always vote sony you cant beat them they just to dang good.

    microsoft just need to leave this world and so something else with there money. they suck in every area of business.

  • http://freelancegamewriter.com Blake Snow

    If i were a gambling man and played stocks, I'd put money down on Nintendo (a lot), Epic (only temporary 'cause the Unreal engine is used like crazy), Valve, Atari (because I trust Phil Harrison), Activision (the most biz savvy big 3rd party), and 2D Boy. That's about it. Some good points, Jeff.

  • http://freelancegamewriter.com Blake Snow

    If i were a gambling man and played stocks, I'd put money down on Nintendo (a lot), Epic (only temporary 'cause the Unreal engine is used like crazy), Valve, Atari (because I trust Phil Harrison), Activision (the most biz savvy big 3rd party), and 2D Boy. That's about it. Some good points, Jeff.

  • http://savidd.blogspot.com DGSaunders

    @ Blake – I'm sorry to say, but you can't put money down on Epic, Valve, Atari (as of Nov), or 2D Boy – they are all private companies (so there are no stocks to buy. Well… at least for the non-rich ;)

    Best,
    ~Savid
    http://savidd.blogspot.com

  • http://www.redthumbgames.com joshuadallman

    To me the most exciting opportunity in this post is “the type of content the mass market wants is different than what the publishers are giving them.” Though obvious to those of us enlightened about broader markets than 18-24 y.o. hardcore males, I predict it'll take another decade before the game industry catches up to this fact – they're just too rooted culturally in that damn 18-24 male market. In the meantime, there is, has been, and will continue to be an opportunity so big you could drive a Mack truck through for indies. Indies don't need to make a better game, they need to make different games than what the mainstream is offering.

    As for “[indies] just need passion and creativity, and they can kick the ass of any of the big companies” there are tons of examples exactly this: Blow (1 guy), N (1 guy), Victi/Vigil on Steam (2 man team), World of Goo (2 man team), Cave Story (1 guy), Buccaneer on Steam (2 man team), Audiosurf (1 guy), Portal (group of students), Aveyond (1 gal), Mount & Blade (1 small team), Dwarf Fortress (2 guys), Darwinia (2 guys), Crayon Physics (1 guy), Everyday Shooter (1 guy), Alien Hominid (2 guys), Gish (2 guys), Immortal Defense (1 guy), Fez (1 guy), Gesundheit! (1 guy), Battleships Forever (1 guy), Line Rider (1 guy), Galcon (1 guy), Samorost (1 person), Grow Cube (1 person), Flow (1 person), and that's just off the top of my head. Indies, look at this list, then tell me it can't be done. It can be, and these people did it!

  • http://www.redthumbgames.com joshuadallman

    To me the most exciting opportunity in this post is “the type of content the mass market wants is different than what the publishers are giving them.” Though obvious to those of us enlightened about broader markets than 18-24 y.o. hardcore males, I predict it'll take another decade before the game industry catches up to this fact – they're just too rooted culturally in that damn 18-24 male market. In the meantime, there is, has been, and will continue to be an opportunity so big you could drive a Mack truck through for indies. Indies don't need to make a better game, they need to make different games than what the mainstream is offering.

    As for “[indies] just need passion and creativity, and they can kick the ass of any of the big companies” there are tons of examples exactly this: Blow (1 guy), N (1 guy), Victi/Vigil on Steam (2 man team), World of Goo (2 man team), Cave Story (1 guy), Buccaneer on Steam (2 man team), Audiosurf (1 guy), Portal (group of students), Aveyond (1 gal), Mount & Blade (1 small team), Dwarf Fortress (2 guys), Darwinia (2 guys), Crayon Physics (1 guy), Everyday Shooter (1 guy), Alien Hominid (2 guys), Gish (2 guys), Immortal Defense (1 guy), Fez (1 guy), Gesundheit! (1 guy), Battleships Forever (1 guy), Line Rider (1 guy), Galcon (1 guy), Samorost (1 person), Grow Cube (1 person), Flow (1 person), and that's just off the top of my head. Indies, look at this list, then tell me it can't be done. It can be, and these people did it!

    • http://www.makeitbigingames.com Jeff Tunnell

      Rooted in their current culture is hitting the nail on the head. These companies simply could not put out a game like Wii Tennis, Club Penguin, Maple Story, or Kart Rider. They can look at those successes and try to emulate their model, but the end product will end up right back in the same demographic and will have a box component attached.

      Isn't the list of successful Indies starting look cool!

  • http://www.subreal.net timaste

    It must be hard to turn those giant battleships!

    I think the future proliferation of distribution options online are definitely creating a market for more flexible and variable games (small, large, and in between). It's always good to have more options as a developer, especially in today's market where a single title failing to sell enough units can lead to studio closure or absorption, something we see every other week it seems.

  • http://www.industrybroadcast.com Ryan Wiancko

    I agree with you 100% and your post mirrors my scathing comments on some recent Gama articles about the same topic. Our industry is just spiralling down the same path as the music and movie industries now that it is essentially being run and controlled by the same, or at least the same type of people. The big companies have become draconian dinosaurs that tenaciously cling to their old models the same way a fat person clings to their comfort food and then wonders why their situation never improves in life.
    The entire world and global business model is changing and these companies are not and we will see the fallout happen very quickly from their refusal to adapt to it because they've been forced to pander to shareholders who know nothing about the modern technological world or the changing market place but simply want easy and predictable cash flow forecasts that tell them their money will be safe for the next 10 years

    • http://www.makeitbigingames.com Jeff Tunnell

      Again, I don't want this post to come off as scathing. I hope to not be one of the perpetual bitchers constantly railing against the big game publishers. This is an analysis of why I would not buy their stocks. I do not think they are going out of business, and I think they make great games. I just think they have tapped out their traditional market and distribution method, and they will have a hard time changing.

  • JeremyAlessi

    The whole world is changing it's as simple as that. Consumerism is coming to a close, especially when it involves physical goods. Networked devices will rule the future. Personally, I believe mobile devices like the iPlatform will completely dominate the whole landscape before long. People no longer need to be chained down to an office, a PC, or a console. The amount of innovation and excitement going on within the iPhone/iTouch world is insane. TouchArcade.com has the fastest moving news and forums I've ever witnessed. It's literally overwhelming.

    The Wii was and still remains pretty cool. The world on the street though is that people are tired of simple controller waggling. It has its gems and will continue to sell for a bit longer but the novelty is wearing off. Hardcore gamers don't like it and adults who can appreciate the sociability and simplicity of the games have new more interesting options on the table. If you don't believe me head down to your local retailer. For 2 years I haven't seen a Wii console on the shelves and now they are full of them.

    In 5 years, if a game's not on a phone very few people will play it. The PC, Wii, 360, etc… are all just dust in the wind.

    • http://www.redthumbgames.com joshuadallman

      There are different platforms for different demographics which address different areas of needs. As Jeff said traditional publishing is not going away it's just maxed out. It will be transcended by more mobile and connected platforms, but it will be a transcendence that includes its predecessor, not simply moves beyond it. Sony was already forward-thinking in this area years ago when they put out the PSP with the idea of having it connect back up to the Playstation 2 and 3 and network (Nintendo to a lesser extent with their Game Boy).

      Traditional box publishing is still too profitable and lucrative to investors to just disappear from the business landscape. Look at some numbers. Super Mario Galaxy, 7.3 million units. Ratchet & Clank Future, 1.3 million. Zelda Twilight Princess, 6.4 million. Jak 3, 1.7 million. God of War 2, 2.3 million. I'm not saying these are impressive but multiply these by $50 or $60 per title and you have a pile of cash waiting to be divided up by publishers, distributors, developers, console makers, etc. Just as buying stuffed animals will never go out of style despite the virtual online ones, buying boxed games as a point of sale purchase will always be a lucrative business. Moreover, even in the US broadband penetration is only at about 50%, whereas the number of people who go to brick and mortar stores to shop is probably close to 100%. Couple already high broadband adoption (people who want it the most already have it) with a slowing economy (less money for luxury services like broadband) and the adoption rate is already slowing and will likely at some point just level off, disappointing those purely in the digital distribution camp who see only the sky as the limit. Additionally, the rest of the world has yet to catch up on broadband adoption rates too (here in South Africa, fast and reliable internet is as rare as gold so guess what, everyone plays offline boxed PC and console games). In short, boxed games are not going away just like cash isn't going away because of debit cards, there will always be a need, the point is to see the opportunity for what it is, which is a more limited one than publishers would have their investors believe. But then, that's all part of the game of creating perceived value for your company.

  • http://www.thestillofthenightcausesastorminthemind.com Jeremy Alessi

    OK, that was overly dramatic ;P The general trend will be moving away from ball and chain devices though …

  • dev

    A great article! My interpretation is that the games publishing industry is doing much the same as the music industry did a few years ago: trying to hang onto an old retail-based distribution model and always shooting for the next Britney Spears while ignoring the long tail. iTunes showed another way to do business, but even then they had the advantage of selling content for less, AND having a super-sexy device to drive it. Gaming doesn't have that yet…even if XBLA games are cheap…and none of the gaming consoles are *must-have* devices in and of themselves (although Wii comes close for many.) What we need, IMO, as devs and pubs, is to find a way to make money of games that sell 50K units, not always requiring 1M.

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  • http://rueckenschmerzenhilfe.com/ R├╝ckenschmerzen

    Microsoft is hard to discuss

  • http://3dcentral.net MikeRowley

    Wow, lots to think about.

  • Helen Atwood

    your blog is awsome

  • http://www.vortixgames.com Ricardo Vladimiro

    I couldn't agree more, but I think the problem isn't only in the huge game publishers but it extends to other markets such as the casual download market.

    People are ready to play games, anywhere, anytime, as long as games are good entertainment products (not fun, but entertaining). They are fed of the graphics fever and they want new experiences, Wii proves it, DS proves it, new interfaces like Guitar Hero and the sorts prove it.

    What the markets are offering them is hit-markets, with sequels after sequels of worn genres and that model is too costly, from AAA to the casual download.

    It's up to the developers (all of them, from flash like us to console studios) to move and I believe we are. Flash, MMOs, new experiences and business models are flourishing.