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Finance

Publishers Versus The Economy

Tue 20 Sep 2011 8:30am GMT / 4:30am EDT / 1:30am PDT
FinancePublishing

With the prospect of a double dip recession looming, how are publishers bracing for another period of economic uncertainty?

When the first signs of a recession hit the game business in 2008, many publishers were bullish about the industry's ability to weather the storm. Games are better value for money than other forms of entertainment, they argued; the consumer may cut back on taking chances, but they'll still buy the blockbusters. That was the rhetoric from the big box business, as it confidently predicted being able to stand its ground and sell while consumers cut back on non-essential spending.

The middle ground thinned out, with independent and internal studios closed, downsized, right-sized and shuttered. Even now, the situation is still difficult to gauge: were publishers using the economy as an excuse to reshape their businesses and show investors they were taking action, or did they really bite the bullet, admit they were hurting and take appropriate measures? Either way, the industry changed during 2009, as free-to-play, mobile and browser games began to find their place, spurred on by lower barriers to entry and consumers looking to spend pennies, not pounds.

Now, in 2011, with a double dip recession a distinct possibility - or a long period of slow growth at the very least - the industry is facing the same challenges it did in 2008. How exactly are developers and publishers preparing for another long, lean period, and what lessons were learned from the last downturn?

If we can generate revenue on a worldwide basis, the GDP on a worldwide basis is actually growing.

Yves Guillemot, Ubisoft

Rather than scaling back, publishers like Bethesda and Activision are focusing on going bigger - spending more on AAA titles that offer better value to the consumer. French publisher Ubisoft is still spending, but it's diversifying, moving into television and film with Ubisoft Motion Pictures, expanding casual brands like the Imagine range, and acquiring talent in the free-to-play space.

"It's important to only do quality, because I think what will suffer is the games that are average or not well positioned," says Alain Corre, executive director of EMEA for Ubisoft. "These ones will suffer the most. But the creme de la creme will be profitable."

Yves Guillemot, CEO of Ubisoft, believes that the recession isn't such an issue if a company thinks globally, and he is currently seeking to expand the company's presence in as many regions as possible.

"I think all companies have to be adaptive to recessions, but we have also to cover the world. If we can generate revenue on a worldwide basis, the GDP on a worldwide basis is actually growing. The rule of our companies is to make sure we can touch all the markets, so we adapt to different countries and we adapt the content."

He also believes the UK economy has the capacity to bounce back after harder times. "In England the advantage is that it goes down quickly but it goes up fast, so what I see is that there's a period where things will be more difficult in the UK, but very quickly when it goes up again it will be fast."

In 2009, EA's John Riccitiello called the recession a "blessing in disguise" as it forced the company to trim the fat acquired during times of plenty. However, in 2011, the publisher's European boss Jens Uwe Intat is reluctant to even speculate whether another crunch is on the horizon. In fact, he doesn't believe it's an issue.

"If I knew whether there was a recession coming or not, there are a lot of people with a much better education in that field who are trying to figure it out," he says.

"I don't even need to know, because the impact of recession on our industry is totally unclear. There are people who say that, in a recession, people still need to have some fun, right?"

I don't think EA as a company believes we're about to go into a double dip recession

Peter Moore, EA

Intat believes that consoles and games have an bigger effect on the industry's economy than the recession, and argued against looking at past downturns for clues to the arrival of another.

"If you look at what happened in recessions in the past and try to correlate, I would actually try to warn you against trying to make a conclusion, because you never know what might have happened without a recession."

"If you have a total recession it might have an impact on people actually buying new consoles. But there are so many other devices out there that people can play on that I'm not actually really sure whether a recession would be a good or a bad thing. I don't know."

His colleague, the newly promoted COO Peter Moore, had a clearer view on the subject: "I don't think EA as a company believes we're about to go into a double dip recession."

"Even though we're theoretically in recessionary times, iPads are selling at a breakneck record, smartphones are setting records, the console business goes up and down depending on what month it is."

Indeed, over the last year EA has been a growth business, expanding operations in Texas and snapping up casual developer PopCap, but other areas appear to be struggling. Just this week it was confirmed that EA's Visceral studio in Melbourne would be shutting down, after the project it had been working on for three years was cancelled.

We haven't been immune from having to do some rips over the years, but we've still got a large company now that's hiring.

Peter Moore, EA

"We've not been shy about making acquisitions when we couldn't build organically," adds Moore. "In the last two years Playfish and PopCap have been pretty sizeable purchases, which, from our perspective, you look at some of the valuations where we live, in Silicon Valley, and every day they look like great deals."

He believes EA isn't just growing, it's "right-sizing," and, he stresses, still recruiting. "We haven't been immune from having to do some rips over the years, but we've still got a large company now that's hiring. We're a company that's hiring aggressively."

There's no denying it's a confident stance, but some are more cautious. Showing his trademark candour, Crytek co-founder Avni Yerli goes further than just admitting there might be another recession on the way - he sets a date for it.

"2015, it will happen. End of 2014, 2015 it will happen."

He is also less certain that games exist in a safe realm. While he agrees that games, as part of the entertainment industry, may not feel immediate effects in the way other businesses do, he argues that it is creativity and innovation that suffer, not just graphs and share prices.

"I think what will be at a disadvantage in this case is that you won't see innovative new games in this cycle or a year later, because nothing gets started because people, publishers, become more risk aware, and do not spend on new games or new IPs. They go for sequels, and very easy sequels."

You won't see innovative new games in this cycle or a year later, nothing gets started because people, publishers, become more risk aware.

Avni Yerli, Crytek

During the last recession, Crytek stepped in to save TimeSplitters developer Free Radical Design after the company went into administration. The UK developer then became Crytek UK, receiving a reported £50 million investment.

"It was not something which had a negative affect on us," says Yerli of that economic downturn. "I mean we had our games in development, we had our technology in development, we licensed our technology out. What we realised when we talk to licensees is that they're all working on new sequels, but not new IPs."

Sony Computer Entertainment, as a hardware manufacturer, publisher and developer, has both a unique perspective and the most tumultuous recent financial history of any of the companies we spoke with. Hit hard by the April hacking attacks that shut down the online store and multiplayer services - not to mention the earthquake in Japan - its understandable that Sony is braced for another dip.

Sony Worldwide Studios' Michael Denny is a master of the interview, but on the mention of another economic downturn his brow creases for a moment. But he too believes the industry occupies a special place in consumers lives, even when they're struggling.

"In terms of gaming in the recession I think nothing is recession proof. I don't believe that, but as an entertainment medium I think we are really good value, and I think its one of those things that consumers and game fans are reticent to give up."

Nothing is recession proof, but as an entertainment medium I think we are really good value, and it's one of those things that consumers are reticent to give up.

Michael Denny, Sony

"So when times are economically hard we have to try harder, we have to make sure our products stay relevant, we have to make sure we're pricing things right. But most of all we have to keep producing innovative new experiences, then people will still want them."

Unlike Yerli, Denny believes that, rather than causing in a wave of sequels and remakes, recessions can actually stimulate creativity among developers.

"Clearly the economic conditions have been quite dramatic, the credit crunch last time and maybe what we're feeling at the moment. But it's interesting, talking from perhaps how it affected us in Worldwide Studios, is that to some degree we all look harder and tighten our belts, but sometimes in those times of adversity even more innovative products can grow out of it. People sometimes perhaps try even harder, they know what's required to spark interest and keep interest in gaming."

Only time will tell if the industry's apparent faith in the consumer's endless lust for entertainment is well placed, or if another crunch could see more businesses closing. But those aren't the only two possible outcomes.

Another is that the relatively new (to the Western market at least) free-to-play model could become more widespread. Carl Jones, director of global business development at Crytek, suggests that another recession could force the market to evolve.

"What's changed is free. Making things free and letting people pay when they want to for the content that they want," he says. "And so certainly at Crytek we're looking at free-to-play as a major changer in the games industry and the products that we're looking at releasing ourselves, we're looking at those kind of models for them."

This is an important change the market has to go through. If we do it right then the industry will actually grow, regardless of the state of the economy.

Carl Jones, Crytek

And he's not just referring to the company's new freemium title, Warface. Crytek recently made its CryEngine 3 SDK free for non-commercial use. "I think this is an important change the market has to go through. If we all do it right then I think the industry will actually grow, regardless of any recession or any state of the economy, because people want entertainment. And if they can get their entertainment free, then great."

The theory is backed up by the actions of his peers. Just yesterday Sony Online Entertainment announced that its MMO DC Universe Online was to go free-to-play. Blizzard, publisher of the ever popular World Of Warcraft, also adopted a model that allowed players a free trial of the game up to level 20.

Jens Begemann founded Wooga, and is already well ahead of the free-to-play pack. While others are trimming the fat on their development teams, Wooga is hiring two new members of staff a week.

"There's not a huge impact to the free-to-play business model," he says. "I think what's for certain is that games, especially free-to-play games, are something that would work in any economic environment. "

"People may save money when the economy is bad on going out or buying expensive luxury goods, but playing a free game and spending $5 here and $5 there - you always have money for that."

8 Comments

James Ingrams Writer

215 85 0.4
Games publishers have to do the same thing as before the recession. Find a way to bring AAA games to market for $15 million rather than $35 million.

If this isn't answered the major publishers will decline whether there is a double dip or not.

Commentators in your article say publishers believe that they need to spend even more, and that "mediocre" titles will suffer, and yet, in the last 3 years we have seen huge inroads by indie games, a huge growth in retro gaming, and more and more market share being taken by the smaller European developers with their "mediocre" and brought to market for under $15 million titles, like STALKER 1-3, Two Worlds 1 and 2, Witcher 1 and 2, Metro 2033, Sacred 1 and 2, etc. All multi-million selling titles and yet games that Bethesda and Valve would call "mediocre"!!!

Posted:3 years ago

#1

Mihai Cozma Indie Games Developer

124 34 0.3
I think you are a little rough about the "mediocre" term, as they didn't say which games are mediocre and which aren't. They said nothing about indie games, nor stalker, witcher and others. I think they are talking about wannabe AAA games that are just mediocre (maybe Duke Nukem Forever style or others), and instead to cut expenses and release early and mediocre, better invest more and get more quality in the products, so you will get less profit but you will keep your image as a developer of quality products.

Posted:3 years ago

#2

Florencia Cafure Project Manager, Vostu

3 0 0.0
Diversity itīs a fact not only for video games but for business
It might help not only Ubisoft, but many other companies

Posted:3 years ago

#3

Tony Johns

520 12 0.0
Because I am at university, I can only afford games after my semester ends,

And there is only so much I can spend per fortnight

I have to use that money to go from home to university and back with petrol and at the same time buy some food like breakfast and vegetables, as well as continuing to take in accomodation into account.

Lucky for me I don't rent, or else I would have had to continually spend money just on rent when I don't need to during the holidays and exams where I could just easily drive to university.

Being a gamer that still stays at home with his parents has been about the best choice I have had in my life at the moment, but I know there are still things I have to factor in and what ever is left I can only spend on just a few games/anime/manga that I could only spend after my university semester ends.

Posted:3 years ago

#4

Andrew Ihegbu Studying Bsc Commercial Music, University of Westminster

466 177 0.4
Interestingly nobody has mentioned piracy. Technically now buying is an optional thing and things get tight for some their morality goes out of the window. First the people who would buy RRP start to go second hand, then sooner or later that modchip or crack starts to look like the only option.

It would be interesting if we had some stats on how piracy vs sales vs second hand has been affected by the depression. Is my guess true, and if so, are my reasons correct?

Posted:3 years ago

#5

Benjamin Kratsch Freelance Journalist, GLP Media

18 5 0.3
Interesting discussion around here.

@Andrew: You bring in this all talked about discussion about second hand games. They are not as bad for the industry, as a lot of people think. I mean just take Tony as a normal student: All right you don't have a lot of money as student and definitly can't afford to buy Modern Warfare 3, Battlefield 3, Uncharted 3 and let's say Skyrim. That way you buy MW3 or BF3 because you are shooter fan, probably sell it and for the amount of money you get, you got your 30 dollar or what ever to invest in skyrim. And so on.

So second hand marcet is a good thing for the industry, because we should never forget that there is not a lot of people that can afford around 2 or 300 dollar or euro for winter season just to spend in games. So I don't think that's about morality, it's just about how much money you can spend. I mean if we take this student: At least he is buying three games instead of one, so he is bringing more money into the circle.

The other point: I am pretty sure that piracy destroyed the pc marcet. PC is kinda dead, for sure you get your games on pc, but there is not a lot of exclusives because it's so easy to just download stuff illegal. I don't think that's a major problem for consoles, because you gotta chip your xbox, which is pretty tough. In germany for example if a guy or shop is doing this for you, they are going to jail.

And never forget: People wanna play online..which you can't I think with a modded xbox.

Posted:3 years ago

#6

Benjamin Kratsch Freelance Journalist, GLP Media

18 5 0.3
The other thing that is pretty interesting to mention is that I guess there were no time to get your brand so easily in sooo much channels.

I mean you have a good brand, take some money, do an iphone game, do and android port, do an facebook game. EA has now 50 mio. active users on sims social and I think they will get good money due to micro transactions.

So I wouldn't see the future so dark, because as a publisher you can use facebook, appstore and stuff to marcet your brands (and sell more retail console/pc-copies) but also to make some extra money.
A pretty nice example was this rage game on iphone...it was good for marceting and when Bethesda is releasing Rage on PC, Xbox, PS3, they can easily sell also an iphone version, because people liked the first game which was more mini game stuff, but really nice made.

Posted:3 years ago

#7

Marcelo Martins President, Clefbits

6 0 0.0
Rachel, congratulations on the great article.

I agree with Michael Denny on two subjects:

1. Nothing is recession proof;
2. Great ideas may become a reality in recession times.

About the Freemium trend:

Freemium is a reality and even that most old-school hardcore gamers (like me) donít like it, thereís a whole new demographic buying stuff on FarmVille and other games.

I believe Freemium is not that bad, as long as the gameplay is fun for everyone, including people that donít like to buy items.

Posted:3 years ago

#8

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