THQ and Activision: A Tale of Two Publishers

One stares into the abyss while the other soars on cloud nine. How can the fortunes of two publishers be so different?

The contrast in fortunes could not be more stark. Only days after THQ's earnings call confirmed what many commentators have expected and feared for years - that the company's business is on its last legs, needing a buyout or a miracle to save it from bankruptcy - Activision weighed in with an earnings call of its own, reporting exceptional sales and predicting a record year for both revenues and margins.

This is not, on the face of it, a story about industry transition - about free-to-play, mobile, social and all the rest of it. After all, these are two companies whose strategies, at first glance, look broadly the same. They've both bet the farm on the traditional end of the PC and console markets; they've both gone for a product mix that combines core gamer titles on console and PC with kids' console franchises. It's not that Activision has embraced the future while THQ clings to the past, or anything quite as convenient for the industry narrative as that. Both companies, in essence, believed the same things - yet one is booming and the other is going bust.

"It's a story about survival strategies - what it takes for a corporation to thrive when its environment is in flux"

The wider context, though, reveals that this is very much a story about transition. It's a story about survival strategies - what it takes for a corporation to thrive when its environment is in flux. A peculiar hybrid of evolutionary biology and economic theory suggests three possible survival strategies. You can specialise, focusing intently on a single niche in which you have few, if any, direct competitors - and hope that the wider environmental changes don't destroy your specific niche. You can adapt rapidly, being an agile, flexible organism (or corporation) that deals with change well. Or you can simply be dominant - an apex predator, perhaps, a master of your food chain so utterly successful that even environmental change doesn't impact you unless it's really severe.

One of the problems with corporate culture - not just in the games business, but across a whole range of industries - is that it's full of people who, when faced with a changing market, claim loudly that they're doing the second thing (adapting and being flexible) while really, in their heart of hearts, believing that they're in the third category - an apex predator which will survive this change through sheer inertia. Combine the arrogant, blustering personality so often demanded by market capitalism with the inflexible thinking fostered by MBA courses and the like, and such delusion is inevitable.

So where do Activision and THQ fit on this spectrum of survival strategies? THQ thought it was doing the flexible thing, probably believed that it was doing the apex predator thing (the company has never quite seemed to understand its place in the pecking order of game publishers, probably because being a stock market listed company demands that you repeat empty phrases like “leading company” until you actually start to believe them) and never even tried the niche thing, which might have been its best chance at survival. Activision, meanwhile, claimed to be doing the flexible thing for a while but has gradually become more and more bullish about its position as apex predator, to the extent that its executives actually now seem to be scoffing at the idea of investing strongly in mobile or digital sectors.

"Without enormous marketing support and the clout of a leading publisher behind them, console titles need a word-of-mouth miracle to build the sort of sales that rescue a struggling publisher"

The big difference, of course, is that Activision actually is an apex company. It's big and strong enough to weather the storm - and even at that, it's been forced to sound a note of caution over 2013, when its revenues will almost certainly start to drop off from this peak. THQ, never more than a mid-range publisher, simply didn't have the portfolio of IP or the marketing clout to keep itself afloat in a traditional games market which, more than ever, only has room for the big hits, and ruthlessly punishes the near-misses.

Look at how Activision's success has been achieved. I don't wish to disparage that success - to achieve growth in a shrinking market is an extraordinary feat - but it is commercial success achieved through market clout and momentum. Is Skylanders a good game? Yes, absolutely, but it's not the quality of the game which has seen the title and its associated toys being allocated more shelf space than every other game combined at my local supermarket, or filled up huge display spaces in every major media retailer I've been into in the past fortnight. Is Call of Duty a good franchise? Yes, it is (oh, shut up - you don't get to own The Expendables on DVD and then tell me Modern Warfare 3 isn't fun, you awful grinch), but the extraordinary public event status of its launch each Autumn is secured through the deployment of bunker-busting marketing budgets, not through finely-honed weapon balance. Is World of Warcraft a good game? Yes - but even if Mists of Pandaria is Blizzard's finest piece of world-building since the heady days of Wrath of the Lich King, it's also an expansion to a game whose cash cow status depends heavily upon subscriber inertia.

THQ has enjoyed no such advantages as it has launched the titles upon which its hopes were pinned over the past few years. Saints Row, Darksiders et al are good franchises and good games, but they have launched into a market where sales of console titles are rapidly shrinking. Without enormous marketing support and the clout of a leading publisher (actually leading, not stock-market-press-release-lingo leading) behind them, console titles need a word-of-mouth miracle to build the sort of sales that rescue a struggling publisher.

This is the harsh reality of where market change has left the traditional games industry. Development budgets soared (and those expecting the arrival of the next Xbox and PlayStation consoles to make everything alright again would do well to recall that development costs will burst through the ceiling once more on those platforms) and then the market shrank, precipitating a vicious cycle in which marketing budgets were boosted in order to reverse the decline. Sales of the biggest games rose; sales of mid-range games collapsed. Companies which could spend the tens of millions required to launch a hit title made money; companies who had previously been happy to achieve second-tier sales with lower marketing and development budgets suddenly found that the second tier had become the bargain bin, and went out of business. Sic transit THQ.

"If its rivals are posting strong growth in mobile while Activision stagnates in console, investors will not be forgiving"

The $64 million question (which probably doesn't even cover Call of Duty's marketing budget these days), of course, is whether Activision's triumph is fleeting. The firm knows it will be tough to match its 2012 results in 2013, but what about 2014 and beyond? Only ideologues expect the console and PC “traditional” game market to disappear entirely; it will still be a big business in future, albeit probably one dwarfed by the immense revenues being generated out of free-to-play models. Someone's going to be making big money in console gaming even five years from now, and it may well be Activision.

Yet such a victory could well be pyrrhic indeed. The company's sideswipes at rivals' heavy investment in mobile and social gaming are actually quite peculiar. EA, for example, shows no inclination to give up on the PC and console markets, but understands the expansion potential that exists in new fields. Activision ignores those fields at its peril. The company is publicly traded, and growth is everything. It may be able to sustain a good business in the console market for many years - even perhaps the lion's share of that business - but if its rivals are posting strong growth in mobile while Activision stagnates in console, investors will not be forgiving. Even in the face of this week's record numbers, the same question mark lingers over Activision; today they're on top, but where's the plan for tomorrow?

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Latest comments (15)

Bruce Everiss Marketing Consultant 6 years ago
It is all down to management quality. Bobby Kotick is quite simply the best businessman in the game industry.

It would have been interesting to include Ubisoft in your comparisons. How to be successful without being the apex company.
Or EA. How to be relatively unsuccessful despite being an apex company.
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Darren Stewart Videogame investor 6 years ago
Rob, another excellent article. My take is that THQ had two key problems.

Firstly, they never had any evergreen franchises except for the licensed WWE games. When you get beneath the numbers of the publishers then all the ones that do well (i.e. survive) have some wholly-owned, evergreen ip which drive profitability and, more importantly, cashflow. Something they can rely on to bring in huge amounts of money every year (or couple of years) while they spend money setting all the other hares racing and hope that one of them comes good.

Eidos had Tomb Raider (no co-incidence that Eidos troubles co-incided with the decline of that franchise). Ubisoft have Assassin's Creed. Take Two have GTA. Activision had Tony Hawk and now Call of Duty (and of course WoW). EA are the exception in that they have FIFA and Madden which are licensed, but they are huge licenses and have an almost unique place in gaming.

THQ have never really had anything. They relied upon second-tier licensed product: WWE and a whole bunch of kids products but they never actually owned any ip that they could rely on year after year after year.

Secondly, and maybe most importantly, THQ bet the farm on uDraw. Simple as that really. They spent all their cash manufacturing uDraw tables that nobody bought. If uDraw had been a success then we'd all be congratulating THQ as being the next Apple (or something like that). As it is, uDraw was a total failure and, most importantly, a failure into which THQ had invested all their cash at a time when they couldn't afford to do that. I'm sure there are lots of post-mortems about uDraw so I won't go into that but uDraw has killed THQ.

A world without uDraw may have looked very different because they had finally, with Saints Row: The Third, created a wholly-owned franchise which they could probably look to year after year to bring in guaranteed revenue.

So, I would argue that THQ were always struggling without some wholly-owned evergreen ip but, in hindsight, committed suicide with uDraw.

I'm not disagreeing with your other points but the key difference between THQ and the other publishers was that the others (that are still around) had/have at least one franchise that they can rely on year after year to bring in the revenue. It's difficult not to also conclude that THQ were reckless with uDraw. They never had the cash to develop and market this properly and, most importantly, survive if it failed. - for people investing in video games
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Daniel Hughes Studying PhD Literary Modernism, Bangor University6 years ago
Great article Rob. Bizarrely I agree with Bruce, and would like to see more about Ubisoft. They're positioning themselves very quietly to straddle this console transition, by releasing their biggest games across both seventh and eighth generation consoles; spreading, and therefore lowering the risk, and ideally, increasing the profit to be made on each machine they support. They're also the only third party publisher to extensively support the first new generation machine, the Wii U, while EA stay on the sidelines and Activision send out tentative feelers. I find it odd that the two more powerful, financially strong publishers aren't taking the (relatively small compared to the cost of supporting 360/PS3 at their launch, or perhaps even compared to new MS/Sony consoles) risks involved with supporting a new console from the off. It's not as if Wii U development costs represent a hike over 360 or PS3. This approach really could benefit Ubisoft, and I won't be surprised that if (and I also hope) in 12 months, Ubisoft are the top third party publisher on Wii U, reaping the benefits of their early push onto the system.

I'm also glad you took the long view of this; THQ are the last victim of the jump to HD systems, a jump that was too far, too fast and too soon for companies across the industry. I hope the next leap isn't as big, only because I want developers and publishers to have a better chance at staying in business and keeping their employees in jobs. It's been sad over the last six years watching middle-tier development and publishing in the West vanish, watching independent console developers become rarer and rarer, and watching a handful of companies prosper while dozens of others struggle.

Hopefully Microsoft and Sony both realise their third party partners have an increasing range of avenues to explore in the games industry, an increasing number of revenue streams to pursue. It's no longer the expectation that every third party will ask "How high?" when a console manufacturer says "jump", and that's a good thing. They have to justify the existence of their machine, and ensure that it's friendly to third parties and to consumers wallets--because six or seven years ago, neither PS3 or 360 were wallet-friendly machines for anyone, even their manufacturers, and THQ are still paying the price of that transition, even as more fortunate publishers prepare themselves for the current transition.
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Robert Fuller Studying GSP, DeVry University6 years ago
Here are some formulas I believe will help clarify the situation
Activision + WoW = $$$
Activision - WoW = THQ
(WoW - New Content) + Activision = THQ Current State
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Edward Chang Director of Product Management, NCsoft West6 years ago
The industry as a whole seems to have forgotten where ATVI was only ten years ago. It was on it's last legs compared to EA relying on franchises that gamers knew but couldn't capture the cash. Now THQ is in that position.
A couple of good strikes with CoD and WoW have made ATVI what is is today.
Was CoD really that promising against MoH when it came out? Did we all really KNOW that CoD would win? How about MMOs? Did we all think of the MMO industry as promising in 2002? I think not.
Chance does indeed favor the foolish but many times you need the unfavored foolish to demonstrate that favor.
"There but for the Grace of God, go I" - John Bradford
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Hugo Trepanier Game Designer, Behaviour Interactive6 years ago
@Robert, your formula for Activision can't be right unless it includes CoD. Its success does not rely on WoW alone.

I hope the best for THQ. I own and enjoy(ed) several of their titles. It's sad to see how difficult it's become for "average" titles to make it. In a way it's good for the customer because it forces publishers to release very high quality games if they want to survive, but in the end it may simply reduce our choices.
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James Berg Games User Researcher, EA Canada6 years ago
I think Darren nailed a big part of why THQ has stumbled (but hopefully not fallen) - the uDraw tanked hard, and it was a costly mistake because of the hardware manufacturing. Saint's Row: The Third was a phenomenal game, and everyone I've talked to around here (Enemy HQ, you might suppose) hopes THQ survives and gets back to making SR games.

Also, I echo the interest in seeing your thoughts on a Ubisoft comparison. Their positioning on the WiiU is a risk, but it could pay off big for them. Anecdotal, but I know a few people that are getting WiiU's specifically to play Ubi games.
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Robert Jacob Founding Partner, Interactive Studio Management6 years ago
I think Take Two deserves a mention. Their challenge has, is and will continue to be to create hit franchises to broaden their portfolio beyond GTA. Arguably no one has done it better over the current console cycle. Danny Billson was brought into THQ to copy that formula. Unfortunately THQ did not have the internal chops to create consistently highly rated games. Too many of their titles ended up scoring in the mid-70s or worse.

The tragedy for THQ shareholders has been the utterly incompetent Board of Directors who have looked the other way as Brian Farrell and company have driven THQ into the ground with nary a protest.
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Darren Stewart Videogame investor 6 years ago
I agree that Ubisoft are an interesting comparison. Over the past year I have increasingly warmed to them (as an investment, I'm an investor) since they seem to have really embraced better than anybody else the dumbell model which appears to be right for this point in the industry, i.e. target your products at either ends of the spectrum huge blockbusters or cheap/casual. Nothing in the middle. I won't hijack the Activision and THQ discussion but my current thoughts on Ubisoft start about here

Take Two are a gamer's dream - they claim (and it isn't hard to believe) that the average metacritic on their titles is the highest in the industry. Unfortunately, they just take too long between iterations (mainly of their Rockstar products) to really enamour themselves to the investment community and actually make a lot of money out of their ip.

Great for gamers but not so great for their shareholders.

If Activision had Take Two's ip they'd make enormous amounts more money out of them ... and at the same time be constantly flamed on the gaming forums for their cynical approach to Red Dead Redemption, GTA, LA Noire and Max Payne. - for people investing in video games
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Edward Chang Director of Product Management, NCsoft West6 years ago
One could argue that EA has exactly the same CEO/BoD set-up. But they have some franchises that hit it big. As an EA shareholder, I feel the tragedy too...
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Paul Jace Merchandiser 6 years ago
I have known for a while that it was only a matter of time before THQ tanked. I'm still not sure why they even bothered bringing in Jason Rubin earlier in the year as their fate seemed inevitable for the last several years. It sucks that people have to lose their jobs but a year from now the name THQ will be just another publishing company that couldn't successfully make it out of generation 7.

As for Activision, they have so much cashflow that they could have a couple bad financial years and still survive. It will be interesting to see how COD sales come in next year when we get new consoles from Microsoft and/or Sony. I suspect Activision will have versions of COD for all three current gen systems as well as all three next gen systems to further leverage the brand and increase their returns.
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Hugo Trepanier Game Designer, Behaviour Interactive6 years ago
@Darren, I fail to see how extensive milking of a franchise is considered good by investors... shouldn't you be worried about brand dilution? This is precisely what happened with the Guitar Hero franchise when Activision finally ran it to the ground.

Rockstar's approach is entirely different. Instead of overcrowding their own market with inferior iterations that hardly differ from the previous one, they release above-average, very polished experiences that are almost guaranteed hits. Fewer and better, so to speak, they manage to score high with critics with accordingly impressive sales that prove their titles are winning gamers' hearts. Again, I'm not sure how this cannot be positive for investors, so feel free to enlighten me.
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Darren Stewart Videogame investor 6 years ago
@Hugo, investors will simply care about what makes the most profit and milking your best franchises is how you make the most profit. We may disagree about Guitar Hero (I would argue that Activision were striking while the iron is hot), we may disagree about annualised franchises like Call of Duty and Assassin's Creed (I would argue that the public seem very happy to buy annualised iterations as long as the quality is there) but surely we wouldn't disagree that, from a commercial perspective, 5 years between GTA games is far too long? If you look at franchise sales over a five year period then GTA is scandalously low given it is probably one of the most valuable ips in the industry.

There could be a GTA game every couple of years (indeed there was until the GTA4->5 gap) and the risk of brand dilution would be insignificant.

The reason that Rockstar are allowed to take so long between iterations is that they have Take Two over a barrel, as was evident by the new contract that was signed a few years back which gave an amazing amount of power to Rockstar. I don't think Activision would allow it. They may have been derided by all and sundry following their fallout with Infinity Ward but, when push comes to shove, I haven't noticed Call of Duty suffering.

We'll never know, but I am fairly sure that if Activision had been in charge of the ip being developed by Rockstar there would have been hell to pay in the forums but the profit from those franchises would be many times what it has been and Take Two's share price accordingly. - for people investing in video games

Edited 1 times. Last edit by Darren Stewart on 10th November 2012 9:19am

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James Prendergast Research Chemist 6 years ago
@ Edward Chang:
Was CoD really that promising against MoH when it came out? Did we all really KNOW that CoD would win?
It's possible. From personal experience (imperfect memory notwithstanding) I remember being blown away by MoH: Allied Assault and the beach landing scene etc. The following games did not really deliver on that initial promise of "oomph" and bombast but I distinctly remember playing either CoD or CoD2 and thinking "Wow, this is it!" and the whole thing of different stories, perspectives and war fronts really made that game feel fresh at the time.
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Robert Fuller Studying GSP, DeVry University6 years ago
@Hugo - Success can be measured in different dimensions. When we look at each of Activisions titles CoD is indeed a successful brand that is still growing and earning it's keep. However, I would argue that WoW is what is keeping the lights on. Was the main point of the equation, but it would look like this with your help:

Activision + WoW = Steady cash flow
Activision - WoW = Some bills may not be paid this month
(WoW - New Content) + Activision = THQ Current State
WoW+Activision = ability to fund new projects like Skylanders
Activision + WoW + CoD = Steady cash flow with the possibility of creating new projects

That's how I see it.
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