Something is amiss at the industry's biggest third-party publishers. Both Electronic Arts and Activision Blizzard reported their results and forecasts in recent days, and while there's a fair bit of difference between the two companies' performance, the commonalities are also striking.
Both of them had a rough year, to say the least. Neither of them is forecasting an immediate recovery either, with guidance for the upcoming quarter being fairly unimpressive, though EA at least is sounding a note of optimism (hopefully not misplaced) in its predictions for the back half of this year.
Okay, sure, this happens sometimes: companies don't always get the results they want and product launches don't always go your way. But there's something striking about two gigantic publishers who have regularly duked it out over the years for the title of the industry's biggest and most important third-party firm, both seemingly struggling to find significant growth opportunities. Often, this would be a flashing warning light for the industry as a whole, suggesting that the entire sector is slowing down or even facing decline.
But that's not the case at all, and in many ways the games industry as a whole has never been healthier. There's growth pretty much across the board; we may be past the initial boom years for mobile gaming, but there are developing opportunities in new genres, new play styles and new markets, both geographic and demographic. Alongside this, console and PC gaming are both in pretty rude health.
"If a big games company can't find a way to grow its business in this environment, well, the problem lies with the company"
If a big games company can't find a way to grow its business in that environment, well, the problem lies with the company. You don't have to dig too deep to see the issue with both Activision and EA in this regard; both of these firms are leaning incredibly hard on big, long-established franchises to drive their growth. Call of Duty, FIFA and their ilk are great, no question, but they're deeply saturated into their respective markets, and while growth for those products is important and plenty profitable, it's also organic and pretty slow, even when it's executed well. This is the kind of strategy you get from a very mature company that's got a pretty solid, unchanging product line-up; a consumer goods company, effectively.
The problem is that game publishers aren't consumer goods companies -- or at least, that's not how they present themselves to the market. They're presented not as stable, low-risk, dividend-yielding firms, but as growth companies, investing heavily in research and development in order to create the next major hit, the next gigantic franchise, rather than sending that cash out to shareholders in the form of dividend payments (which are low for Activision and non-existent for EA). Even after their share prices tumbled last year, they both trade at an above-average Price/Earnings ratio, meaning that investors are expecting them to grow at an above-average rate.
Even more intrinsic than their dividends and market fundamentals, though, is the fact that publishing games is a business that exists at the intersection of cutting-edge technology and media -- two of the hottest sectors in the market. And EA and Activision are expected to act like it, not like firms selling shampoo or baked goods, no matter how well-managed and consistent the slow growth of such a firm may be.
It's not just expectation, either; it's risk management. The shampoo and baked goods markets won't go away entirely tomorrow, so there's a hard limit to the downturn those sectors can experience. Call of Duty, though? Any number of factors could rip the rug out from underneath a franchise like that in a relatively short space of time. Even EA's licensed sports franchises aren't entirely immune to that possibility. Searching for the next big hit and honing the company to be an effective, creative R&D machine isn't just a nice-to-have for a publisher -- it's how you make sure you're diversified enough to avoid a major franchise taking the company down with it.
"You can really sum up the most important difference between EA and Activision in a single phrase: Respawn exists"
Of course, executives at both EA and Activision would retort that they absolutely are working on the next big thing as well. At issue isn't that they're doing so; it's how much focus they place on it and how good they actually are at it. Both companies, bluntly, have a problem that stems right from the top of their leadership; nobody ought to question the actual management skill of Robert Kotick or Andrew Wilson, but you'd be quite right to ask whether either of them is best-suited to the role of articulating and implementing an innovative vision and direction for a company that desperately needs a creative, insightful and visionary hand on the tiller.
Below top management, no doubt, lies some degree of the malaise that stifles creativity at many (but not all) large companies of all kinds. Bad decision-making, internal politicking and the associated poor cost control that would destroy a smaller firm but is able to metastasise within a large company because it's protected by the sheer size of the host. Ultimately, though, the buck stops at the very top.
There are key differences, of course, though you can really sum up the most important difference in a single phrase: Respawn exists. EA's decision to acquire Respawn at the end of 2017 is currently the main thing that stands between the company and the more grim financial outlook of its larger rival; its forecasted growth is heavily reliant on good revenues from Apex Legends (which has yet to prove itself commercially and could either outperform or underperform those estimates dramatically, though there's some suggestion EA has tried to be conservative in its estimates) and on very strong performance from Respawn's Star Wars game at the end of the year. Of course, a cynic could easily point to the current ascendancy of Respawn as being only the opening stages of a cycle whose closing moments we can see with Bioware.
Ultimately, it's worth reiterating that there's nothing intrinsically wrong with a business built on established, heavily saturated properties. The question is what kind of company these firms think they are and what they prioritise. One wonders if all the excitement around games-as-a-service hasn't gone to the heads of some business leaders; allowing them to wander back into the comforting embrace of the kind of management they learned on their MBA programs, and leading them to forget that the beating heart of the companies they run is still the intrinsically risky, scary and difficult task of inventing brand new things and making them successful, not pumping a meagre couple of percentage points of annualised growth out of a decade-old product.
Until EA and Activision can both show that they're firmly in the business of building the future and not pumping the past, investors -- and everyone else -- should remain wary.