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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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Rob Fahey avatar

Rob Fahey

Contributing Editor

Rob Fahey is a former editor of GamesIndustry.biz who spent several years living in Japan and probably still has a mint condition Dreamcast Samba de Amigo set.

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