Sunday, December 21, 2008

Microsoft is Cable: Part Three Edition

In 2001, at the launch of the first Xbox, Steve Ballmer said:
We know we have to succeed [with a game strategy] but there is a broader concept there that we will pursue at some point. You can say, is it the end of the road or is there a bigger play? And the answer is yeah, there's a bigger play we hope to get over time."

I guess we got to that point. In yesterday's New York Times Bits section, Shane Kim, newly appointed head of strategy and business development for Xbox was quoted as saying:
“We have been very focused on making sure we win in the gaming space,” Mr. Kim said. “Now that we expand and our aspirations broaden, we need to think about which assets of Microsoft fit in.”

Which closes the loop on what I wrote in December 2001:
Microsoft is following a strategy that worked for it before: Get a foothold, and iterate. They want to get a position in your home and continue to expand and improve until they consume more and more of the applications and operability for the platform. MSN, after all, looked a lot scarier before launch than after, but it is still around. Xbox will be around for a long time. This is not a battle that will be won in a single platform cycle. It is a war of attrition. When measuring competitors, Microsoft, with its hubris restored, is poised to win.

and moves us one step closer to Xbox fulfilling the prophecy Bill Gates shared in his 1995 book The Road Ahead:

Companies that hope to participate in the creation of the applications and services and enter the content business through investment and/or influence want to move now, while the opportunities are open. Some of these companies connect up the television set. Part of their strategy could be to offer, for a single monthly fee, the connectivity to the highway, the set-top box and a package of programming, applications and services to go with it…. Although supplying the boxes will increase the up front capital required by the network operator, the outlay will be worth if it helps create a critical mass of users.

By making the Xbox a game platform, Bill got us all to subsidize that nasty up front capital expense. In the 2001 piece, I also detailed how the Xbox allowed Microsoft to avoid legal scrutiny and become the dominant set top box. It was not a case of insightful brilliance on my part, it was merely an exercise of my uncanny grasp of the obvious. After all, Bill Gates laid the whole thing out 6 years earlier.

My premise all along was Microsoft would lay low, until they gained an installed base of 20 million or so (according to I was off by about 5.9 million), and then they would flip the content switch. This would be late enough for the gamers to be entrenched enough not to reject the box as a CDI/3DO everything box. It would also be late enough to have family members who are not game members wondering if there is something they can do with the box. It would also be a large enough base to really excite content folks with the audience size. Microsoft made some smaller deals with content creators and studio deals for film distribution, but the first real step in this direction was Netflix. Mr. Kim outlined the next ones in the article:
He argued that while there might be hundreds of video sites, most of the activity was concentrating on a handful of sites like Hulu and YouTube. So his first instinct is to cut a handful of deals that integrate the Xbox more deeply into such sites.

(If you have not checked out Hulu yet, you should. The the Mac Mini plugged into my television, I was able to do Dick Van Dyke Show marathon at the site, as well as introduce my son to the wonders of Lost in Space.) It's really neat to have all the iTunes stuff on my computer and iPod. If I want to spend more money - I actually did- I can get a Mac Mini, or less money and a get a somewhat anemic Appletv, to move it to my television - or I can use my 360. Before purchasing the Mini I was able to use the 360 to channel media from my Mac, but it was kind of cumbersome and the Rube Goldberg essence of the set up received a very low Wife Acceptance Factor score. Microsoft is fixing this, soon, I won't even need the Mac. In typical Microsoft style, they let others build the content stores while they own the OS and in a very web 2.5 kind of way, the billing system and the community.
While I am gloating about how right I was, I should admit, where I was wrong. I wrote:
I can see the argument and the germ of a massive marketing campaign: "Don't you want to edit your home videos using XP and then watch them in your living room with your Xbox? And of course you want to have access to your Microsoft Passport to make purchases online from your living room. Oh, yeah, and that Windows Media Player thing…" Through services such as Microsoft portfolio company Intertainer, you can access many of the offerings available via cable, right there in your Xbox. Intertainer utilizes Microsoft's Windows Media Player and related billing systems, and offers 65,000 hours of programming from more than 70 content providers including Warner Bros., DreamWorks, Twentieth Century Fox, New Line Cinema, NBC, Discovery, A&E, ESPN, Pearson Television, Warner Music, Sony Music, and others. This does not even address content available on the World Wide Web at large, including first-run pay-per-view movies, which are, or will soon be, available from companies like Moviefly, CinemaNow,, and other online movie services. These have small consumer bases today, but the offerings become significantly more appealing when they come through your television set rather than your PC. If there is a broad installed base of Xbox consoles in use, it will also become among the first viable platforms for interactive television programming.

Intertainer went out of business before Xbox Live happened, so NBC and Fox content will come in through Hulu, as well as a ton more. Movielink was acquired by Blockbuster and Cinemanow has been ignored in favor of direct distribution deals and Netflix for catalogues. I also though Passport was going to be pulled into the Xbox, when in fact, Live is being pulled into the PC world. Hey, if I am going to toot my own horn when I am right, I do have to point out the mistakes as well.
Mr. Kim says he is now working out a strategy to make money and not simply be a carriage provider. This makes sense, but I believe he is only feigning humility. First of all, carriage providers are subject to considerable regulation, not something Microsoft is about to walk into knowingly. Second, more significantly, as I wrote last April in part two of this seemingly ongoing series, Microsoft enjoys leveragable advantages over cable:
Microsoft's advantage over cable is significant as well. Cable companies must pay for the boxes to be installed in people's homes. We buy 360s and subsidize R&D through game purchases. Cable companies compete each other by using a shotgun approach to broadcast everything under the sun to every subscriber. They must secure a lot of edge case content to broadcast into every micro, nano, niche interest known to man. I have never even surfed through the Golf Channel. Those 30 or so Spanish language channels? Nope, and there are a lot more. My cable service is kind of like British food in the 90's. Sure we give you a lot of uninteresting and possibly overripe content, but just carve off the bad bits and there is still plenty of good stuff underneath. Microsoft is able to narrowcast to a homogenous user base so they can post content and serve on an as needed basis. The audience programs their own channels. Same variety, less bandwidth. Relative to a cable company, they are heavy on storage, low on serving. Oh yeah, and they don't even pay for the pipes. We have to pay for the ISP to connect us to the subscription service for which we pay a monthly fee. That is enough to make and MSO break down in tears.

Finally, and most significantly is cable is weighed down by its legacy. Microsoft launched just a few years ago. So they are able to roll out with IP addressable boxes with powerful processors and built in hard drives. Every time Microsoft identifies a new feature, they are able to download an update to the installed user base. Every time the cable companies realize consumers want things like TiVo, they have to source it, engineer it into the system, and then figure out how to get consumers to accept it. This puts them years behind the market. The more incremental boxes in the field, the larger the variation in the installed base. Stealing a page from Apple - the first 360 dev kits were Macs - Microsoft's installed base is homogenous and the system is closed.

So I guess while we are all trying to figure out whether Microsoft beat Sony yet, or if Nintendo is really ahead of Microsoft, Microsoft is targeting the cable systems and satellite providers. What is the aggregate value of Time Warner Cable, Comcast, Charter, DirecTv, Dish Network and Bskyb again? Games are no longer the driving force of Xbox, they are only division.

As much as I love Apple, and would love to see a company which replaced a blue screen with a red ring not own the set top in my living room, I think they did it. There is no question Microsoft is the hands down leader in set top boxes, they just haven't told anyone yet.

Tuesday, December 9, 2008

A Brief Reminder of Gamestop's Addiction: Re-Run Edition

This post is possibly more timely today than when it was originally posted.

I am a bit behind the times, but I just read gamedaily's interview with Gamestop's new CEO and it kind of made me feel icky in my tummy. This guy is in charge of about a third of the video game sales and he is not on our side. His positions on digital distribution and used games make him sound either delusional, or like an ostrich with his head in the sand.

BIZ: What are your thoughts on the digital distribution options that connected consoles are introducing to gamers today? Do you see today's gamers bypassing retail one day, as music consumers currently do with iPods and iTunes?

DD: The first digital distribution was Napster and it was illegal. Let's just start there. The software publishers are afraid to death of piracy. Once a full game is lying on a hard drive, there's the potential for piracy. Aside from the games, the bandwidth, etc., our studies have concluded that the network won't be in place to do digital distribution of full games until 2020 to 2025. And that's using today's size, but as consoles get more powerful, games get bigger. Right now, a 30GB game with your best T1 line is about 72 hours to do it.

He is running our biggest retailer, but doesn't understand the market forces operating in his favor. Or maybe he just won't talk about them publicly. This guy is the proverbial little boy with his finger the dike. He is trying to hold his position as toll taker between consumers and publishers, while pressure is building on both sides of the wall. Consumer and publishers both want direct downloads. This model is currently failing Hollywood because, as he correctly points out, technology circumvents distribution chokeholds. The game industry is tracking a few years behind music and television, but there are definitely cracks forming in the dike. Poor Mr. Gamestop CEO does not realize placing his finger in the dike will not stop the leaks. He believes bandwidth the impediment to game downloads, but it’s not. Publishers want to put games on line, but can’t for fear of alienating the retail channel, and hardware manufacturers can’t allow it for fear of losing the opportunity to sell at retail. Once this fear is allayed, the market for game downloads will flood into existence like music and television before it.

Gamestop, Wal-Mart, Target and all the retailers hold shelf space over the heads of the publishers and console manufacturers. If publishers undersell or consoles allow full game downloads, the retailers won't stock them. It's their only weapon. When we look back to the music industry, downloads were initially slow, but a billion downloads starting happening overnight. When Apple made it easy, a billion sales happened over night. The adoption curve was so steep it all but bent over on itself. Television is following the same adoption curve, and there is no reason to believe games won't follow the same curve. The impediment is not technological, and it is not a problem waiting for a breakthrough, it is artificial, and will disappear on its own. Today, publishers and the consoles need retail to get hardware into market, but as we move to the back half of the console cycles and there 50 million plus of each console in the home, expect to see more direct downloads of whole games. Once it happens, Mr. Gamestop CEO is going to get very wet. Like Sony music who kept trying to come up with new CD encryption and NBC who tried to leave iTunes, he will realize, you can't stem the tide. The publishers will go direct, because they can. He tries to make an argument he publishers will make less money direct, but unlike his store, they will get paid for every unit sold on the console.

BIZ: Do you feel threatened by the lower cost digitally distributed games offered to consumers?

DD: I would argue that the average value of a current generation game is about $20. We will give $1 billion out to consumers this year, who will use that money to buy new -- not used -- games. Consumers have been conditioned that their video games have residual value, just like a car. The real cost of a game today isn't $59 but $39. Nothing that has been digitally distributed retains the same value as a retail version; it's always less. Let's say a retail game is $39. Microsoft and Sony are the gatekeepers for their consoles. And if you're a third party that should scare the hell out of you because that's the only way to get to your customer. They'll take 10 to 15 percent. Video game publishers sell me games today for $48 wholesale. If they go direct to the customer they'll probably get about $30 for them. They'll get less for the game if they bypass retail.

If games are really worth USD 20, why is he paying USD 48 to get them - because he sells them a lot of times. As I addressed in an earlier post, his used game policy drive the value of the game to USD 20. Games do not have a value of USD 20. Games in Gamestop have a value of USD 20. If publishers got paid on each download sale, something which does not happen at Gamestop, not only would they more than make up the difference, they would maintain the higher price. He also tries to argue used games are a sales driver, but the argument just doesn't hold up.

BIZ: What are your thoughts to those in the publishing business who say used game sales are hurting the games industry?

DD: I do talk to many publishers about this. We will give out $1 billion worth of credits that will be used to purchase new video games this year. New games in the U.S. this year will be $10 to $12 billion, so 8 to 10 percent of the total dollars used to buy new games this year will be from currency from GameStop's trade-in program. What we see is that consumers want to buy new games, but they don't have the cash because our trades go up as our new game sales go up. They're using trade-ins to buy games because more money is going into their gas tank. It's a source of currency that helps drive the video game business. I think the argument that it competes with the new games is false. Imagine what new car sales would be like if you couldn't trade in your old car.

Used game credits are stored value held by Gamestop. The contribution of the stored value credit toward the new game puts the new game into the stored value system. The publisher gets paid once on the transformation, but then the game becomes currency in the Gamestop system. Once in the system, the unit is sold an unreported number of times. The total Gamestop currency grows with games in circulation, and each unit of growth removes value from the publishers. Mr. Gamestop CEO assumes used games are only used for acquisition of new games. They are not. One billion dollars worth of credits are used to pull the games off the shelves the first time, but how many times are other used games sold? There answer, is enough to generate about another USD 2 billion in revenue. The publishers don’t get paid on those. Gamestop has a 50% margin on used games, much better than the 21% margin on new games. According to their SEC filing, 44% of their gross profit is attributable to used games and on a unit basis,53% of all game sold are used. If the industry generates USD 12 billion next year, Gamestop’s game sales, based on market share would account for USD 4 of those 12 billion dollars. My math skills aren’t so great, but this would mean USD 2 billion in sales are attributable to used games and publishers are only paid on 2 billion for new games, with an additional billion in stored Gamestop value going toward new games. Consumers are actually subsidizing Gamestop’s inventory with used game returns. Even if we assume every purchase made with credits comes from someone who would otherwise not purchase the game - major leap of logic - game publishers still lose 2 billion dollars a year.

I don’t buy Mr. Gamestop’s residual value argument either. Sure I look at depreciation when I buy a car, but I’m not buying a car from Gamestop. I am buying a game. Moreover, the auto industry makes money from used cars through the sale of parts and dealers make money through service. Game publishers make money once, on the sale - at Wal-Mart and only sometimes at Gamestop. Which brings up a good point. Wal-Mart has roughly the same market share as Gamestop, but there is no game trade in. They do the volume, at full price without the subsidy. Gamestop didn’t create the concept of residual value, they created the concept of the cheap game. When you buy a game at Gamestop, it goes something like this:

“Oh I see you are buying Super Death Ray Auto Blaster 17.” says the counter guy. “You know its an “M” rated game.” Gamestop did have a 94% compliance rate in the most recent FTC study.
“Would you like to buy it used. You can have a [10 to 50%] discount.”
“But it ust came out two days ago.”
“I know, but we got some back, you can get a discount and it’s guaranteed to work.”
The consumer hears “Would you like a kick in the balls or this nice shiny game?” Mr. Consumer, who already decided to purchase the game and not rent, buys the used game. He would be stupid not to.

Mr. Gamestop CEO please be straight with us. You figured out a way to make money without paying for inventory. That’s cool, it’s the American way. While its self defeating in the long run, in the short term you will make money in a crack dealer kind of way. Please don’t insult our intelligence though. In reality you are not any different than the dude selling bootleg Batman DVDs on Canal Street in New York, you just have a bigger table. And don’t delude yourself, those publishers and consoles who say they like you, they do, because you are selling 33% of their product. Let’s see who shows up at your birthday party once your market share falls. I have a sense you will lose some support. If you want to take a look at the Ghost of Christmas future, talk to your counter parts at Circuit City and Toys R Us. They used to have your market share too.

Wednesday, December 3, 2008

Congratulations to the New Secretary of State: Michael Morhaime Edition

In the first chapter of his latest propagandist tome, Hot Flat and Crowded, Thomas Friedman addresses the issues arising from increased security around embassies. He writes about moving the US Embassy in Turkey from the city center, where it existed for over one hundred years, to a remote location, encircled by impenetrable walls. The original embassy was in the crowded town square. The new embassy was far removed from the population and very much resembled a prison. In his words, it could have been used as location for the filming of the Turkish prison film, Midnight Express - you know, the one with the tongue scene. He referenced a number of diplomats who explained how difficult it is to convey anything other than negative thoughts about their country from behind walls. When diplomats are allowed to walk out the door to get a cup of coffee and invite citizens into the building, they get a sense of the culture. When everyone is locked out, they get a sense of the people running the government. More importantly, they lose the ability to talk to people. As Friedman points out, it is harder to be enemies with someone you know. The walls remove the ability to know.

I was thinking about this on the morning of the announcement of Hillary Clinton as our new Secretary of State and realized how wrong the designation really is. You would think our first cyber President, the guy who is already speaking to us on Youtube, would realize effective diplomacy is already happening. World of Warcraft is played in 119 countries, including Bosnia and Herzegovina, Congo, East Timor, Lebanon, Isreal, Micronesia, Rwanda, Sierra Leone, Tajikistan, among others. These are countries we don't do a very good job reaching. Contrast this with the 80 countries in which the US has US Commercial Service offices with business and trade specialists, coupled with the easier access to WOW and you can start to imagine the impact. People in those countries learn about us through the media - often state controlled, the Web - often censored, and now WOW. Which provides the most favorable introduction? Trade missions, embassies and even tourism results from discussions, negotiations and least visas with hosts of restrictions. WOW drifts over borders like a fragrant phermone and invites players to join a community. While all of these citizens of the world are not necessarily playing on the same servers, or interacting with other, their interaction with their friends is being facilitated by an American export.

I am not advocating the type of propaganda of not very well hidden messages of war time films, or the insertion of messages to the players. These tactics would be no better than dropping leaflet bombs and would quickly detract from the integrity of the game. Our historical unidirectional messaging through media allowed the world to see what we want, but other than through their dollars, they couldn't tell what they want. With the dissemination of WOW, everyone can hear what everyone else has to see in a manner even more powerful than through web 2.0 tools. We can use this tool not only to talk, but to listen. The lecture turns into a discussion. No special messaging, no government controlled input. Just people, talking to people while they whack at rattle cage skeletons.

Web 2.0 lets people communicate with each other and there is no question it is a revolutionary tool, but WOW let's people play together. To Friedman's point, if you are friends with someone you can't be their enemy. It is tough to be enemies with someone after enjoying a four hour round of golf with them. WOW is the new golf course. People from all around the world are playing with and against people they would otherwise never meet, and in many cases not even speak to. But in the virtual world of WOW, the person's character - maybe the pun was intended - is not determined by where they live by accident of birth. Can you hate the guy who stood by you in battle or hung out with you at a festival? The power has already been recognized by the Chinese government. After realizing the influence Chinese MMOs have over the younger generation, the government, in a very Chinese way, started to regulate not only the number of new MMOs allowed to be released in a year, but the content of the MMOs. They want it to be Chinese.

Friedman points to a time in history where Richard Nixon came to the same conclusion. Not our most popular president, but after you read this you may consider him to be the true first cyber president. In the famous kitchen debates with Nikita Kruschev in 1959, Nixon and Kruschev were arguing about relative technology capabilities. Nixon conceded the Russians were more advanced in harnessing the power of rockets, but the US had better color television technology. It sounds kind of silly on its face, even smacks of American consumerism, but when you dig down, it is very smart. Rockets are used by governments and televisions are used by people. The televisions can connect people. Nixon so much as said this when he invited Kruschev to send more of his content and himself to US citizens through color television and suggested America should do the same into Russia. Of course it never happened, but it makes me wonder whether the cold war would have been so cold if we actually heard directly from each other rather than through the filters of domestic news and governments.

WOW provides the communication platform directly to the generation of people who drive the culture in each nation it touches. We invited the United Nations to America because we wanted to host the platform to facilitation communication among world leaders. Now we are on the cusp of providing a platform for modern communication among the world's citizens. What are we going to do with it?

Admittedly, this post is kind of over the top, but as I've said before, in the words of Peter Parker, "with great power comes great responsibility." WOW didn't set out to be anything more than a game. While relationships and communication are arising on the periphery, they are incidental and not by design and the secret to peace in the mideast has not yet been divined from the game. But when considering the unlimited potential of this platform, we must acknowledge it's not just a game.

Used Games: People Are Waking Up

I hate the used game market. I first wrote about last February, but at the time, no one else seemed to care. The "used games are bad meme" is finally starting to build. Folks from Epic, Atari and others spoke out against the practice in recent weeks, while the Gamestop CEO continues to rationalize the value to the industry with voodoo math (In case you are interested, I addressed the flaws in his argument a few months ago.) I guess caring and speaking publicly are steps in the right direction, but the solutions proposed don't address the issue.

The publishers seem to think episodic installments and downloadable content will help, but if they read the message boards, they will quickly learn it will only exacerbate the content. So long as we have trade in value from Gamestop, games become depreciating assets. Gamers are getting a quick lesson in beginning economics. The game is burning value as it stays on the shelf. Each day they way the value to them of keeping the game, against Gamestop's posted value for a trade in and the currently available new games. The quicker they turn it in, the more money the get, the more popular game inventory Gamestop has and the less incentive Gamestop has to re order. It is a great cycle . . . for Gamestop. Contrary to Mr. Gamestop CEO's assertion, games do not have an inherent residual value of $20. Gamestop creates a residual value, along with an incentive to return the game as quickly as possible to maximize the value. Downloadable content plays directly into Gamestop's hands.

With the exception of Rock Band and Guitar Hero, DLC expansions are delivered no more than quarterly after the release of the game. The value of keeping the burning asset on the shelf is not increased by DLC. It is undermined by the gap in time between initial release, and expansion release. By the time the expansions are released, the value of the game at Gamestop has declined significantly, allowing the gamer to repurchase the game to take advantage of the DLC, and return it to the store for another credit. Chaching, chaching for Gamestop on two sales, nothing for the publisher. In an even uglier scenario, the gamer just throws the game back into their Gamefly cue. Publishers may feel they are making money on the downloads, and they are, but downloads only have value after the significant investment made in the initial release - the one suffering from a lot of lost revenue. Moreover, DLC is selling into less than 50% of the initial purchasers and in most cases less than 20%.

We have to treat the disease, not the symptoms. We cannot accept used games as a fact of life. We must take a stand against it. There are a couple of ways to address the issue.

The obvious answer is to make all games downloadable only. It would be great to be able to convert on an impulse directly from a demo. Technologically, it is more than feasible. Practically, it is just not. The biggest problem is we don't have the technology to download a console. Every time the download issue arises, the retailers threaten to stop selling consoles. The downloads will happen eventually, but, like the music business, it will be in the form of a tidal wave hitting the shore, slightly later than it should. Because we can't flip the switch and go download, we have to look at other options to make sure we still have a business when download time comes.

First, don't sell to Gamestop. I am not talking to consumers, I am talking to publishers. It will hurt in the short run, but not as much as you may think. Gamestop sells a lot of games, but when we factor in the losses from used games and MDF paid for every corner of the store, the margins are lower than other retailers. Gamers go where the games are, and if Gamespot doesn't have the new games at release, they will stop going to Gamestop. Most of the lost sales will be made up by other retailers. You may argue about not being able to hold price at Wal Mart or Best Buy, but the increase volume from consumers who no longer buy at Gamestop will allow you to maintain price longer. It is just supply and demand. The gamers learned about it, publishers should too.

Okay, how about something a little tougher to implement, but a bit more palatable. Make games valuable only to the initial consumer. It is kind of like EMA's proposal for activating games, but uses Gamestop for promotion the same way the MMO companies used Chinese software pirates. What would happen if the first purchaser was able to play the whole game, but any subsequent purchaser could only play as far, or with the assets, the publishers wants them to use? A purchaser of a used game would be able to use console stored value points, or a toll free number if not an on line subscriber to unlock the balance of the game. If this sounds familiar, it should. iD used this model with Doom and it changed the business. Consumers will dictate a reduction in the price of the limited game, making it a more attractive purchase, reaching a larger audience. If the game unlock is set at $26, or about the amount the publisher take to the bottom line for full price unit sold at retail, the publishers will receive the currently lost revenue and the Gamestop price could be reduced to roughly the same amount, and no one would care. Some people won't convert because they won't like the game or they may be sated by the shortened experience. But the revenue received from the conversions which do occur is revenue which would otherwise have never been received. Gamestop becomes a promotional partner rather than black hole of revenue. The reduced price will enable the game to reach more people than even the fully accessible game. Which gets me to the final point.

When you point a finger at someone you are pointing four at yourself and this is no exception. At 59 USD games are the most expensive piece of media sold to consumers. The home video market started with a price point of 99 USD and consumers largely yawned. Sales were in the tens of thousands. When prices were reduced to 19 USD the numbers climbed to the millions. The used game market exists in no small measure because our games are too expensive. People don't like paying so much. I hear the arguments about how expensive production is but movies cost more. We can get rid of institutionalized used games, day and date rentals, explore new windows, release less expensive bits episodically and more. In other words, think of ways to grow the market. When Take Two did it with their Madden killer they made the first in roads against the greenest of EA Sports evergreen franchises.

Again, simple economics - supply and demand - prices go up demand goes down. Some may argue the elasticity of demand is small on something like a game, but I do not believe. Nothing in America is perceived to have a lower elasticity than gasoline, but when we saw a significant rise in price, we saw the first demand reduction in history. We determined the value of a gallon of gas and it was less than the one set by the market. Game sales considered as a function of installed base are stagnant from cycle to cycle and year to year because the price is stagnant. We spur demand by console price reduction, but not front line games.

Not that we've woken up to the disease of used games, let's work on the cure.

Monday, November 24, 2008

Lara's Back But Eidos Fumbled: Honesty is Such a Lonely Word Edition

Honesty is such a lonely word.
Everyone is so untrue.
Honesty is hardly ever heard.
And mostly what I need from you.

(Billy Joel)

Lara is back and I am happy. I have been playing Underworld since the release last week and think this is the best Tomb Raider since the first one. The environmental puzzles are great fun and not the too hard ones from later Tomb Raiders, the graphics are updated to exactly where they should be, and Lara's moves are updated and connecting me to Lara the way they did in the first one. She still shakes her head when I ask her to do something she doesn’t want to do, and I am duly impressed by the way she angrily brushes the side of her face when I rudely walk her into the foliage. Apparently, the critics don’t feel the same sense of nostalgia. Sure, bringing the identical Duke Nukem to Live Arcade justifies an 85, but roughly the same amount of time it took to build the Eiffel Tower to improve the experience and restore an icon justifies only the middle seventies. Or does it? The reviews are coming in mixed, and Metacritic, unsurprisingly is focusing on the lower ones.

Eidos, sadly lacking in experienced PR and weak in the product pipeline department, like most publishers knew the scores would be all over the board. Allegedly, they wanted to control the artificially and wrongly influential Metacritic, by timing the release of the bad reviews. There are two flaws in the strategy. First, Metacritic picks and chooses reviews like a four year old choosing M&Ms out of a bowl. The site happily skews a score in one direction or another, often ignoring reviewers included in aggregations on its own site. Second, Eidos was honest. All publishers manipulate retail promotion and review scores. They just don't talk about it.

I remember walking into EB years ago, before I joined Eidos, with a publisher who still thought EB promoted the games based on quality. She was in charge of the late, not so great GTE Interactive and had shipped Timeline the day before. The title was really expensive and somewhat of a break through in some regards. Tomb Raider was two and a half months from shipping.

"Hi, have you heard anything about Timeline?" I said, beginning my one act play.
"No, never heard of it." Considering my positioning in the store blocked his view of the box full of Timeline shelved behind me, the response was somewhat reasonable.
"How about Tomb Raider?" I prodded.
"Of course, it's amazing, they go this chick and she jumps and moves, can't wait for that one." Considering he was one of the recipients of a coffee mug and squishy ball from Eidos a week before, this response was reasonable as well.

It was a lot cheaper to buy counter guys then. They got squishy balls, mugs and shirts, managers were wined and dined at the EB shows and E3. Critics were in a whole other league. In those days junkets were not only permitted, they were expected. Game presentations would happen in Las Vegas, or on a cruise or something, with lots of liquor, free airfare and stuff I shouldn’t write about. This treatment started to be frowned upon in the late nineties, only to be transformed into after hours basketball games, happy hour meetings and of course, the ever present "cute PR chick." Kind of like Chicago in the thirties, everyone knew this was going on, but unlike Eidos last week, no one put it in a press release.

The market has evolved, a bit, but the only changes are the nature of the payoff. When it comes to dollars, many of the review sites employ carrots and sticks. The carrots are more obvious than the sticks. Did you ever notice the review scores for games tend to be higher on sites where their artwork is the background image for the page? This may give you cause to question the integrity of the review when you read it on the review site, unfortunately, the ad is not there when you see it on Metacritic. The whoring of review scores can lead to good things. If reviews weren't skewed by ad dollars, we wouldn't have unbiased sites like Giantbomb to read. The sticks are harder to find. A consumer may see an exceedingly low review on the site, but they may forget Atari sued a critic and may never even know another game's publisher stiffed the site when it came time to pay for the ads. All they say are inexplicably low review scores. This is not to say publishers are entirely innocent.

Publishers in all media time release of reviews. Sometimes the timing is based on content. Movie studios don't hold screenings if films are going to be bad. Book publishers hold back galleys, and game companies don't send out review copies. Other times marketing decisions drive the timing. If the review comes out too early, marketing may peak before the product is available. If all the good information and really cool screen shots are revealed in one magazine prior to release, the others may not even mention it – and the publisher can forget about getting a cover without a grant of exclusivity. By definition, exclusivity means the publication will be the first to reveal the information. The only way for a publisher to live up to its end of the bargain is to – gasp - ask others not to release reviews until the exclusive period is over. In the interest of timing and efficiency, they are willing to let the others have copies prior to the expiration of the exclusive period so other reviews can get out quickly. These copies are provided with the understanding the results will be kept confidential. It is actually all pretty innocent. Especially when you are sitting on a very good game.

Kotaku, who did not get any exclusives on Tomb Raider, got all up in arms at the suggestion, later stated to be untrue by Eidos, that Eidos' PR was holding by review scores to influence Metacritic. If true, shame on Eidos, this is bush league stuff. If Eidos truly wants to influence Metacritic scores it should do what the other publishers do to ensure high Metacritic. Buy ads, get critics in early, dole out exclusive content and get guaranties of 90 and above in exchange for exclusive content.

4000 Miles: Bragging Edition

I passed the 4,000 mile mark today with my trusty Nike +. I knew I was going to do it with this run, and I was excited to plug my iPod in to confirm my achievement. When I passed the last milestone, at 3,000, it was the highest category, I was certain I leveled to the highest class. When I plugged it in, I was taken back 22 years to Mount Fuji.

I spent the summer of my junior year of college on a management study tour of Japan. Six weeks in Tokyo living in a closet sized room, with a very convenient one piece bathroom sized just right to be packed with a twin in a Winnebago and touring factories. I have to admit the invention of the single piece of hardware to serve as a sink faucet and shower head was ingenious. My tour was to be evidenced by a research paper comparing and contrasting unions in Japan and America. I made sure I understood the distinctions in the culture by researching various model bars and all you can drink clubs on a nightly basis, guarantying a very Japanese hangover the following morning.

One night, I and a couple friends took a break from partying to climb Mount Fuji. Someone told us it was cool to see the sunrise from the top of the mountain. Having seen many sunrises from the bottom of Ropongi, I figured this could be an improvement. Before you start to think the climb is connected to completing my 4000'th mile by athleticism, I must explain, climbing mount fuji is much more like riding a Segway through Venice Beach than conquering Kilimanjaro. We heard it would be cold, so we put on a couple of layers of clothes, stocked up on flasks of Whiskey and jumped on the bus to the foot of the mountain. A trailhead as wide about as wide as a ten lane freeway wound its way from the parking lot up the side of the mountain. We stopped at the small stand and bought our walking sticks and passed on the water bottles. This was the first of many stands up the mountain where you could buy water and burn an imprint into your walking stick which either indicated the height you achieved on the mountain or some kind of cruel commentary on your decision to hike up a mountain in the dark. I couldn't tell, it was Japanese.

We made it up to the first checkpoint and proudly presented our sticks for burning. It think the altitude was 50 meters. I noticed the bottles of water we did not want to carry were more 500 yen more expensive than at the bottom. We were moving strong and walking up the well defined path, holding our place in the crowd. It was not quite as crowded as a New York sidewalk, but it would not take many more people to get there. As we passed the second and third checkpoints we started to get cold, and tired. Whiskey was not the best idea as it was clearly contributing to both. By the time we got to the half way point, the water was a good 5,000 yen more than it was at the bottom and we were regularly being passed by little old ladies who were 85 years old if they were a day.

So how does Mount Fuli tie to running? When I plugged in today I noticed 4,000 was no longer the highest level. Nike's new expansion pack to the achievements all the way up to 10,000 and there were half a dozen people in the category. I am sure 4 of them are over 85.

Thursday, November 20, 2008

Midway's Problems Are Not Unreal: The Press Creates Another Story Edition

This morning the interwebs lit up with headlines like this: "Unreal Engine 3 Fingered in Midway's Struggles" promoting articles tying Midway's problems to UE3. From the headlines I thought this was a Midway finger pointing article. This would almost seem plausible if Midway had a single profitable year since 1999, a year when UE3 was a but a glimmer in Epic's collective shorts. In reality, Midway was not finger pointing. No one was. Much like Detroit's auto industry, Midway's problems stem not from technology, but pure and simple bad management. In fact, the very article used as a foundation start the kindle the anti UE3 fire says exactly that. The game journalists who picked it up either decided not read the whole thing - maybe a habit they picked up from reviewing games- or they decided flowery prose is more fun than the truth.

The original story appeared in Daily Variety from Ben Fritz. He quite accurately wrote:

To find out, I spoke to several ex-employees. And while there were lots of little things, one issue popped up again and again: Midway's decision to license Unreal Engine and use it for ALL its games.

Our gaming journalist brethren either read that part and moved on, or simply engaged in an extended game of telephone, copying each other's postings, something many of us experienced before. They failed to look at the next paragraph:

"The mistake we made was, instead of just taking the base Unreal 3 engine that 'Gears of War' was made on and building games off of that, we let our tech and product development guys try to really modify the engine to add all these diff things," one ex-employee told me. "It was a ton of new technology which they just weren’t capable of doing. It put all the games way behind schedule."

Ben didn't blame Epic, Midway didn't blame Epic, so why is everyone else is blaming Epic? The employee quoted in the article clearly explained it was Midway's decision to modify the code base, not the engine itself that led to problems. Not a big surprise. UE3 is quite polarizing. Developers either love it or hate it. The folks who try to reengineer it tend to hate it - especially around the time of new code drops. These are the folks who buy a boat and complain about how poorly it handles on the freeway. The folks who build within the code base, or build accessions on top of the existing technology love it - even around the time of new code drops. This concept is nothing new. If you use a technology or anything for that matter, for its intended purpose, it works. If you ask it to do something it can't do, much like my 13 year old son, it will rebel in frustration.

Midway's problems don't stem from the Unreal engine. They stem from management's failure to identify the problems arising from its dictate that every Midway game would be built on Unreal. This is a great strategy if every game you are building is an FPS or over the shoulder shooter, or if the teams tasked with expanding the functionality were experienced with the technology and working in concert. Unfortunately management was either not being told what was going on, or chose not to listen. Unlike the other publishers who also suffered delays moving to this generation, Midway took a very, very long time to respond to technology issues. Couple this with a conscious decision by prior management not to work with external developers and not to exploit a rich library of beloved IP or build on the rays of sunshine in the catalogue like million plus selling Rampage for the Wii, and the company will find itself in trouble.

The good news is the company woke up and acknowledged the shortcomings. Management has been changed from the top down, a decent old school product made it out the door, and they are supporting the release of future products. The articles more correctly should say, "Midway identified what went wrong and hopes they turned the corner: and Epic had nothing to do with it."

Friday, November 14, 2008

Brash, We Hardly Knew You: RIP Edition

This just in, hardcore gaming publication Daily Variety is reporting Brash has shut its doors. While it would be fun to make some "Brash and Burn" quips, if true, the high profile flame out will make it harder on all of us and perhaps set external financing efforts back a bit. It really would have been better for us all if it worked.

Fortunately, even though stock prices for other publishers are down, sales appear strong and the closure, if true, seems to be a reflection of poor execution compounded by bad business decisions, and not the industry.

In other news, Generalissimo Francisco Franco is still dead.

Hooray for Harmonix: Everyone's Happy Edition

At the top of the last post I said I wanted to write something happy and good. And I do, and now I can. One of the best things I can say is too many great games came out to leave time to write a post. I'm in the business because I love games, and I purchased every major release in the last few months, logging countless hours in everything from Dead Space, to Mirror's Edge yesterday. Many of these games couldn't happen on the last generation of console, but one in particular could, and that's the good thing I am writing about.

Viacom's recent public filings included a statement indicating additional payments would be made to the Harmonix founders. Significant additional payments would be made to Harmonix founders. While admittedly seething with envy, I am truly excited to see the payments being made. Our history is littered with mega payments for "the greatest developer" in the world which later turned out to be overpayments for news events. The mega acquisitions, more often than not, resulted in dissolution of the thing the publisher acquired and the corresponding loss of the developer's spirit. The very thing the publisher tried to own. John Riccitiello spoke to this point at DICE last year and acknowledged EA's is shortcomings in the past and said it is striving to change the culture. Time will tell, but what about the others? The boys at Infinity Ward don't seem so happy. At the other end of the spectrum as those developers who got the "You know we can pay you the royalties we owe you, or we can call it an acquisition and you can save all those taxes" deal (I wish you all were in the room to hear Diego Angel's reaction that suggestion.). These deals turn into publisher ammunition in acquisition discussions leaving developers to constantly wonder "where was I when the stupid money was being spent."

The Harmonix announcement is so great because it shows Viacom not only got exactly what it paid for, it got more. The deal was drafted in a manner to compensate the developer when products did better than anticipated. In case that was not enough encouragement, Viacom left the company alone to do what they do best. Left to its own devices without publisher interference, cultural indoctrination and scores of publisher ground troops, Harmonix followed its Guitar Hero mega hit with its Rock Band Mega Hit. Now for the cool part. Rather than milking the franchise and forcing Harmonix to grow a dozen teams in all directions until the property ends with "Rock Band Babies," Viacom supported Harmonix in its pursuit of Beatles music for a new product. How cool is that? Just in case we have not reached the pinnacle of coolness, rather than challenging the additional payment Viacom made it, and welcomed it with the following statment:

"We may not have anticipated the payment would be that high, but it's based on what they have achieved,'' Viacom spokeswoman Kelly McAndrew commented to Bloomberg. "If they are making more money for us and we have to give a little back, that's OK."

Tuesday, November 4, 2008

Eurogamer has Multiple Personality Disorder: Sybil Edition

I really, really, really want to write something positive. There are a lot of good things about the game business, even in these times of layoffs and economic hardship. But I am more motivated to rant about things that really bug me than things that are going along swimmingly. One of these triggers just occurred in connection with Legendary, which in the interest of full disclosure, I helped to place with publishers . . . twice - that's another story.

A couple weeks ago the folks at Spark Unlimited were happy see their hard work was being recognized in the September 2, 2008 preview on Eurogamer which said:

Instead it focuses all of its resources into doing one thing: providing really good, entertaining, run-and-gun gaming. Stripping away the various complex systems and ideas which have accreted on the FPS genre since the days of Doom, Legendary instead focuses on using the power of modern hardware to increase its scale. In part, this means putting plenty of creatures (dozens, in some cases) into your encounters, recalling the frantic energy of Doom itself. It also, however, means really turning up the scale to epic levels in other ways. . . .

We ended our tour of duty pretty satisfied with the excellent shotgun and scoped assault rifle combo we'd picked up, but there are presumably plenty more choices to be found later in the game. . . .

The scale, as mentioned, is impressive, and enemy animations aren't half bad either. You also flay skin and flesh off your bestial foes as you pepper them with small arms fire, which is a "nice" touch (for some very unusual definitions of the word "nice".) . . .

Legendary was looking remarkably polished when we saw it, with no major outstanding bugs evident in the 360 version apart from some stuttering in the cut-scenes. That's a pretty good sign for a polished launch for the game, which we're expecting to appear on 360, PS3 and PC simultaneously in October or November. It's unlikely to set the world on fire (literally or metaphorically), but for straightforward, well-executed FPS action that's perfect for a half-hour stress-relieving blast, it's looking like you could do a hell of a lot worse this autumn.

Not exactly the verbal blowjob given to a Gears 2 or Fallout 3, but as a first installment of a franchise, it didn't merit that type of praise. This preview was followed by the Eurogamer Germany's review which said:

Had he not so uncommon and would Bulli, which is the way forward, a few liberties here and there present, it would be more. But even as friends action should take a look at Legendary throw. They are at least accustomed to that in such a plant a coherent story a rare and especially part is completely optional. And they also know that New York is destroyed. Always.

That didn't really make sense to me either, it is German run through Google's best impression of a Babble fish. The important point is the review ended with an award of a 7 out of 10. Again, not the best rating but probably within the range of other reviews, like OXM, which scored the title 10 points higher than its Dead Space review with a 75.

This is why we were all so surprised to see Eurogamer follow its positive review and sister site's review with a score of a 2 out of 10. That's right, 2 out of 10. Dan Whitehead, the author who takes great joy in his use of flowery language wrote:

Legendary is the gaming equivalent of cheap supermarket own-brand beans, but instead of costing eleven pence it costs the same as a prime steak cooked by a top chef. It's a bad, bad game. One of the worst I've played on this generation of consoles, in fact. In that regard, at least, the title is surprisingly accurate.

It kind of makes me wonder whether he knows how he skewed the metacritic score and how many publishers rely on this score to give publishers their next job. Sure, it is not his fault, but as Spiderman teaches, with great power comes great responsibility. In this case, he not only shirked his responsibility to the developer, but to his readers, his publication, and his own credibility. Here is the site's scoring policy for granting a 2:

Avoid at all costs - this is less entertaining than setting fire to a ten-pound note. You'll have barely ever seen a 2/10 on EG - and for very good reason. A game this bad almost certainly won't reach our eyes, because publishers generally know better than to send games of this standard to us in the first place. In many cases these are your typical "straight to budget" titles that no sane publisher would try and release at full price, and they certainly wouldn't want us to rip them to shreds in public.

What you're facing here is a game with appalling generic visuals built around an awful design, cursed with cretinous AI, brain-frying audio and controls that feel like they've been designed to upset people or boost sales of replacement game pads. It could just be that the game is just so hideously old fashioned that someone has released the game by mistake. Who knows what goes through the minds of people who feel the need to try and sell crap? Pity them, and pity the fools that stock it and more so the morons that end up buying it without checking first.

I am not going to argue against the score relative to the scores, because we see inflation and disparity with all games. The aforementioned Dead Space ranges from a 65 to a 100 among different publications. I am solely considering the disparity of scores within a single publication. It smacks of a personal issue. It would seem Mr. Whitehead has a personal issue with either Atari, Spark, or both. Maybe he has no issue, but was having a bad day with no dog to kick. Perhaps he was venting against a publisher without the pipeline, and marketing dollars of EA and Activision. Whatever the reason, I am hard put to find it in the game itself. So to Mr. Whitehead, I say shame on you.

As for Legendary, while game has garnered some 80's from reputable sources which will be published soon, I have no more delusions of the game receiving a 100 than I do of the next Adam Sandler mega hit getting a 10 out of 10. The fact the game was completed at all is a testament to the dedication of the team and their belief in the property. While the dedication is impressive, it is no reason to buy the game. You should buy the game because it really is fun. It does what a game is supposed to do. Eurogamer said in the preview, and quite possibly in German.

I am not advocating mediocrity because the reviews are not an indication of mediocrity. They are an indication of the critics opinion which remain out of touch with the consumer. This game happens to be scoring from many critics in the range of games selling in the millions of units. Unfortunately, it's US publisher did not have the strength to garner 50 reviews in this crowded market. The critics lack of awareness, combined with the power assigned by publishers creates an untenable situation.

C'mon publishers, wake up and realize this guy's words are of no value. There is no correlation between metacritic scores and sales. As Robin Kaminsky pointed out at DICE the sales correlation is with scores coupled with marketing. You will note, titles with strong marketing programs get higher metacritic scores than titles without a program. I am not insinuating anything here, it could just be a case of the squeaky wheel getting the oil. More marketing means more awareness, means more reviews, means better scores. You can take this a million different places. This is not the time or place for me to do it. All I am saying is there is no reason for you to pay attention to a guy who feels empowered by diminishing the efforts of the others at the expense of credibility and the integrity of his own site.

Don't take my word for it, I am an interested party, try the game.

Check it Out: Cliffy B in the New Yorker Edition

In probably the first and last article to mention CliffyB, Jay McInerney and Lorrie Moore in the same paragraph as Gears of War, the New Yorker published a great piece about Cliffy, Epic and Gears. Really solid mainstream coverage without calling them dorks.

Check it out

Monday, October 27, 2008

Take Three?: Third Time Is Not Yet a Charm Edition

[I put this up a few weeks ago, and then took it down. I don't know why, so now I am putting it back up. Enjoy.]

A couple weeks ago Take Two announced the termination of takeover discussions with all parties, but it seems the “victory" over the would be invaders is Pyrrhic at best. While the company will certainly survive, whether the actions were in the best interest of the shareholders is up to debate. With the decision to remain fiercely independent seeming set in stone, maybe Take Two will finally move to more fiscally responsible plan than “Rockstar makes all the money and 2K spends it” If last quarter’s events taught us nothing else, we learned GTA’s value has always been factored into the stock price. After the smoke cleared, we see the company is worth roughly the same thing as it was the day Strauss Zelnick entered the board room.

I know all the game stocks are down now, but the most recent USD 380 million plus decline in market value happened before any of the current market wide declines. This could be temporary and there is still time for Mr. Zelnick’s hearty rebuff of EA to prove visionary. It is often hard to tell so close to the events. Actard has been on the ropes a few times in its history and now by some measures it is the largest publisher in the business. Much of the industry thought Yves Guillemot was nuts when he committed so strongly to internal development, and now Ubisoft is widely regarded as the best video game production company in the business. I even had someone tell me the other day history will look at George Bush as a visionary for starting the war on terror. History can create some strange heroes.

But wait a second. I am starting the story in the middle. Let’s take a quick look at Mr. Zelnick’s previous forays into the game business. This is actually his third. Mr. Zelnick left 20th Century Fox, as the boy wonder president of production in 1993 to run Crystal Dynamics. Crystal looked like the place to be. New Media was poised to take over the world and this company was not only tied to the promising 3DO platform, but was funded by the blue chip VC behind 3DO, EA and every other company that mattered before and after 1993. 3DO had just successfully completed the first non biotech IPO of a company with no revenue, significant losses and a soaring stock price. While 57% in the first four days is modest compared to the dot com IPO's it was a big deal in the pre-Netscape days. Crystal was a logical jump for an aggressive guy looking to change the world of media. Unfortunately, through no fault of Crystal or Zelnick, the 3DO platform never took off and Mr. Zelnick and others left the company. Crystal expanded its sku plan to include other platforms and successfully created some franchises. Unfortunately it never created a profit. Eidos acquired the company in 1998 for significantly less than the aggregate venture investment.

Mr. Zelnick then joined BMG as president in 1995, ascending to CEO in 1998. Prior to his joining the company, in 1994, BMG started a game publishing division, BMG Interactive. This was not unusual, in fact it was status quo for record companies. Warner and EMI both started game publishers around this time. They all figured games, distributed on the same media, in the same stores, were a logical progression from music. They all found out they were not. The division was run by Gary Dale, who joined Rockstar as Chief Operating Officer in January 2007, after the departure of founder Terry Donovan. BMG Interactive signed a deal with DMA in March of 1995 and in 1998, the Houser brothers moved over from BMG Music and Donovan from Arista, to form Rockstar Games. Rockstar worked with DMA to create the first Grand Theft Auto. It would be a stretch to think the CEO of BMG, a company with 10 figure annual sales had any day to day interaction with the game division which would barely amount to a parasite on the flea on the tail of the dog which was BMG, but the interactive division, along with Rockstar, was shed under his watch. Again, in fairness, all the other record companies shut the divisions down and wrote off losses rather than selling anything. BMG Interactive, in spite of itself, was actually sold. I say in spite of itself, because I received the pitch from Mike Suarez and Don Traeger when they were trying to sell. The two guys came to my office and showed me the portfolio. GTA 2 was in development and was not significant enough to warrant a place in the presentation dominated by a console port of Paperboy, a marginal snow boarding game and a not even marginal basketball game. GTA only came up in a mention along the lines of "we are also doing another version of that top down PC game Grand Theft Auto.” If the guys selling the company couldn't even see the value of the title how could I ascribe knowledge to the CEO 55 levels above them? It is simply an interesting observation of ships passing in the night.

Last year, Mr. Zelnick, through Zelnick Media, walked into Take Two through the side door. He organized the institutional investors to vote him, and a friendly slate of directors onto the board, thereby ousting the man identified as the worst CEO of a public company in America. At the time, the stock was trading around USD 16, up from the sub USD 10 per share where it spent the previous summer. Zelnick had a plan to turn it around. Over the course of the next year he made some tough decisions, not the least of which was delaying GTA IV. The new blood seemed to have an impact on the market value, and it even started trading up for a few months . . . . until the summer, when it moved right back to where it was when he started. In fact, the biggest increase in the company's market value since Mr. Zelnick stepped in occurred with EA's hostile offer.

When EA put the offer on the table, the stock jumped from about USD 16 to a hair under what would become it’s 52 week high and a hair above the USD 26 offer price made by EA. Mr. Zelnick immediately went into defensive mode to stop the deal from going through. All of a sudden it was 1987 all over again and Mr. Zelnick started doing his best RJR Nabisco impression as he reached into his bag of defensive strategies. He fought the offer in the media, inserted poison pill stock grants and a bunch of other stuff. The unanswered question is, why? Who was he protecting? Was he thinking the defensive strategies would increase the price of the company, or did he think the acquisition was not in the best interest of the shareholders? There were a lot of moralistic arguments swirling around the gaming press about how bad it would be for EA to take over the company and I am sure he wanted to protect his employees from what was positioned as an oppressive structure. However, as a CEO, he can’t worry about those things. He has a fiduciary obligation to act in the interest of the shareholders and the company and he was presented with an offer containing a USD 776 million premium over the company’s market value the day before. He had to work to maximize the value of the company and if a sale was the best option, he had to maximize the price of the sale. His response, calling the offer “opportunistic” and saying it “. . . substantially undervalue[d] Take-Two’s robust and enviable stable of game franchises, exceptional creative talent and strong consumer loyalty” make it sound like the he doesn’t think the offer is high enough. Neither did his advisors, Bear Stearns and Lehman Brothers - really. Were they looking at the same slate as the rest of us? Theirs included games like Spec Ops, Red Dead Revolver, Manhunt, are any of these still alive?

Take Two’s product line looks kind of like the theme song from the first season of Gilligan’s Island. I can almost hear the theme song playing him my head as I think about the strong points of the company. There’s GTA, Midnight Club, and the rest. Sure Bioshock is important, but so are the Professor and Maryanne. Bioshock is a rounding error at EA and Actard, and until the sequel, it remains somewhat unproven. Take Two without GTA is Eidos. Take Two without Rockstar is Midway. Go ahead, do the math, you’ll see. The market did. When the initial offer was made by EA, GTA was on the horizon. Even though EA said it would not able to take advantage of the revenue, if the deal was done quickly, the acquirer could book the revenue, at the very least, they would get a hold of the company while the coffers were full. Once GTA is released, not only is the unlimited upside potential crystallized into a certainty, the release represents the last cash windfall for a number of years. But Mr. Zelnick must have seen this. So why did he really stall?

As a simple guy looking from the outside in, but based on the market’s reaction to EA’s decision to withdraw the offer, it looks like Mr. Zelnick was wrong. At the time, the company was not worth more than EA offered, and in fact, it is not even worth as much. If it were, it would be sold. The stalling seemed to be a combination of ego and brinksmanship. While it worked in the Cuban Missile crisis, the outcome here was more Bay of Pigs. The difference between those two events was research. In this case, there seemed to be none.

First, and perhaps most significantly, he should have known he would not get a higher offer out of EA. Looking at John Riccitiello’s history, his first offer is usually his best, and his last. We saw it played out publicly in the case of Eidos, and a few others. With Owen Mahoney backing him up, the offer was based on EA’s determination of Take Two’s value to EA. They will let the deal fall through before they overpay for something. By stalling the negotiation, it doesn’t seem Mr. Zelnick knew this.

Mr. Zelnick stalled the process while he generated interest from others in the wings. This could be considered the responsibility of the CEO. It appears he thought the EA offer would establish a minimum value for him to use in discussions with other suitors. Unfortunately, he did not realize the company had unique value to EA at a specific point in time. He found other suitors in fact, these discussions were on-going on August 19th when EA agreed to drop its hostile bid and enter into negotiations with the company. I believe in Mr. Zelnick’s mind, he thought the EA meeting would go something like this:

“Nice to see you John” with a firm handshake.
“Strauss” Riccitiello replies.
“How’s the family?”
“Doing well, yours?”
“Great thanks. Now that we have the NDA in place, I can tell you, we have offers of USD 30, USD 35 and USD 40 per share for the company. If you are interested in matching those, we’d love to hear it. Otherwise, nice to see you.”
“Of course we are. We’ll give you USD 45.”

Unfortunately, it didn’t really happen quite that way. The other offers never materialized. There were just discussions. I wish I was a fly on the wall, but after the long diligence session, and in the midst of other discussions which were not generating significant enough offers to do a deal, it probably went something like this:

“Nice to see you John” with a firm handshake.
“Strauss” Riccitiello replies.
“Strauss, we’ve looked at the books and analyzed your products, your production pipeline and your distribution reach. We’d like to revise our offer. . . “
“Great!” looking up at John
“We can’t justify the offer any more.”

and the stalking horse left the room. . . In fact, the stalking horse left the whole farm. The value to EA came and went. It moved from a “have to have” to “nice to have.” Nice to have’s aren’t worth as much. EA announced its termination of discussions, and we learned the increase in value over the previous months was not attributable to anything undertaken by Take Two when the market value returned but to just below the trading price on the day before the first EA announcement was made. The decline made Mr. Zelnick’s earlier statement of being vindicated by the sales of GTA IV look a lot like President Bush’s Mission Accomplished speech on the deck of the carrier.

Now we can use the hindsight which was unavailable to Mr. Zelnick during the discussions to determine whether this was the right idea. Can Take Two survive as a separate entity? Of course. It is still a USD billion company. Is it going to be a lot harder for them to survive, of course. The company grew when games cost between USD 1 and USD 5 million and today games cost significantly more. The higher cost of games makes it harder for the company to compete against the bigger players. Moreover, the smaller slate makes it more difficult to secure and maintain shelf space in a highly competitive market. Is the shareholder value going to be maintained – not so certain. The real world has always placed a higher multiple on EA and recently extended the treatment to Actard. In the eyes of Wall Street, there is EA, Actard and some other publishers. As we move forward, this credibility gap will likely grow. Stock prices are not only driven by revenue, but by the impressions of institutional investors. They like steady and predictable slates. The only prediction Take Two can make is GTA will sell a lot. Compare that to a "Madden," "Guitar Hero" and "Call of Duty" every year. Not to mention so WOW revenue. The market value is important because it is the measure of the cost of capital. The company's life blood in the cold war of ever increasing budgets we call game development today. EA may not have been the best choice in the long run, but it definitely had the deepest pockets.

From a creative perspective I have to admire the commitment to stay independent, but the institutional investors who installed Mr. Zelnick did not bring him in to establish a new high point in creative game making. From a business perspective, I have wonder whether it was right to walk away from a sale at roughly USD 760 million profit for the shareholders in just over a year‘s presence in the board room. I wish him, and the company the best of luck. In this business, he is only a few hits away from making a hostile offer to acquire EA. Then I will eat my words.

Wednesday, October 15, 2008

Check it Out: Stuff You Didn't Know About Lego and Gummy Bears Edition

In between posts about the new Macs Gizmodo posted these very cool Jason Freeny posters.

You can buy high quality prints of these and more at this link. (I don't get paid for selling these things, I just think their cool.)

Nothing more to say. . . .

Tuesday, October 14, 2008

Greenlight Process: Guest Blog Edition

A while back put a sidebar up asking for submissions, here is the first. A developer who, in the interest of protecting future business chooses to remain anonymous, submitted the following report from the front. Enjoy:

Production Green Light Process

A friend at a developer pointed out a recent article titled ARRESTED DEVELOPMENT by Matthew Wasteland in this month's Game Developer Magazine.

In a humorous manner the article details a series of comments made by a Publisher to a Developer through the course of their production. The associated timeline indicates to anyone on this forum the (expected) absurdity of some of the remarks.

However, it did highlight the relative value to production of certain comments and how - as far as successful production is concerned - not all roles should have an equal voice in the oversight or direction of the development process.

For example, at the beginning of game production, the development team is focused on creating R&D based prototypes that usually visually have little resemblance to the final product. During this time, the QA, Technical and Creative Production leads should have, in weighted voting, the largest decision making power over the general direction and value of the game.

At vertical slice - when the game has a more refined demonstration of core experience value - all voices (from production, sales, marketing, QA, executive, etc) would be more or less equal as the goal is to objectively determine a P&L's overall viability relative to game value, market projections and costs. If there isn't a unified vision for success with the game at this point: change it, kill it, or accept the likely consequences (hello: Quasimodo!).

At the end, the only voice that matters to production is QA which tells the group what has to be done to be done. Because "done" can at times become somewhat subjective and depend on available time and money - Marketing and Sales should also have a strong voice in determining what *must* be fixed to successfully ship and meet plan.

However, it seems to me that at many Publishers the "Greenlight Review" meeting, in an effort to have all departments 'on board' and involved in the decision making process, has become more of a equal voting forum where expertise is not always valued according to the relative needs and benefits to the production and resulting business P&L.

It could be worth considering having a weighted value assigned to different groups that would vary according on the stage of product development.

What do you think about your Greenlight Process? Working great or needs improvement?

Did EA Endorse Obama?: In Game Politicizing Edition

According to this post, wholly stolen from Jalopnik, pro Obama ads appeared in Burn Out.

Barack Obama has begun advertising on billboards within the virtual world of an online video game in what appears to be a first for a presidential campaign. Players of the online racing video game Burnout Paradise on the Xbox 360 Live network noticed billboards promoting Barack Obama and the website, which helps people determine how to register to vote and where to vote. This was later confirmed by a representative for the game's publisher, Electronic Arts, who said:

"Like most television, radio and print outlets, we accept advertising from credible political candidates. Like political spots on the television networks, these ads do not reflect the political policies of EA or the opinions of its development teams.”

We Should All Want Brash to Work: They Can't Help Themselves Edition

Writing this blog makes me a nicer person in business meetings. It is cathartic. Before the blog, something like Mitch Davis' interview with Gamedaily would set me off and dominate the first 10 minutes of the next meeting I had. Now, I can write it, get it out, and move on. Thank you dear reader for your help and indulgence. It also explains why the post is a bit on the snarky side. The whole thing could be avoided if Mr. Davis, the CEO of the company, took responsibility for the company's actions rather than shirking responsibility and holding tight to plans the market has already rejected.

I want Brash to work. We should all want Brash to work. With coverage in the New York Times and Wall Street Journal, everyone who would ever think about putting significant amounts of money into the game business saw their story. Never has a company name been so appropriate as theirs in describing their securing of capital and approach to the game business. If Brash make it, we would be lining our pockets with the lucre of Brash's success as others invest in the video game business. With Eidos, Charles Cornwall, Jeremy Heath-Smith and a handfull of others proved big war chests and great game making leads to industry domination. He took the company from nowhere, to number two publisher with the number one title in 18 months. After Charles and Jeremy's departure, Eidos showed big war chests with bad game making will lead to big losses. If Brash fails, our hats will be back in our hands as we inevitably face the question in every meeting "How is this different than Brash?" In anticipation of these meetings, and before I address the Mitch Davis interview that triggered this post, let me give you your first response to the question.

You look the potential investor in the eye and say "I won't ever say this:

But [Bert] Ellis says video games that are co-branded or licensed with major movies are a much safer investment. Even a bad video game, paired with a good movie, can be very profitable, he says.

"The safest, most lucrative way to sell a video game is in tandem with some kind of movie that is already heavily marketed," Ellis said. "Your downside is protected by the co-marketing."

Brash vehemently denied this philosophy after it's co-founder said this in the first interview about the company. Unfortunately, their first games betrayed their denials. Their first publicly released game (rumors circulated of an earlier film based game intended for release prior to Alvin being bounced by the consoles for poor quality) based on the Alvin and the Chipmunks film so bad it led reviewers to write "friends don't let friends play games like this," but it actually sold through. This seemed to confirm the business plan and the thesis. Unfortunately, consumers were not so forgiving of Jumper and Space Chimps. It seems you can only really get away with trying to sell a doody in a box once.

What the company fails to acknowledge in their adherence to a plan abandoned even by companies built on IP licensing is when dealing with a new film IP rather than mitigating your risk, you are exponentially increasing your risk by assuming the risk of the film's performance as well as the game's performance. A good game paired with a breakout hit film will lead to great game sales. A great game with an underperforming film will sell like a new game IP. Chronicles of Riddick is the best example. A marginal game with a bad film, nothing. In other words, the publishers run the significant risk of investing the same amount of money as they would in an original IP, plus payments to licensor, and only getting the same sales as the original they gave up to make the license. They are renting an IP and building a game presence for someone else. This is why every other publisher in the business is moving away from all but a precious few proven film licenses, and into original IP, making the good ones more expensive, and the undesirable ones, virtually worthless. I learned this when I was pitching Peter Jackson's King Kong to one of the publishers on the leading edge of this migration.

"This is exactly the kind of things you said you are looking for. You have two and a half years until the release of the film, the budget is fixed and large and the promotion will be huge." I said describing what I thought was a lay up.
"Doesn't sound like us. We need big franchises." replied the bizbot.
"What's bigger than Kong with the director coming off Lord of the Rings?"
"Something with a fixed release 2 years out, guaranteed marketing budget in excess of USD 80 million and guaranteed sequels."
"Wow, that's a tall order. King Kong is kind of unusual though, is it worth an exception."
"No, can't commit. The monkey dies."

The property was ultimately acquired by Ubisoft who did exceedingly well with the game, but without a follow up film, it was hard to justify a sequel. These guys knew early on what THQ and others are learning today. The license business worked for a wide range of films when game cost was lower. Cartridge games at sub USD 500k were great, PS One at sub USD 1 million were still great because the inventory became just in time. PS2 games at sub USD 3 million started to test the equation. PS3 and 360 games at USD 10 million and more dramatically change the equation. Current gen games work best when you can amortize development cost of the course over multiple titles. Ubisoft builds two Clancys on common technology before they build new tech and they are not the only ones. Most publishers are following the same course. When it comes to licenses, there is no opportunity for the second title. The games will sell well when the are released against a film, but sales fall to a fraction of original sales when sequels are released without a film. Unless there are guaranteed sequels, there is no opportunity for amortization. The publishers also take a major hit when someone like Pixar chooses not to renew. Accordingly, the number of high profile orphan film licenses is increasing on an annual basis.

The only significant dent in the license pool came when Brash picked up a bunch of licenses other publishers did not want. Titles like Saw and Jumper were floating around for years before Brash picked them up. Rumored titles like Where the Wild Things Are, and Clash of the Titans seem to defy current business logic and the rumored 300, has no film support. The resources allocated to these games would be served on original IP, where Brash would have more control over its destiny. The one bright spot in their slate is Night at the Museum which is poised to well as a film, but Brash would still have to break from prior practice and release a strong game against the film. Even if they do, it is a stretch to think this will counterbalance the threat of high risk licenses. They could be vindicated and proven to be the only one to see the true value in these licenses . . . and monkeys may fly out my ass before you finish reading this post.

Rather than looking to the flawed premise or poor execution and completely avoiding Michael Jackson's sage advice to look at the man in the mirror, Mr. Davis took the opportunity in Gamedaily to blame everyone around him and renew his commitment to the original plan. ". . . other than that, how'd you like play Mrs. Lincoln?" Don't build assets, don't build proprietary technology, don't build proprietary IP, just build value for others because they co-market.

In the first question, contrary to other media reports, he indicates Thomas Tull's departure had nothing to do with the way the company was being operated:

Thomas is Chairman and CEO of Legendary Pictures, and co-founder of Brash. Although, he has resigned from our board due to a conflict of interest he remains an investor and a close advisor to the company.

This is a stark contrast and much less believable than Ben Fritz' report:

Tull is believed to have been disappointed with the quality of Brash's games, as well as the company's strategic direction. He wasn't available to comment. A Brash rep declined to comment.

It's not clear exactly what changes Tull wanted at the publisher, though possibilities include a stronger focus on quality, even if that meant delaying releases, and abandoning its exclusive focus on licenses.

Call me nutty, but it seems odd for a founder/investor/board member to wake up one morning after being involved with a company for over a year and determine he has a conflict of interest. Especially since Mitch indicates business will continue as usual. Judging from the upward trajectory of Brash in the film business, financier of last year's Batman film, among others and the downward trajectory of Brash based on poorly regarded film based games, the latter would support a decision by an executive to not shit where he eats. If Ben's supposition is true, it makes it kind of hard to believe Mr. Davis is really taking the company in the direction of higher quality games.

Mr. Davis explained:
Good games take time, and it's fair to say that we were overly ambitious in putting out three games in our first year of business. We certainly took our lumps on those titles, and for that reason we have made several changes.

First and foremost, we've put an end to short-cycle games. In fact, as I mentioned earlier, some of our games will benefit from up to three years of development.

Second, we're working with better development studios. We've got more than a dozen film-based games in varying stages of development with such great developers as Factor 5, Game Republic, Pipeworks, BottleRocket, Zombie and Amaze Entertainment.

We've re-organized. We've made some changes within our management and our production team that position us to make better decisions for our business. I believe that Variety mentioned the departures of a few executives and lower level staffers, including Larry Shapiro. This is certainly true. After our first few games did not meet expectation we decided that we needed to upgrade our staff and realign our business in a way that allowed us to better meet our goals of great games based on exciting IP. Most recently, we hired industry veteran Lori Plager as Senior Vice President, Intellectual Property Acquisitions to fulfill Larry's former responsibilities. Lori—who spent more than 6 years securing licenses for Activision—was a great addition because in addition to having great relationships with all the Hollywood studios, she has direct experience working within a large publisher and a solid understanding of the development process.

Translated into English this could be explained as "making games is hard." Brash initially hit the ground running and quickly signed developers who eagerly committed to aggressive time lines and insufficient budgets. It was clear the games could not be delivered on time and on budget. Unfortunately the people on staff either did not know, or did not want to tell the emperor he had no clothes. Either way, bad commitments led to bad games. Increasing development time alone will not make the games better, talking about it will not change anyone's opinion.

Mr. Davis defies a promise made by the company after the Bert Ellis interview. They said they were going to show things, not talk about them. If he really wants to change the perspective on the company, he should show great things, not talk about them. The prior games already removed any vestige of credibility. He could have said "The stuff in development is great, and I can't wait to show you." He didn't. Words alone only provide fodder to a pessimistic gaming press who can say "he says the list of developers is great, but with the exception of Bottle Rocket's work on the seminal "Mark of Kri" their collective average Metacritic ratings makes a better golf score than testament to great game making. Three years development is good, but a well polished turd remains forever, a turd." (I know I consistently question the validity of Metacritic, but it is the only thing we have and it is the thing publishers use to judge a developer.) Writers may look beyond Metacritic to find the break out hit. This would lead to a comment like "If you would rather look at units sold, a much more relevant measure, find the break out hit in the group beyond Amaze's work on Harry Potter." I see what these guys write. They are not forgiving. They will not change their perspective until you put something in their hands. They have been lied to too many times. From my perspective, while these developers have the potential for greatness, and Okomoto-san of Game Republic and Bottle Rocket have shown it in the past, and Factor 5 moved a lot of Star Wars units it was through the support of companies like Capcom, Sony and Lucasarts coupled with Nintendo. A great title is the result of a collaboration of a publisher and a developer. Mr. Davis hung these guys out to dry by spending their political capital to elevate the status of his company, when in fact, the publisher should elevate the status of the developer. Without contribution from both, the title will not be great. Where is the greatness on the Brash side?

Mr. Davis tells management is changing. I heard rumors many fled on their own when they could not implement the changes they felt were necessary, but this is really splitting hairs. The point is the announcement mentioned one executive. Lori Plager is a wonderful person. Her hiring is truly a coup for Brash, but she does not fill the vacuum on the production side. He says they are sitting on a pile of licenses, it is great Lori is there to manage them, but who is going to build them? If they had someone, wouldn't he say. Rumors are circulating of another Activision exec who will fill the void. If he is on board this would have been a great time to talk about it. You can come to your own conclusion while we wait for the announcement. I hope one comes soon.

The next response shows a Clintonesque ability to compartmentalize:

BIZ: Reporter Ben Fritz described Brash as a company "in turmoil." How would you describe the Brash business to this point?

MD: In a little more than a year, Brash was able to achieve amazing things. We secured financing, we signed multiple licenses, we hired more than 70 people and set up three offices, we put out three games in our first year and have more than a dozen in various phases of development. Now, we are at a point where we can reassess. We have systems in place, and feedback on what has and hasn't worked. We're making changes to refine our business so that we can meet our goals.

Indeed they have done a lot, but what they didn't do is the one thing they were supposed to do. They are a game publisher. Game publishers make games. They did not make a decent game. I am not privy to their inner workings, or the goals established by the founders, but somehow I doubt the goals included any of the above. While they may have been shooting for three games in the first year, I am confident, a return on the investment in the games was at least an unspoken assumption. In the preceding response he acknowledged management was leaving, either by choice or corporate decision. Two of the departures were two of the three company founders, the rest were senior management and no one has been announced to replace them. While this may not be turmoil to you Captain Smith, it may be indication there is a large gaping hole in the hull.

Like I said in the beginning, I hope Brash makes it. I also hope this is the last Mitch Davis interview until a high quality product comes out from the company. Freedom from finger pointing and promises in favor of high quality product would be an industry leading event we would all admire. He may have "felt" he had to respond to reports in the press, but it is only a feeling, not a requirement. Brash is not a public company and has no obligation to issue press releases, or tell anyone what they are doing. This is a privilege they should embrace and enjoy. I look forward to them proving me wrong.