Wednesday, April 30, 2008

The Mighty M: Reboot Edition

When I was at Eidos I found myself in a room with Avi Arad, then CEO of Toy Biz. It was Toy Fair and he was trying to convince me to let Toy Biz make a second Lara Croft action figure. If you ever saw the first one, you would know why he was fighting a losing battle. Avi told me he wanted Eidos to partner with him to acquire Marvel. Toy Biz was going to buy it out of bankruptcy. The thought was intriguing because the Eidos business plan was partially modeled on Marvel. The prospectus I wrote for the NASDAQ offering in 1996 started with "If Marvel were started today, it would be a game company." Eidos was an IP company which happened to use games to inject intellectual property into the world's psyche. Once injected, we could move them anywhere - and we did with Lara. I spoke briefly about the Marvel opportunity with Charles and we both thought Avi was nuts. In hindsight, Avi was nuts, but he also acquired Marvel and not only turned the company around, but created more value in the IP than it ever had before. He targeted Marvel because the company owned a library of known IP. Spiderman, Hulk, Xmen were already injected. Of course they were not deeply known beyond a small circle of American otaku, and bad exploitation of the properties occurred in other businesses – sound familiar yet - but he showed the properties were actually in the long term, not the short term memory of the public.

Because the game business is relatively young - Marvel was started in 1939 - we don't have a lot of libraries floating around. We also don’t value library content. We look at IP as franchises to platform sequels, but do not look for extensions or windows for the underlying content. If we look to those same folks Avi catered to and mention Defender, Gauntlet, Smash TV, Joust, Killer Instinct, Spyhunter, Rampage, Robotron, Tapper, and of course, Mortal Kombat, we would see a warm, fuzzy glow growing from the listener. These games are the foundation upon which our gaming knowledge is built. For many of us, these arcade games were our introduction to the business. $60 for a 360 game is a bargain relative to what I dropped in Defender. For people like my 12 year old son who did not play these games when they are new, they are time tested, proven, fun game dynamics. Sure, bad versions of many of these games made it to the console, but remember Marvel? Did you ever see the 1970's cartoons where the character's mouths didn't move? How about the Roger Corman’s Fantastic Four movie? As we saw with Spiderman, one good product can erase the short term memory. The properties live in long term memory.

So why is the company with one of the deepest libraries in the business languishing? I think they forgot they had it. Midway has yet to articulate a cohesive strategy to leverage its valuable IP from casual through hardcore markets, in and out of games. By failing to do so, they are trying to compete against better capitalized companies with one hand tied behind their back. They must be agile, and cater to their strengths.

If we look at games on a cost/complexity continuum with minesweep and Solitaire at the bottom and Grand Theft Auto IV and World of Warcraft at the top, we would see all of the games being produced by major publishers crowded into a very, very narrow band at the top. At the bottom, you would see a very, very narrow band containing all the products populating facebook, miniclip, addicting games and garage games. Both ends are very crowded and very noisy. Getting above the noise, takes marketing and a bit of luck. In between the two bands is an, empty gaping hole of nothingness, some publishers are calling “advanced casual.” For the purposes of this post, I will call it the place where all of Midway’s games reside. Because games in the top band games are expensive, and people won’t pay for bottom band games, the middle market is the most attractive to publishers. Due to their scale and structure, it is difficult for them to get there. Don’t rely on my opinion; look again at what Bing Gordon said he wants to do after he leaves EA.

Core gamers scoff at this market as irrelevant to “real gamers,” but real gamers are playing these games. Even though they want to sit down for 4 hours and unlock some achievements in Mass Effect, or lose 5 hours in some Halo 3 multiplayer, they may work for a living. Gamers, and non-gamers, are choosing to play discreet, easy to pick up and play games. Arguably most Wii titles fit in there at the high end, and Publishers are starting to fill the space from the top down with titles like Boom Blox, Rock Band and Guitar Hero. Even though these titles are less expensive to make, they are more expensive to market, because this is a new category and the titles have to be explained. Publishers either spend a lot of money and effort on marketing, or they secure a license to create awareness for the game. Licenses are expensive. To the great pleasure of musicians, EA and Activision are locked in an arms race to secure the best music for Rockband and Guitar Hero. Jamdat paid USD 137 million for a 15 year Tetris license. Midway doesn’t have to worry about this cost. The company proved the relevance of its library with straight ports of arcade games to Xbox Live, and they get the brands for free.

I am not saying Midway should forego the top band and focus exclusively on the middle, but if they have a competitive advantage in the most lucrative and fastest growing sector of the market, why are the giving the games away for free? Midway has the opportunity to leverage its IP to grow a dedicated and committed community while they build their top band titles. Before TVland, no one saw value in ancient dated sitcoms, then Viacom built the channel and the value in the IP. The TVland investment did not stop the company from building MTV, Showtime and a myriad of other distribution brands. Where is Gameland? Every one of those Gameland customers is providing two available eyeballs for the top band product. I really don’t have to explain this to Midway when its second cousin once removed company, Nickelodeon, is one of the strongest marketing channels on the planet.

Midway is building AAA games for the top band. The company just had its gamers day where it revealed the 2008 lineup. The press responded well to the slate which includes This is Vegas, Wheelman, NBA Ballers: Chosen One, TNA Impact and Unreal Tournament III:360.. While Midway does own the Ballers franchise, and it could be a great counter to EA Sports with a committed effort in other sports – the slate is completely devoid of known, Midway owned IP.

Assuming a competitive quality level, each of these games will require significant marketing dollars to launch during the second half of the console cycle. As Midway saw with Stranglehold, even the first half is tough for a new IP. TNA and Unreal will get support from Spike, and the existing brand, respectively, but these also carry lower margins due to license fees. If the properties are successful, the brands are being built for companies other than Midway. Why not look inward? In 2004, 2005 and 2006 the Mortal Kombat franchise contributed 18 to 22% of the company’s revenue. In 2007 and 2008 it is not represented. When EA found itself in a similar position with The Sims, it turned it into a separate business unit. There is more stuff in there as well.

You may think this is inconsistent with my earlier posts in which I bitch about sequalitis and lack of risk. I assure you, it is not. I am advocating a balanced portfolio of low risk licenses, medium risk sequels and and high risk original IP. Here Midway is missing the middle piece. I just want to put a couple more chips on the roulette table. A more balanced approach would produce the funding and p and l room necessary to take risks and build new valuable IP next to the old.

There is tons of other stuff to talk about, like downloadable content, ancillary markets, alternative distribution channels and ancillary licensing, but this gaseous belch is really about a simple way to leverage value into a financially predictable system for the creation and exploitation of intellectual property. But who am I to tell them how to run their business?

Most Popular Posts: Rerun Edition

Thank you again to everyone who is coming to site. For those of you who don't make through the pile of words on the first page, here are the most popular buried posts:


Game Objects are Securities

OLPC: Negroponte Did A Great Thing

The Game Business: The MMO

Microsoft Is Cable

Microsoft Is Cable Part 2

Blockbuster and Gamefly Are Enablers

Gamestop Needs An Intervention

What Really Sells

What's Up With The Ratings: The Byron Review

Check it Out: Mental Floss Edition

GTA IV talk everywhere, including here. Time to take a breath, calibrate, and return.

Some mental floss to help with the process:

Mark Pesce explains things you never thought needed explaining and how technology fits in.

Doug TenNapel can't be explained, but is definitely worth your time.

Tuesday, April 29, 2008

Out Appled: Part Deux Edition

Apple elevated the tech market by changing our expectations. The company made consumers believe their electronics could be well designed and easy to use. Now it looks like they are changing advertising as well. Apple was always the only technology company to hit the mainstream with a simple, one note marketing message. 1984, the first iMac, iPod, iTunes, they all gave you a focused message in an entertaining way. When it came time for the switch ads, it took thirty seconds to make Windows look foolish. It seems like Lenovo finally got the memo. In their second blast across the bow - the first is here - Lenovo apparently sent this video to its Chinese suppliers. Lenovo really doesn't understand the Apple brand, but the video is fun just the same.

The Timothy Plan: Hypocrisy Edition

Every once in a while you come across an act of Hypocrisy so egregious, you have to laugh. I read an article on game politics about a mutual fund called The Timothy Plan, which call itself a family of mutual funds offering individuals a biblical choice when it comes to investing.
If you are concerned with the moral issues (abortion, pörnography, anti-family entertainment, non-married lifestyles, alcohol, tobacco and gambling) that are destroying children and families you have come to the right place.

The Timothy Plan® avoids investing in companies that are involved in practices contrary to Judeo-Christian principles. Our goal is to recapture traditional American values. We are America's first pro-life, pro-family, biblically-based mutual fund group.
The fund issued a press release indicating it would not invest Take Two Interactive because "it is releasing another video game that contains extreme sexual and violent content." Curiously, the release did not mention the other 5963 companies listed on the NYSE and NASDAQ exchanges into which they were not investing yesterday. The release went on to say:
The Timothy Plan, a morally responsible family of mutual funds, refuses to invest in companies like Take-Two Interactive because of their involvement in the anti-family entertainment and pornography industry.

Of course the press release does not explain The Timothy Plan has never invested in an entertainment software company and from their prospectus, it appears entertainment in general is outside their scope of interest. It also did not point out Take Two now joins Disney on their last of Hall of Shame companies. Perhaps the only list whose members include both Disney and Take Two. But rather than focusing on what they don't invest in, let's take a look at what they do buy.

Just looking at the top three holdings, we can forgive their position in Warnaco, parent company to, among other things, Calvin Klein jeans. Of course Calvin Klein jeans came under fire for sexualizing a 14 year-old Brooke Shields in the "nothing comes between me and my Calvin's" ads, and the famously controversial 1995 ad campaign which was pulled after the complaints for the ads similarities to kiddie porn got too loud, but this all happened a long time ago. Why should we question an investment in Washington Group International, one of the leading contractors for decommissioning chemical weapons and military bases, as well as constructing highly classified facilities, just because they had a bit of a kerfuffle with the EEOC last month.

The U.S. Equal Employment Opportunity Commission (EEOC) today announced a litigation settlement with Washington Group International, Inc. (WGI) for $1.5 million dollars, as well as significant injunctive relief, on behalf of African American workers who were racially harassed and then retaliated against for complaining about it.

But one of them I really don't get. I really can't get my head around Kennametal. They do a bunch of stuff, but this line from their website stood out:
Kennametal produces a variety of tungsten alloy and tungsten carbide armor piercing penetrators for the U.S. Government and prime contractors. The penetrators are utilized in small and medium caliber ammunition.

The fund is upset about pretend violence in a video game and one of their top ten investments is in a company making real bullets. You can't make this stuff up. I guess it is ok to support a company which enables the killing of real people, but it would be morally reprehensible to support a company which enables killing of animated people.

If I were Stephen Colbert, these guys would be getting a wag of the finger.

Monday, April 28, 2008

Where Is The Independent Money: The Venture Capitalist Edition

Even though game budgets are going up and the time to contract with publishers is getting longer, console developers still rely, almost exclusively, on publishers as their sole source of revenue. The same market forces which drove film studios to seek alternative sources of finance are at play in the game business. But the money is not here yet. I started writing this as the first installment of the search for independent money for game developers. VCs are my starting point, because they have been circling the industry the longest, and even made some successful investments over the years. In the middle of writing it I heard Bing Gordon left EA to become a partner at Kliener Perkins, one of the top venture capital firms in the world. If you read N'Gai Croal's faq with Bing, you will see, as a partner in the vc which backed EA, one of the fathers of the game business as we know it is not going to invest in the games we play on the console.

When I worked for Cooley Godward, the firm did a lot of work for venture capital firms and the companies they invested in. I just started working with game developers and the VC's started to read about Myst and Doom. Other attorneys in the firm who were doing real work and did not have time to play with my game clients would refer calls to me. The calls were always the same.

"I want to invest in some of that multimedia stuff. Who should I invest in?"

"Well I wouldn't give any money to anyone who would take it." was my standard reply.

"That's funny, now where I can put some money?"

"Well, if you want to fund Presto's next game it would be about a few hundred thousand dollars."

"That's not enough. Do you know it takes the same amount of time to track a multi million dollar investment as one of a few hundred k?"

"I know."

"Who will take more? "

"No one you want to give it to."

Some of them did find investment opportunities. Rocket Science, Crystal Dynamics, Digital Pictures, Anyriver Entertainment and a few others took their money. Contrary to reports at the time, Rocket Science founders said they really didn't buy a moon rock. Each of these closed their doors or sold at lesser valuations a few years later. The losses stung for a while and were attributed to the industry, when it was really the choices, not the industry, which was flawed. There has not been a significant investment in a US developer since.

VCs had invested in game companies prior to the developer investments, but these companies were truly disruptive and more portfolio than content oriented. Investments were made into EA and Spectrum Holobyte when games were distributed in plastic bags to computer stores. Ten years after EA, the same VCs invested in 3DO's effort to launch a new hardware platform. In the eyes of the VC's each of these was a success. Until Netscape, 3DO's 1993 IPO was one of the hottest to hit the Silicon Valley. The first open market trades were double the initial offering price. It was also one of the first non-biotech companies to provide VC's with public market exit before the company generated any revenue. This should tell you, they do not always define success the same way you do.

Some developers think they are perfect for venture capital. They create and own proprietary technology and upon success there is a disproportionate return. The risk can be further mitigated by track record. Developers who make great, best selling games, tend to make more best selling games. When was the last dog from Blizzard? Unfortunately, the VC's don't agree. The pat answer given to developers is "VC's don't invest in content. Game development is a hit driven business and we need leverageable technology." This works to get the developers to leave you alone, but it is only part of the answer.

From an investment standpoint, games are in fact the worst kind of content. If I make a film, I have the opportunity to recoup through theatrical distribution, television, cable, dvd's and even on line. If I have a bad game, I have an opportunity at retail, and that is it. If it does not sell, there is no library value and no secondary market. The technology side is not an awful lot better. When the VC's say leverageable, they want to know there is an opportunity for the thing they paid for, even if the thing they invested in does not pan out. Google search technology used to drive bright yellow servers? Viagra as an angina medication? These tech company missteps laid the groundwork for future opportunities. The search technology did not make sense with yellow boxes, but it turned out to be very ad serving friendly, and Viagra . . . . The investors did not get what they paid for, but the investment was not lost when the original goal was not achieved. If I make a great new animation technology or physics library, I may be able to leverage it into other games, possibly the animation business, but it is not likely to create a new billion dollar business. In short, in games, failure is FAILURE and the upside is not enough to interest a VC.

VC's need an exit in 3 to 5 years. Console game developers don't go from zero to Google in five years. Biodemic did sell for USD 860 million plus, and Rare sold for USD 375 million in cash, but these are really aberrations (any publishers interested in acquiring one of my developer clients should substitute the last portion of the foregoing sentence with "and these represent some of the only justifiable and rational valuations for developers in the history of our industry"). When a VC looks at a developer of console games, they see the opportunity to invest 10s of millions of dollars into a game, or game specific technology. If it doesn't work, the only value is the undepreciated value of the equipment in the shop. If it works, they can double, or if they are lucky, triple their money on a sale of the company.

You may notice I was only talking about console games. I was not talking about MMO's. VCs love MMOs. Red 5, Real Time Worlds, Perpetual, Turbine, Mythic and a bunch more are able to secure venture money because they are creating new game paradigms which are disruptive to the very lucrative, existing game business. There are comps. VC's love comps. Comps with exits while the market window is still open, be still my heart. Warcraft stands as a shining example of what can happen in success. If you think Warcraft can't be beat, you are not thinking like a VC. Remember when Yahoo was the king of search when Google launched? They see each MMO investment as the one which will topple Warcraft as number one. VC's are preconditioned to invest in MMOs from their experience in industries like biotech.

VC's have been investing in biotech for years. It is an industry where they will put hundreds of millions of dollars into researching a drug. If the drug shows efficacy in animals, research moves to humans. If it makes it shows efficacy through two phases of human testing, it moves into a blind study. When the blind is removed, if the drug is more effective than the placebo, it is worth billions. If not, you hear a large sucking sound coming from where the company used to be. One of my friends worked at biotech company with a product which made it all the way through the final round of testing. When the blind was removed they found the placebo was 50% more effective than the drug. I jokingly told him they should market the placebo. He did not think it was funny.

MMOs are more like Viagra than like console games. Developers of MMOs are raising tens of millions of dollars in capital to build a game. Unlike console developers, in addition to the game, they must buy or build technology and resources for q/a, customers support, billing, security, serving, distribution, marketing and a myriad of other tasks traditionally handled by a publisher. This narrows the field and makes success less likely - a barrier to entry. High barriers to entry into large markets make the reward great. The size of the reward is indicated by comparable companies. Any startup is going to to model success from the value placed on Blizzard in connection with the Actard deal. At every given opportunity, Activision executives identify Blizzard as the value in the relationship. Simple, superficial, press release math would ascribe a 9 plus billion dollar value to Blizzard's operation. Even assuming the accuracy of the rumored USD 100 million production cost of Warcraft, this is a nice return. The valuation does not stand alone. Asian MMO companies raised boat loads of money on the Chinese exchange. A lot of them remain cash rich, even after the collapse of the Chinese markets. While the equity value may have decreased, the games continue to operate on their very large margins. We can shorten this one by saying, an MMO is a lottery ticket and there is often room for one in the portfolio.

When you sit and scratch your head about why a widget maker like Slide can command a USD 50 million investment at a USD 550 million valuation, when Irrational Games sold for much less during the development of Bioshock, think about who is spending the money. Before you start to complain about VCs lack of vision, look in the mirror, many really are smart and really do understand exactly what you are doing. They are simply not interested. Your business is about as vibrant as a steel mill. VCs are looking for high risk, high return. A console game developer is usually either a startup offering high risk, low return, or a going concern offering low risk low return. It doesn't mean it is a bad business, just not for them.

If you really want to get their money, think about these things, because the VCs will:

1) Does your management team have proven execution experience in the roles they are taking in your company?

2) Is the idea already being done?

3) Are you disruptive to the current market?

4) Do you have a strong barrier to entry?

5) Do you have an effect way to attract people to your business?

6) Will you be building proprietary technology?

7) Will your customers pay money for your service?

8) How big is the market?

9) Is there a visible exit?

10) Is there an opportunity for to make barrels of money (10x return) a 3 to 5 year window?

If you make it through these questions with good answers, you are probably not building the next GTA and you may have a shot at VC money.

Sunday, April 27, 2008

Warner Eidos: 3D Chess Edition

A few weeks ago Eidos ( I can't bring myself to call it SCi) issued a press release indicating it was in takeover discussions with unnamed suitors. Rumor reports pointed to Warner and NBC/Universal. I thought it was a good idea. Then, last week Eidos issued a release indicating the acquisition offer was turned down and the company would need another 55 million pounds to stay alive. Viewing this from the outside, you could either say, Warner and Robert Tchenguiz came in at a bargain price, or, nicely played Eidos.

A bit of history. . .

Tchenguiz is reported to be the man behind SCi's takeover of Eidos in the first place. In March 2005, Elevation Partners' all cash offer lost out to SCi's cash and stock bid, for the acquisition of Eidos. He purchased a 15 percent stake in the company at the time. The valuation was within spitting distance of the valuation in the deal announced last Friday. Warner, didn't arrive until 18 months later, when it purchased a 10.3 percent of the company. Their investment of USD 87.5 million plus some licenses, especially when adjusted for decline of the dollar relative to the pound, is very close to the total market capitalization of the company today.

Back to today . . .

I really don't know what happened in the discussions, but just for the fun of it, let's make some drama. Imagine prospective acquirers, sitting at the table with a "beleaguered" company thinking they have the upper hand. Rumors of two bidders circulate, and then all of a sudden one's parent company misses it's quarter and drops out. Since there is no one else at the table, and the company cannot survive without cash, Warner feels strong. A low ball equity heavy offer is made, the press release indicated the offer was turned down because the equity component was too high. They reason Eidos has to take it, it is their only option right? Wrong. Cuban missile crisis time.

Eidos knows Warner came in at significantly higher valuation. If Eidos survives, there is a chance of recouping. If Eidos tanks, the investment is gone. So, Eidos turns down the offer and says it will raise money through an equity sale. In Warner's eyes, if the equity sale goes well and someone else comes in, the company is saved, but their position is diluted. If the sale does not go well, the company tanks, and Warner is out USD 87.5 million. If they put the money in at a price discounted to the current trading price, they ensure the survival of the company and reduce the effective purchase price of their investment by half. Well, when you put it that way. . . . The only remaining piece is going back to the largest shareholder/about to be second largest shareholder and ask if he would like to remain number one. Why yes I would, I will increase my stake to 2% more than yours.

While this is likely not an accurate description, it is more exciting than saying the parties couldn't agree on a purchase price, so the parties immediately agreed upon an alternative which would benefit all involved. As a result of the investment, Warner's investment is protected, Tchenguiz protects his investment and remains the largest shareholder and Eidos stays alive. Overall, it looks like a rollback of the clock to December 2006. But wait. . .

It would be a rollback, if not for everything else. There are a bunch of squishy words and actions which indicate there may be more going on. Stuff which really makes Warner look like they deserve the "well played" accolade.

Eidos' CEO, Phil Rogers, announced the deal as a strategic partnership which gives Eidos increased scale in North America, and help Eidos achieve its goal of growing North American revenue to 50% of the company's revenue. As Charles Cornwall said 11 years ago when he had the same goal, the US is the largest homogenous market in the world, without it, a game company cannot survive. Europe is about the same size as the US, but it is fragmented by language, borders and distributors. In the US, all but a small percentage of the market is covered by a handful of accounts, and a single language. When Eidos achieved the goal about three years after Charles set out to do it, the market value of the company skyrocketed. The US market was grown by placing business development, production and marketing resources in the United States. Every game company since then learned this is the only way to do it. This is why all the Japanese companies are increasing their presence here. In the years following Charles' departure, the US business development, production and marketing where eliminated or significantly reduced. The reductions were met with a corresponding decline in the relative size of the market and a 90% decline in market value. The curious thing about Friday's announcement though, is the deal, as reported, indicates relative growth will occur, but it only addresses distribution. On its face, there is no change in the relationship. Warner was distributing Eidos in the States before the deal, and they are distributing after the deal. Perhaps the clues lie in the actions and not the words.

1UP reports Eidos laid off its entire PR, marketing and sales departments. If you pair this with Warner's operations build up over the past couple of years in the US and Europe, it looks like Warner may be having its cake and eating it too. Sun Tze taught us to seize control by controling supply lines - regardless of the foregoing, I still believe anyone who quotes Sun Tze is a dick. If Warner is takes over the vacated roles, Warner will control Eidos' revenue supply lines. Charles used say "the lowest form of life is a minority shareholder." They couldn't do anything and no one had to pay attention to them. But what about a minority shareholder who controls your supply lines? You have to listen. It is not just about getting Eidos to listen. Warner gains scale, which John Riccitiello has been saying is critical to success in the game business. You must be big to survive. If Warner is in fact taking over marketing and distribution, they are amortizing investments in their infrastructure across Eidos properties as well as their own, and increasing their power in the retail channel. All without paying the full purchase of the company and without having to worry about funding the further operating expenses. So who had check mate?

This sounds great, but it is probably not all there is to the deal. When we sold the Tomb Raider film rights, Warner was the most aggressive suitor and ever since Jason Hall, their interactive group expressed its desire for games which could migrate to film. If, in addition to enhanced distribution and marketing, Warner got film rights over Eidos IP, or at least a first look, they really cleaned up on the deal.

It is going to be fun watching this one develop.

Friday, April 25, 2008

Check it out: Game CRACK Echochrome Edition

Stop what you are doing. Stop reading, and go download the Echochrome demo on PS3. The game is full of the "i" word. It is just like Portal without the guns. You know what, it is really nothing like Portal. That is the point. It is like nothing else out there and it is addictive.

I read an article once where the author wondered what Escher would have done if he had access to computers. He would have built Echochrome. You know you had an Escher poster on your wall once. Go play.

Thursday, April 24, 2008

GTA MMO To Be Released 4/29: Rampant Speculation Edition

I am sorry for David Jones and Real Time Worlds, and I am sorry for their investors. Sure, their MMO may be great, but the genre is about to be redefined. I am mixing fact with speculation and predicting future action, so the gaseous belch of speculation which follows may be completely off base, but . . . I wonder if anyone can tell me why GTA IV is not the next evolution of MMO.

In the words of my ex Eidos boss, Charles Cornwall, the MMO market is roast duck or no dinner. You are Warcraft, or you are not making money. There are some points in between where people make a nice living, but it is not Warcraft "fuck you" money. It is also hard to imagine the Warcraft killer. Gamers just don't want to leave a game they invested so much time money and effort. Guilds may sniff around a bit, but they talk about the new game in Warcraft. Warcraft can only be trumped with a disruptive model. What happens if about 4 million people to buy your game over the course of a week, and you provide them with a bazillion different multi player modes? Interesting you say, but it's not persistent. The game is not, but your avatar is when you join the Rockstar Social Club. But there are not millions of players you say. You are right, there aren't millions of players in Warcraft either. You are segregated across servers. You play on a single server with your guild members. In GTA, you will invite your friends into sessions which, coupled with the online presence, are remarkably like servers.

The Rockstar team built a rich, high res city with driving, flying and floating vehicles, an in game radio system and world wide web, and a bunch of other stuff we don't even know about yet. We can view this as a single game, or we can view it as a platform - 'Third Life." As a platform accessible through somewhere between 10 and 15 million 360's and PS3's, the audience could quickly reach Warcraft levels. But consumers are not paying monthly fees you say. You are right, but who is saying they will not be paying? As a platform, Rockstar has its choice of revenue streams. Advertising in game through billboards, placement, radio and the web; sale of game objects, music and videos and stuff we can't think of. There are some hints out there. look at the front of the Social Club, there are ads for the Liberty City Marathon, a new club, a card game and sperm contributions. What happens if the platform is opened to other people for them to start businesses? It worked in media darling Second Life with a fraction of the audience.

Every console generation has its platform defining game. I think we are about to see the definition of this generation. It may be time for me to change my gamertag from ChaunceyGardner to Hiroprotagonist - if J will give it up.

Games Get No Respect: Rodney Dangerfield Edition

A while back, in the middle of a conversation with N'Gai Croal I mentioned we put games on a par with porn. He liked the comment and asked me to flesh it out. I knew I believed it, but I didn't really know why. I sat down and wrote a piece which N'Gai was kind enough to publish on his excellent blog . If this post seems better than the others, thank N'Gai for editing me.

So, thank you to N'Gai, and Here is the post:

I once told N'Gai that society at large perceives games much as it does porn. My reasoning is simple: everyone looks, but no one will admit it. You would be just as likely to pick up a woman in the bar and ask her to come home to see your porn collection as you would to invite her back to see your kick-ass gaming set up. The likelihood of either achieving the intended goal is very low, and one would get you slapped before she walked away in disgust. Then again, after thinking it through, I may be wrong. You may be more likely to choose porn. Applying the nine out of ten rule, nine out of ten women will say no to either proposition, but would you really rather have the one who says yes to games come home with you?

While it is easy to see the comparison, it is much harder figure out why. So when he asked me to expand on the thought and write a piece, it took me a while to figure out what to say. All I can do is talk on a personal level about a life in a career my parents don't understand and living on the receiving ends of disapproving stares everywhere from cocktail parties to school open houses.

I don't really know how we got to this point. Maybe it's because games are still considered toys. Even though most households own a game console, the vast majority of people consider videogames to be for kids. But if this misconception were the genesis of the low regard, Mickey Mouse would be mentioned in the same breadth as Jenna Jameson. He is mostly for kids, but adults don't put him in a porn box, and they are also willing to sit down and watch it with their kids. Some women may not even be offended if you asked them back to your place to see your digitally remastered "Steamboat Willie." But when it comes to games, Fox News has no qualms about backing journalist Geoff Keighley into a corner over the "Debbie Does Dallas"-meets-"Star Wars" content--content which is not even contained in Mass Effect. There must be another reason.
It could be the misconception that games are only for kids, combined with the sophisticated and sometimes violent content contained in games aimed at the average player--who happens to be 33 years old. Looking at trailers from Grand Theft Auto IV will provide no greater understanding of the feel of playing the game, or its contextual violence, than looking at a medley of death scenes from "The Sopranos" communicates the familial bond portrayed on the show. "The Sopranos" was not for kids and was not written as if it were. But if the public thought it was available on the Disney channel, they would be upset.
I think I am on to something. The majority of the public does not know what is in a game, or what goes into making one, but they still think we sell mature content to kids.

It is very easy to exist in the mainstream and never see a game. Most games sell less than one million units. A number which is the media equivalent of a hair on the back of a flea, hanging from the tip of a dog's tail. Unless you watch late night MTV, ESPN or G4, you won't see an ad for a game. Outside of comic books, Teen People and gaming publications you will never see an ad in a magazine.

If you want to buy a CD of a DVD, there is a place to buy one within walking distance of where you are sitting. Think about it, there is. If you want to buy a game, you have to mean it. You really have to look. When you walk into our number one retailer, Wal-Mart, games are hermetically sealed in glass coffins in the back of the store. I don't even know if they put the bullets behind glass. Unless you went to the store to look for one, you would not even know they exist . . . even though games are a growth area for them.

Forget about a non-gamer walking into our second-largest retailer, GameStop. There is no reason for them to go there, unless they're buying a game for someone else. If they do, they find a store that largely resembles the cluttered basement of their mother's house when they were a kid. Most of the time it does not smell much better. If they get past the front door, the counter person, whose every word is available to publishers for a price, will only discuss the last thing corporate was paid to channel through his mouth--right before he suggests you buy it used.

In other words, the mainstream has no access to what is really happening. Their only knowledge comes from the press. GTA had undisclosed sex in it! Hillary Clinton thinks games should be regulated like alcohol and cigarettes! Guitar Hero moved a lot of units! It is all their fault for not taking the time to learn about the industry we love.

Or maybe it is time to look in the mirror and realize our insular world is creating the issue. We suffer from low self-esteem without even knowing it. Like the porn business, too often we measure our self-worth by our ability to transition into to other media, or to cross over completely. Jenna Jameson is interviewed regularly by the mainstream media; she's viewed as a success not only because she sold her company to Playboy for hundreds of millions, but because she also appears in mainstream films. As a matter of fact, she achieved national press when she stood up at the AVN Awards, in front of an audience of her peers in the porn business and announced she would never appear in porn again. The announcement came as she was presenting the newly named "Jenna Jameson" crossing over award to the porn star with the best presence outside of porn.

Their biggest star is celebrated for her ability to shed the stigma of her origins and move on from the business relatively unscathed. We are not a hell of a lot different in games. Too often, we measure our self-worth by validation from industries other than our own. We see all kinds of press comparing games to box office receipts. Do you ever hear the movie industry comparing themselves to games, to television viewers, to live theatergoers? They don't, because games are nothing like box office.

We have a single window and a smaller market. We should be proud to say our margins are significantly higher and we know our consumers better. Franchises extending beyond a third installment are the rule, not the exception. We also exult in game-to-film transitions, as if the transition to film is a validation of our art. A franchise is often viewed as a success of it makes into film, but the film is completely irrelevant. We don't need the validation.

If games are so important, why won't we talk about them honestly? We just don't think they are important enough.
When I was about 13 years old I wanted a computer. Scratch that--I needed a computer. I went to my dad and told him I needed an Apple ][ (anyone who had one would only use the brackets for the "2" designation). I showed him the ad I found in a magazine and explained how I would learn how to program on this computer. What? The ad has 16 screen shots and 15 of them are games? I didn't even notice. I was looking at the command prompt for BASIC programming in the lower left corner. I could not admit I wanted it for the games.

Even at 13, I knew that games were too frivolous an application to justify the powerhouse of computing created by 16K of on-board memory and a cassette deck. The funny thing was, my dad still bought the computer; I still played games; and when I got bored, I taught myself to program. Maybe I wasn't lying. Maybe dad is just smarter than me. The truth of matter is, games turned out to be good. We both knew I was going to play them. I just knew instinctively that I couldn't admit it.

Flash forward almost exactly 20 years later. I am sitting at my desk at Eidos when I get an email--subject: "Meeting with Steve Jobs to hear about the future of computing." I almost wet my pants. I am sitting at this desk because Steve Jobs envisioned a personal computer. I responded with an immediate yes. I didn't really care what the email said, I just wanted to meet Steve Jobs; and, at least by email, he wanted to meet me. I anxiously waited for the day to arrive and found myself at Apple headquarters, sitting down to meet the man.

He led off with an Apple survey, which revealed that games were the second most popular application on consumer computers, and he wanted to support them. The survey actually surprised me. I could not believe so many people lied. Games are clearly number 1. Jobs knew it too. Because games advance technology more than any other application, with the possible exception

These two applications consume more bandwidth and processing cycles than any other two applications on the web today. People generally buy new technology for the most taxing applications, and in this instance, people were more willing to admit to gaming than something else. Porn may have helped the VHS beat Beta, but Jobs would only go so deep into the well. And since the greatest marketer of our time thought he needed games to get consumers back to the platform, I gave him Tomb Raider in exchange for a great marketing deal. Tomb Raider appeared prominently in the launch campaign for the iMac in 1998. The iMac ads bolstered Tomb Raider sales on all platforms. Tomb Raider told consumers that their iMac wanted to play with them.

Games were flying high. Steve Jobs was going to save Apple and he was going to put us in the forefront. He would garner mainstream attention and give us a much needed endorsement. The medium would be cast in the same light as a film from Pixar, rather than Vivid. Then I got the call from within the industry. Doug Lowenstein, who was running the ESA (then called the IDSA) called to ask for titles he could show to Congress. The ESA held annual exhibitions where they would set up videogames in front of Congress to show games were not bad. Doug asked me for a game. I offered Tomb Raider. It was the number one game on the market and best represented state of the art game technology and character.
He turned me down.

He said he could not show guns and violence to Congress and expect them to treat him favorably. Yet that same year, "L.A. Confidential," with more guns and violence than Tomb Raider, was nominated for an Academy Award as best picture. The winner that year? "Titanic," which had more nudity than any commercial videogame on the market at the time or since. Doug did more work than anyone I know to advance the cause of gamers and ensure constitutional protection for games. In his learned, expert view, he could not show Tomb Raider to a panel of mostly old white guys. He knew that his message would be rejected if he proudly displayed the best we had to offer.

That was 10 years ago, and while things have changed a bit, our industry is still young. We are just getting to the point where people will publicly admit they play games. The kids who played the first NES are growing into the adults who shape our entertainment and consumer decisions--and they still play games. We are on the cusp of genuine recognition. Once we get there, how do we define ourselves? As a young medium, people often say that the game business has not created its "Citizen Kane." The reality is, even if we had, we wouldn't know it. We have not defined a grammar for gaming or a structure for criticism. Hell, we have not even defined a uniform system of titles and credits for the people who make games. How much respect are we showing ourselves?

We must define our medium before others do it for us. Or should I say continue to do it for us? Shakespeare's plays were viewed as entertainment for the common man and not as high art. Until they were deeply analyzed, explained, and proven capable of standing the test of time. Most games, like most plays, are not Shakespeare; 99 percent or more, of everything created is absolute s--t. But there are some gems. We must figure out ways to identify those products--and elevate the people responsible for their existence.

We have many things to be proud of. Sam Houser, the most self secure man in games, once told me, "If someone can give me a single creative or financial reason to make a GTA film, I would do it." He is right. I think he said it about ten years ago and I still don't have one. Sam looks at his game as his art. His team is not setting out to make something that might tickle the fancy of their favorite filmmaker, driving that director or producer to make a movie. The team puts their collective heart and soul into their game. Their game is their statement. They take their external validation from the people who love to play their game. By working this way, their game stands alone, and their example stands a very good chance of transforming the industry.
Change is coming from the outside traditional gaming as well. I wrote a post on my blog in which I quoted the back cover of Ian Bogost's book, "Persuasive Games: The Expressive Power of Video Games," where he wrote, "Videogames lack the cultural stature of 'legitimate' art forms because they are widely perceived to be trivial and meaningless." I was the only one who picked up the book, because the crowd of people at the TED conference felt videogames lacked any meaningful cultural stature. Bogost's first book, "Unit Operations: An Approach to Videogame Criticism," is an attempt to establish a framework for review and analysis of games. "Persuasive Games" builds on these ideas and starts to explain the power of games. These books are important and are step in the right direction. They are establishing a language that will allow gamers and non-gamers alike to understand and discuss this medium. It is our responsibility to invite people into our world, and show them what they are missing.

Because the world is not going to one day wake up and proclaim that games have more value than porn.

Wednesday, April 23, 2008

Analysts: You Gotta Love Them Edition: Part Deux

Where do these guys come from? This morning a new doom and gloom analyst report came out from Goldman Sachs about the game business. Apparently, for the first time in the history of the business, software sales will peak mid cycle. Thank you for the clarification Mr. Higginbotham. Don't listen to me though, this is what he says:

Goldman Sachs analyst Robert Higginbotham has stated that video game sales may have peaked this year. And as one of the biggest beneficiaries of the video game boom, leading retailer GameStop may be negatively affected by a slow down, he said.

"We see GameStop shares as poised for a pullback as industry growth remains on a path toward deceleration from its current peak," Higginbotham wrote, according to MarketWatch.

Assuming his analysis is correct on the software side, which I will address below, apparently, Mr. Higginbotham does not believe Gamestop will enjoy any benefits from the inevitable price decrease in consoles. As I wrote in the last analyst post, these guys assume a static console base. In the real world, console sales increase exponentially each year. They increase even more when the prices fall, which they are likely to do this holiday season. New console buyers want to feed software to their machines. This means average unit sales and unit sales of hit titles increase. Don't forget Gamestop has a margin on those consoles as well.

He continues:

GameStop shares have risen 30 percent in the last month, but fell 2.5 percent in midday trading to $55.21. Although the next couple months are poised for further growth thanks to huge releases like GTA IV and Wii Fit, Higginbotham is concerned about the back half of the year. "...the remainder of the year lacks any big releases, and comparisons get tougher throughout the year as we lap titles such as Halo 3 and Guitar Hero III," he noted.

Before I talk about titles in the pipeline, Mr. Higginbotham should recognize the strength of GTA. GTA will open big, but it will have a long and robust tail. The game is one of the few games which will hold full retail price for a year. It will be one of the top sellers of the holiday season, even though it is released in Q2. As far as a dearth of strong titles, I wish this were the case. I sit in meetings with publishers trying to avoid the release of mega titles against our launches. I don't know about stock prices, P/E ratios or neat analytics, but I do know a sure thing when I see it. Especially this close to release. This holiday season, like all others, will be a blood bath for publishers at retail and a gift to consumers and software retailers. Let's take a look at the titles announced so far:

Titles you would mortgage your mother's house to have a piece of (all multi million sellers):

Gears of War 2
Fallout 3
Midnight Club Los Angeles
Madden Football '09
Soul Caliber IV
Star Wars: The Force Unleashed
Brothers in Arms Hell's Highway
SOCOM: Confrontation
Metal Gear Solid 4

Titles you would borrow on margin to have a piece of (all million plus sellers):

Too Human
Saints Row 2
Just Cause 2
Far Cry 2
Mercenaries 2
Bourne Conspiracy

Titles you would dip into your savings to have a piece of (likely million sellers and great breakout possibilities):

Sonic Unleashed
Little Big Planet
Lego Batman
Afro Samurai
Project Origin
Jason: Rise of the Argonauts

Contrary to Mr. Higginbotham's advice, I would not short software sales today, but thank for the tip.

Tuesday, April 22, 2008

GTA IV: Contextualization Edition

Nikki Finke was kind enough to pick up a post from my blog. In the preamble she described the game Grand Theft Auto IV as “loathsome.” I love Nikki, I love GTA, so I have to address the adjective. I could think of a lot of ways to describe GTA IV. Perhaps “mind boggling in scope,” “unbelievable achievement in game making,” “more technologically complex than the NASA systems that put a man on the moon,” or just “beautiful.”

GTA IV will be released on April 29 by a division of 2K Games called Rockstar. The game is actually the sixth installment in the series, all were created by the same core group of people. At the hub are Sam Houser, Dan Houser, and Leslie Benzies. The three men, together with Terry Donovan started Rockstar because they wanted to make games they would want to play. Mario is fun and all, but why couldn’t you turn off the Sopranos, and turn on a game which did not insult your intelligence? Gamers were aging, but the industry still viewed its consumers as emotionally stunted 12 year olds. Rockstar proved to be right. Today, the average age of a gamer is 33 years old and they want games that speak to adults. GTA IV is an "M" rated game - the industry equivalent to the MPAA's "R" rating - and will not be sold to anyone under 17.

The GTA series drives its medium forward and takes us where we’ve gone in films like Scarface and The Godfather. I am not stretching here, if we look at Roger Ebert’s original review for Scarface, we can easily replace the references to the film with references to GTA and make just as much sense.

The interesting thing is the way Tony Montana stays in the memory, taking on the dimensions of a real, tortured person. Most thrillers use interchangeable characters, and most gangster movies are more interested in action than personality, but "Scarface” is one of those special movies, like "The Godfather," that is willing to take a flawed, evil man and allow him to be human. . . .

Al Pacino does not make Montana into a sympathetic character, but he does make him into somebody we can identify with, in a horrified way, if only because of his perfectly understandable motivations. Wouldn't we all like to be rich and powerful, have desirable sex partners, live in a mansion, be catered to by faithful servants -- and hardly have to work? Well, yeah, now that you mention it. Dealing drugs offers the possibility of such a lifestyle, but it also involves selling your soul.

Isn’t the most troubling part of watching The Godfather, Scarface, or more recently, The Sopranos, feeling like you might do the same thing in the same situation? In GTA, you don't feel it, you do it. In each installment, you play a character, invited to prove himself to the bad guys. Instead of sitting and waiting to see whether Michael can take the gun out of the toilet and put a bullet in someone’s head, you do it. The game is not limited to large missions or tasks. Simple things serve to suspend your disbelief and move you further into the world than a film can. If you don’t like the song playing on the radio in your car, you change the station. If you want to work out, you go to the gym, your muscles will grow. You dictate the action and you make the decisions. While the game is no better lodestone for your moral compass than Scarface, there are consequences to your actions. If you commit a crime in public, the police will be after you. Like Tony Soprano, it may get pretty hot, but also like Tony Soprano the heat may die down without your going to jail.

GTA is violent, but like the movies, the violence is a reflection of our time. In 1972, Vincent Canby called The Godfather “. . . one of the most brutal and moving chronicles of American life ever designed within the limits of popular entertainment.” Today it runs regularly, unedited, on basic cable. Eleven years later Scarface took violence further to reach same point, and 15 years later, The Sopranos brought more sex and more violence directly into our homes on pay cable. In each case, it was ok to watch. GTA shows us, it is ok to play. The game is a fantasy, it is ok to pretend. Don’t be scared of the people doing this stuff in the game. Be scared of the people doing this stuff in real life.

CTA v. GTA: Wrong Kind of Special Edition

Games get special treatment. Equating the game to an X rated flim, the City of Chicago decided to stop a bus promotion for Grand Theft Auto IV. A transit authority representative said:

Over the years, GTA transit ads have come under fire in other cities as well. In 2006 Boston Mayor Thomas Menino and others forced the Massachusetts Bay Transit Authority (MBTA) to pull ads for GTA Vice City Stories. The transit chief there justified his decision by issuing a policy which equates M-rated games with X-rated movies.

I am not going to get into the First Amendment issue, because it is complicated and others will do it better. I am also not going to talk about the comparison of M to X, which is just wrong, because many are addressing that as well. I just want to do a quick comparison.

Here is the banned GTA ad:

Here is a campaign for the Sopranos:

The content of the Sopranos ad is more graphic than the one for GTA IV, and the content of the show is more graphic than GTA IV. The Sopranos contains nudity and stronger sexual content than any GTA game. But the ads still run. This has to be attributable to the great observation from the Byron Review:

There is a generational digital divide which means that parents do not necessarily feel equipped to help their children in this space - which can lead to fear and a sense of helplessness. This can be compounded by a risk-averse culture where we are inclined to keep our children 'indoors' despite their development needs to socialise and take risks.

Oh, yeah, and it is kind of our fault too. As an industry, we like to say we don't target minors with "M" rated games. Advertisements are only run on television late at night, and we do not advertise in mainstream magazines. We do however advertise in game publications, and who exactly do we think are buying those? There are strong restrictions and protections on the sales of games, but not the magazines. I can argue all day long about how difficult it is for a young person to get their hands on an "M" rated game, and how the violence is contextualized within the game and mostly not gratuitous, but how do you address an ad like this, completely without context?

I do not want my 12 year old to see this ad in his magazine. If he does, I want to be there to explain what is going on. I get just as uncomfortable when I see the commercials for the latest horror or slasher film during The Simpsons on Fox, but their poor choices do not justify ours. If we want to be able to make powerful arguments in they face of actions by organizations like the CTA, we cannot give them fodder like the Kane & Lynch ad.

One more thought. . . .I am glad I live in L.A. where, at least on this issue, the city puts it all into perspective.

Check it out: Afro Samurai Edition

You can buy the anime on iTunes. In the fall, you can play the game.

Monday, April 21, 2008

Game Content: Talking About What Really Sells Edition

Games are constantly being attacked for sex and violence - even though we have none of the first, and strictly control the second. Politicians, media, parents and crazy lawyers all attack the industry with a broad brush, sweeping kids together with adults, and M rated games together with E’s. The industry is diverse enough to accommodate Mario and Snake Plisken but the media and politicians still portray our market as one for children. The average aged gamer, who is 33 years old, probably enjoys playing Mario, but he also wants to play some Halo, a bit of GTA, some Call of Duty and a touch of Zelda.

Just to place some perspective on the market, I pulled some information from The Entertainment Software Association and the list of the top selling games from Next Gen. According to The ESA, eighty five percent of the games sold in 2007 were E, E10 or T. This equates to the G, PG and PG13 ratings in the film industry. The rating system is administered by a self imposed oversight board called the Entertainment Software Review Board. If you are interested in finding out what happens when an industry does not self regulate, take a look at David Hajdu's excellent analysis of the death of the comic book business, entitled "The Ten-Cent Plague: The Great Comic Book Scare and How it Changed America."

I went through the top selling games to see what people were buying ratings-wise. I compared the games to relevant films and other content, not to justify the game content, but to create a reference point for people unfamiliar with the game content.

The top 20 games of 2007 were: 
1) Call of Duty 4 (M) - most like Black Hawk Down (R)

2) Halo 3 (M) - most like Star Wars (PG) meets Alien (R)

3) Guitar Hero 3 (T) - most like playing air guitar in your mom’s basement

4) FIFA Soccer 08 (E) - most like watching a soccer game on Univision (GOOOOOOAAAAAL)

5) Madden Football 08 (E) - most like watching the Super Bowl

6) Need For Speed (E 10+) - most like The Fast and the Furious without the sex(PG13)

7) Pokemon Diamond and Pearl (E) if you don't know, I can't explain it.

8) Assassins Creed (M) - most like The Messenger: The Story of Joan of Arc (R)

9) Super Mario Galaxy (E) - most like Finding Nemo without the story (G)

10) Brain Age (E) - most like a rowing machine for your brain

11) The Simpsons (T) - most like, well, The Simpsons: The Movie (PG 13)

12) Pro Evolution Soccer (E) - most like watching a soccer game on Japanese TV

13) WWE Smackdown vs. Raw 2008 (T) most like WWE on TV

14) Mario and Sonic at the Olympic Games (E) - most like a Saturday morning cartoon in the good old days

15) Spiderman 3 (T) - most like Spiderman 3 (PG 13)

16) Transformers: The Game (T) - surprisingly similar to Transformers: The Movie (PG 13)

17) Mario Party 8 (E) - most like a game of Candyland on acid

18) Tiger Woods PGA Tour 08 (E) - slightly more interesting than watching the Masters on TV.

19) Pirates of the Caribbean: At World’s End (T) - curiously similar to Pirates of the Caribbean: At World’s End (PG 13)

20) Forza Motorsport 2 (E) - strikingly similar to watching auto racing on TV.

The three “M” rated games accounted for roughly 23% of the slightly less than 90 million units in sales represented by this list. Contrary to popular belief, there are no “Hostel’s” in there and no “Debbie Does Dallas.” In fact I challenge anyone to find a single naked boob. More significantly, I challenge anyone to find a single scene involving gratuitous violence.

Game ratings are based on similar criteria to those applied by the MPAA. The number one title, Call of Duty 4 places you in the middle of a war zone. People are shooting at you from all over, your buddies are dying and you are killing bad guys who look an awful lot like Iraqi insurgents.  Kids shouldn't play it. On the other hand, an adult gamer, would no more want to play an E version of the game, than watch a version of Black Hawk Down edited to secure a G rating. If you think these games are getting into the hands of children directly, you are just wrong.  The average age of the most frequent game buyer is 38 years old and Eighty percent of console games were purchased by people over the age of 18.   

I know statistics can be manipulated, so let's just look at practicalities.  If a person under the age of 18 tries to purchase a game at Wal-Mart, Blockbuster, Target, Toys R Us or Gamestop, a register prompt tells the cashier to check ID. Kids who are playing these games get them from their parents.  In Wal-Mart, Target and Toys R Us, the games are locked behind glass.  I don't think the bullets are locked up in Wal-Mart.  A kid can't even get the game to the register unless someone hands it to them.  When it happens, the someone is usually their parent - assuming none of us are catering to the dead end kids hanging out Gamestop looking for "buyers." You don't have to believe me, you can hear straight from the kids in this post on, where they explain their games come from their parents.

I am not delusional. I know there are ultra violent games out there. I played the snuff film called Manhunt and saw the ESRB speech where Gail Markels showed the scene from Postal where the player lights someone on fire and pees on them, but these games just don't sell in volume. Don't take my word for it, look on the top 100. You won't find them. Based on the unit sales of the 100th title, if you don’t make it into the top 100, you don’t earn out your production cost.

Like any other media, violence alone will not sell games. The game must be good. The Sopranos was loaded with violence and boobies on HBO, but they were able to strip out the violence and boobies and still had a hit on A&E. The same can be said for any best selling M rated game. But as grown ups, why should we? So Mr. Politician, when complaining about in game violence, we are really asking whether someone over the age of 18 should be able to watch Black Hawk Down or Alien.

Thursday, April 17, 2008

NBC Universal and Warner want Eidos: Only two? Edition

According to the Daily Mail, Eidos is in discussions with NBC Universal and Warner for an investment or acquisition. UK reporting requirements differ from those in the US and announcements of potential acquisitions of public companies must be made very early. I left Eidos in February of 1999 and have not owned a share in the company since 1999 - I wish I could say I have not owned a share since 2000, but I will save the discussion for another post.

Eidos earned the tag "beleaguered" in front of its name. From about 2000 to 2005 when the game market was growing a rapid clip, Eidos market cap fell from over 1 billion dollars to under $100 million. There was a blip in the last couple of years when it looked like SCi was going to turn them around, but after running up as high as 700 million dollars, a string of quarterly losses drove market cap down to where it is today, at a slightly elevated 106 million dollars. The game publishers seem to have turned their backs on the company and are not expressing interest (or maybe not at the current price) and there are two non game participants at the table. My question is, why only two?

Disney, Warner, Universal and Paramount have all announced intentions to grow their video game businesses. Disney is furthest ahead with Warner moving up in second position and Universal and Paramount just getting out of the gate. Each studio is trying to determine an appropriate strategy and each is slightly different. The thing they all agree upon, is the business is different than anything else they are doing, and they want to enter the market intelligently. One of the key issues is determining who will build the games, followed closely by credibility in relevant markets. Eidos delivers both, at a significant discount.

If you take a look at Eidos assets, first on the franchise side, then on the development side you will see either one standing alone would justify the purchase price.

A game franchise is the most valuable asset in the game business. Unlike film, our franchises grow with subsequent release and build on existing technology. Franchises like Final Fantasy are in their 15 iteration, and as we see with Madden Football, the market will even forgive some bad installments over the years, so long as they are followed up by good ones. Take Two is a top tier publisher with one mega franchise. Activision existed for years on one, and now has only two, in Call of Duty and Guitar Hero - after the merger closes, they will be a powerhouse with World of Warcraft and Crash Bandicoot. EA has The Sims, EA Sports, Need for Speed and Medal of Honor. In most cases, a handful of franchises make a very profitable publisher. Eidos fully owns and pays no license fees on one mega franchise and 4 franchises which sold over over a million. As the Tomb Raider film rights reverted from Paramount, all of the rights are unencumbered.

Solid, proven development teams are hard to come by. Considering the rate at which independent developers are closing their doors, they are getting harder ever day. We see anecdotal support of value in acquisitions like EA's purchase of VG Holdings, parent company of super developers Pandemic and Bioware for up to 865 million dollars last year. The purchase including something like 8 or nine games in development and rights to a couple million plus selling franchises. The price is arguably supported because past game performance strongly indicates future success. Companies who developed great games in the past make great games in the future. Bioware and Pandemic developed great games. You know who else develops great games? Eidos internal teams. Among other studios, Eidos own Crystal Dynamics which originally built Legacy of Kain (3.5 million units), but recently was responsible for Tomb Raider, the company also owns IO Interactive, the company responsible for Hitman and Legacy of Kain. Not to mention Eidos Hungary who built the very innovative Battlestations Midway for a song.

Eidos is a company with great assets, poorly managed. With the right management in place the company will turn around on a dime. NBC Uni and Warner are both well positioned to make the turn around. When measured against their studio rivals, the winning bidder will instantly industry leading development capability (in the case of Warner, further enhancing Monolith) and instant street cred in the game market.

Sure there are other costs associated with restructuring, higher employee termination costs in the Europe, redundancies, and even after canceling a bunch of games, the company will need a more than 100 million dollars to execute on their plan, but what would it cost to build the franchises and development resource in the first place? How long would it take?

Don't ask me whether to buy the stock today. I don't know. I was president of the company and after I left I still sold my shares a year too early.

Tuesday, April 15, 2008

Analysts: You Gotta Love Them Edition

The game analysis business is very competitive. They like to make important or controversial announcements to get some ink. As we see in the graphic I stole from Kotaku's "Analyzing the Analysts" post, historical accuracy does not seem to be an impediment to their continued pronouncements. But sometimes, analysts askew wild statements like "EA will postpone GTA IV" or "iPhone is not a viable gaming platform" in favor of an appearance of real live analytics. In this case, UBS's Ben Schachter established a premise, supported by a bunch of numbers to predict GTA IV sales. Unfortunately, he ignored some facts. Why cloud the model with real world facts, when your predictions can be so much more accurate without them?

Schachter says the performance of GTA IV should be measured by tie ratio to the installed base. This is a great addition to the universe of video game analytics. Really. It is the first time I have seen it incorporated into the analysis of game sales. Too often game companies are modeled on either film or technology companies without regard to the quintennial (I think I made that up) fluctuations in the installed base of consoles. Sadly, this is the last supportable fact in Mr. Schachter's analysis before he takes his step through the looking glass.

I pulled some quotes from the Gamedaily piece:

He explains:

"Investors cannot define success of the game in terms of units of GTA IV sold compared with prior GTA titles. This is because the game can only be sold to consumers who own a console capable of playing the game. To that end, the success of the game is defined by the attach rate (or tie ratio) which equals the number of units sold / the installed base of applicable consoles (in this case Xbox 360 and PS3)," he explained.

Mr. Schachter appears to be looking at the installed base of consoles as a static number. According to, the current size of the relevant installed based is 30.3 million worldwide. As evidenced by previous console cycles, the installed base grows at an ever increasing rate. Features increase, production costs go down and retail prices go down. The unit sales seem to contemplate Christmas software sales, but not Christmas hardware sales. Moreover, GTA IV is one of those elite titles we refer to as "console movers." Granted the incremental number of people who purchase the console to play the game is not earth shattering, but it is significant. There are a large number of people out there sitting on the fence who will buy a console to play the game. Don't believe me, then tell me why Microsoft was willing to pay for exclusive content, and why is Sony releasing a bundled PS3 with GTA IV?

Moving on. . . .

Circling back to the positive early buzz and the importance of reviews, Schachter stated that there is definitely some upside in his six million units estimate. "Should Metacritic scores come in above 95, attach rates could rise to 30%+, implying potential U.S. sales of 7-8mm units (scores for the past three GTA titles were 95, 95, and 97). Any attach rate above 26% would beat expectations in our view," he said.

Here Mr. Schachter has accurately captured the sentiment of the market. So many of the core gamers who played all the GTA's and purchased consoles are waiting to see what the critics have to say. GTA is definitely one of those titles people never hear about and will not buy unless there are positive reviews. I am not being serious here. Worse, I don't see how the attach rate is extrapolated. His number would put the attach rate on a par with Call of Duty 4 which is currently at 28.8%, but should be a bit higher as the bulk of its sales happened into a slightly smaller base. While this is the top selling title on the consoles to date, GTA has traditionally more than doubled sales of COD and number 2, Halo, in previous releases. But we can't really use prior attach rates because they happened a different point in the cycle. He doesn't mention it, but attach rates for core games are higher on the front half of the cycle than the back. In fact GTA's performance on PS2 has very impressive tie ratios, hovering around 10%. This is a really long way of saying attach rates are slippery. Numbers go up, numbers go down, in the end, they can support anything.

Finally, we get to revenue:

"At 6mm units in the U.S., the game would generate ~$360 million in total retail sales (assuming a $60 retail price), at 8mm units, the game would generate $480 million of sales in the U.S., or about 33% upside from current expectations," he added. "Additionally, we expect the game could do similar numbers in Europe, almost doubling our U.S. totals."

Once again we ignore all those pesky facts which only introduce additional variables. He also uses retail numbers so he doesn't have to worry about all those silly internal numbers like the bottom line. The retail price is assumed to be $60. We all know what happens when we assume. First, the retail price of the base unit is $60 USD in the US. The retail price of the Collector's Edition is $90. As GTA is one of the few titles which can hold retail for over a year, even if the Collector's run is relatively small, it will increase the average retail price. I know what you are saying, the increase is peanuts. Yes it is, but the retail revenue increase in Europe is not. The UK retail price of GTA IV is 39 pounds and the Euro price on the continent is 65 Euros, or at today's rates, USD 76.14 and USD 102.45, respectively. If sales are roughly the same in Europe, or 40% as stated in the article, shouldn't revenue be much, much higher?

I realize headlines are cool, and new angles on analysis are hard to find, but c'mon guys. Let's sprinkle some reality into the work.

Saturday, April 12, 2008

Writers: Why We Need Them in Games Edition

I have been reading the back and forth between writers and game designers sparked by Adam Maxwell’s gamasutra article. There is no shortage of vitriol or cultural elitism on either side. At one extreme, designers are saying writers are never useful or necessary, on the other writers are talking about the weakness of games stories. Did anyone realize in between calling each other morons and useless, they are not even talking about the same thing? Before the sides can work out their differences, they have to be within shouting distance of the same topic. Once they address each other, everyone will agree writers are a tremendous help to games, but they are a single element and their contribution will not make or break any game.

I come to the party from the somewhat unique perspective of someone who both hired and represented writers to work on games. In these roles and from playing a lot of games – a lot of games – I learned there is one truism, a great game with a shit story is going to do very well, but the greatest story in the world will not save a shit game. We play games to have fun. The backbone of the game experience is your interaction with the things on screen. If the interaction is not fun, you won’t slog through it to get to the stimulating third act. Game developers take this to mean a writer is an after thought. By doing so, they are losing the opportunity to share their work with an audience beyond traditional gamers. On the other side of the equation, our Hollywood brethren often see interaction interfering with good structure. Don’t believe me, take a look at this quote from a Hollywood game reviewer:

As a writer myself, you can probably imagine I'm not too sympathetic to Maxwell's argument. In fact, I think I make it a point in my reviews to focus on story, characters, humor and themes, much more than other game reviewers. Perhaps that's why I'm a little more positive in my reviews of titles like "Kane and Lynch" and "The Simpsons Game" and a little harder on "Super Mario Galaxy" and "Rainbow Six Vegas 2" than most other critics.

Does that make sense? Let’s look back through his prism at a film:

I rented No Country for Old Men. The thing sucked. It was completely on rails. I tried to use the bolt gun and the NPC would not let go of it. Completely non-interactive. I tried to use the shotgun at the murder scene, only cinematics. The only thing I could do was advance scenes or go to the menu. I would have to give this one two thumbs way down.

How about a trip to Sea World:

The crowd was awed by Shamu’s jumping ability. He soared above the tank like he had a jet engine up his ass and spun around in a 360 before landing back in the tank and kissing a small child. The food was beyond compare for any other theme park and the weather was beautiful. Unfortunately, I do have to take points off the overall experience because there weren’t any lions. The lack of lions caused the experience pale in comparison to the Bronx Zoo, which had lots of lions.

I rented the film, to see a compelling narrative; I went to Sea World to see the fish. I play a game to interact. I am not looking for something outside of the experience. In his quest for narrative, our game critic is criticizing some great games. His reviews were dramatically different than those of game reviewers. The Simpsons Game utilized writers from the series and the writing was fantastic and completely in tune with the license. But the game was bad. There were camera problems, play balancing issues and other factors, which made it just not fun. Likewise, Kane and Lynch had very well developed characters and a nice story, but neither would overcome the frustratingly poor targeting system and bad AI, which killed sales. The operative descriptor of these properties is "game" and the game was bad. On the other hand, finding all the stars in Mario Galaxy in a single sitting is easier than finding the story, but who ever bought a Mario game for the story. Pick up your Wii mote and you will lose hours. It is just plain addictive. I promise you, not a single one of the legions of game reviewers who gave the game one of the highest average review scores in game history, took off points for their inability to identify Mario’s motivation.

When a critic attacks a game for a bad story or a writer comes to the table with the intention of fixing narrative, or desiging a a game, they are doing a disservice to themselves, and almost guarantying a bad outcome. These are the writers who go to their agents saying they want to work in games. The agents put these guys at the top of their lists, and when the calls come in from the publishers, and after a discussion about how much less they are going to get paid than on a film or tv job, they are sent out to do the work. No one ever talks to them about what is expected from them. As a result of this process, we end up with a writer who believes they will be changing the game world paired with a developer who thinks they are the lead writer. Relationships arising this way create the tension and ill feelings among writers and developers.

The best relationships come from a writer who likes games and only wants to write and a developer who appreciates their contribution. These writers respect designers enough to know they can’t design a game. Robert Rodriguez writes, directs, edits and scores great action movies and plays a mean game of Halo. He does not want to design a game. I was with him when he took a look at a game script and saw the characters were not well established in the opening scene. Robert did not want to give comments on how the game play should unfold, but he did want to explain why it was happening. His paragraph describing the establishing shot of a bad guy's office painted a more compelling and complete picture of the character than any 20-minute introductory level I ever played. Any game would benefit from Robert, few developers know he would do it. I never met a designer who could do that. The company did not listen to Robert and the game came out without the scene. The game didn't suck, but it could have been much better.

Once the writer is picked, the developer has to communicate what they want. This hardly ever happens. One of my favorite horror stories came from one of the publishers who said they would never work with a big name writer again. There are a few of them. They told me the experience they had with an Oscar nominated writer was so bad, they would never hire anyone else. The guy didn’t know shit, he didn’t deliver shit, and everything he said was wrong and never relevant. I knew the guy so this seemed odd to me. I called up to ask what happened. It turns out there was significant back and forth between the writer and the developer. The feedback for each draft was limited to “not right” and “make it different.” Oh yes, there was one more thing, it was six months into the project before they told the writer the lead character could not speak.

As much as the developers hate to admit it, at its best, the relationship is symbiotic. The developer can design and animate a character to participate in a game, but like Gepetto and Pinocchio, it takes the Blue Fairy to give it life. Writers are our Blue Fairies. One of the first times I saw a successful use of a writer on a game was about 11 years ago on Fighting Force. Core Design was working on the game and it was ground breaking, innovative, and fun. The characters could not be described as anything beyond generic. We brought comic book writer and artist, Marc Silvestri, in to help with characters. Marc looked at the little girl character and said "that Jubilee rip off, can she cross her arms, blow a bubble, and tap her foot?" He meant during an idle move, but didn't know what it was called. "Can she rip the bubble out of her mouth and throw it before a big fight?" These moves and new designs were incorporated into the game and the game got better. Core was able to design a brilliant game, but they would not have come up with the character additions in a million years. It is just not what they do.

This not to say writers can only be Blue Fairies, but we have to start somewhere. Before Activision hired Randall Jahnson to work on Gun, they read a lot of scripts. After reading his work, they decided he was the guy to write the game. They sat down with Randall and told him they were making an FPS in a western environment. Nothing more. Then they asked for an outline. Randall spent some time with Neversoft, understanding the technology and gameplay. He worked with them on the story beats and then made himself available over the course of the next two years. The end result was one of the most lauded game stories ever.

Given time and communication, it can really work.

For anyone who thinks these issues are going to resolve themselves overnight, let me point to a story from Variety:

THE HOT TICKET two weeks ago was to Francis Ford Coppola's hacienda in Napa. Fred Fuchs, head of Coppola's American Zoetrope, pulled 50 people to the 1,600 -acre estate for a weekend summit on multimedia, complete with five meals and a tour of the vineyard.

After Saturday morning intros, the afternoon was taken up with demos from companies like Virgin Games and Spectrum HoloByte.

"We're interested in getting into this in a big way," Fuchs said. "We met a lot of fantastic people."

The future isn't in licensing and adapting feature films, it's creating new characters and stories for the interactive marketplace. That's what we're interested in. The time has come." — May 13, 1993.