ATVI - Activision Blizzard

[Jurgis]

I am looking at ATVI and cannot decide whether it's attractive as investment or not.

Just gonna post random thoughts:

 

- Lost CFO to Netflix

- Activision and Blizzard division CEOs both resigned in 2018

- Separated from Bungie/Destiny franchise - this was lauded (on Morningstar, for example) as the big upcoming franchise. Now it's gone.

- Close to zero organic sales growth for the last 10+ years

- It's not clear whether King Digital purchase was worthwhile

- WoW continues to decline (as expected)

- FCF is nice, but even with current stock decline the ratios are not that cheap

 

I'd think it's going into "too hard" pile.

[5xEBITDA]

ATVI is a disaster, as is EA, but at least EA has some positive growth going for them at the moment. ATVI is going to lever up and buy something I bet, maybe TTWO or another publisher. ATVI has been a good short but I wouldn't go long them or EA at this point, they are both facing business model challenges that aren't even close to being fixed right now.

[Jurgis]

ATVI has been a good short but I wouldn't go long them or EA at this point, they are both facing business model challenges that aren't even close to being fixed right now.

 

Would you care to elaborate on this? Thanks.

[5xEBITDA]

ATVI has been a good short but I wouldn't go long them or EA at this point, they are both facing business model challenges that aren't even close to being fixed right now.

 

Would you care to elaborate on this? Thanks.

 

Sure, there are a couple points to this. I've been following the industry for ~5 years.

 

First, the traditional business model is known as gaming as a product (GaaP). You buy the game retail and aside from maybe a DLC or expansion pack, the company's engagement with the customer ended there. This is shifting to gaming as a service (GaaS) which is focused on extending the interaction between the company and the customer by keeping them engaged in games longer. This is done by 1) having more "bite sized" DLCs (maybe 4-5 total over ~1.5 years), 2) micro-transactions (MTX), and 3) subscriptions.

 

Subscriptions are tough, you don't really see that anymore except for mobile games.

 

DLCs and MTX have been the bread and butter for EA/ATVI since 2012. I like using Battlefield as an example. Retail price is $60 and the life cycle is 1.5 - 2 years. Over that time, you have 4-5 DLCs and then MTX purchases which, all in, brings your total revenue per customer to ~$300 over that time period. Aside from MTX, you actually need to buy the DLCs because if you're in a group party with friends and the map rotates to one you don't have you'll get kicked out of your group. So the customers have been fairly captive from that point of view. Its been an amazing strategy since this first rolled out, but its falling apart now which I'll explain.

 

An interesting note on the $60 base price tag. There's not really a good reason for it to be $60 anymore. Gaming cartridges (back in the 90s) used to actually cost around $90, but after the industry switched from cartridge to CD-ROMs they dropped the price to $60 since it was a big manufacturing cost savings. Another smart thing the gaming companies have done is offer digital downloading at the same $60 because the margins are much bigger. But I don't think this $60 is here to stay much longer.

 

The player base has been increasingly alienated by these pricing practices, and for a long time it was just something they needed to suck up and deal with. However, as the # of people with CS backgrounds have grown the barriers to entry to make games has plummeted and independent studios are putting out fun games with graphics not so far off from the tent pole, AAA titles the big studios put out. So, now the player base have alternatives and are beginning to revolt against these prices. You've seen this with backlash against Star Wars Battlefront II, for example. These independent games are primarily all free to play, or maybe cost like $10.

 

The moment this industry actually changed was the success of Fortnite. So many people think Fornite is popular because the battle royale mode is fun. They couldn't be more wrong. The reason Fornite is such a big deal is because its shown this "GaaS" model really working. The wikipedia page for Epic Games actually spells out this strategy, which is why I'm surprised no one really seems to get it. Fornite is a fun, free to play game and only makes money from in-game MTX purchases. You can google around and see just how much money this game is making off of this...

 

That success signaled to me that ATVI/EA had a real problem on their hands because they both wanted to capture that success, but don't really know how to do it. I specifically shorted ATVI because they were implementing battle royale mode into Call of Duty, but it was clear to me that wasn't going to make a difference to the customer because the pricing structure was staying the same. Low and behold, ATVI has been disappointed by call of duty this year.

 

So basically, ATVI/EA are massively over-earning here due to DLC/MTX purchases. ATVI is the worst offender, I think something like 60%+ of their EBITDA comes from these purchases.

 

They have a pricing problem here. I don't think they want to do away with in-game purchases which is why I think they're going to start cutting the up front price tag of $60.

 

You'll see a lot of things in the news about "loot boxes" and regulations on that which I think are kinda overblown. I do think this product will be regulated, just not in the way people think. No one is going to actually ban it out right. What you're going to have is the ESRB (video game rating agency) begin issuing notices on boxes that in-game purchases are enabled for games, and I wouldn't be surprised if you'll need an adult to purchase it for you if you're younger than 15 just like how it is with M rated games.

 

I think this is going to be a big deal because, and I don't have hard #s for this, I think the majority of the in-game DLC and MTX purchase volume is coming from kids who have their parents credit cards on their play station / xbox. These transactions are so small, like maybe < $5 each, that it never sets off any charge alerts. However, because they're so easy to make the volume starts to really add up. You see news articles about guys blowing $10k on characters in FIFA, and while that exists, I think it makes up a small % of fanatics and isn't really a big deal. I wouldn't be surprised to see gaming consoles and PCs start to require a two-step authorization with your phone to make these purchases. If this doesn't happen, maybe a screen pop up that just keeps the amount of $ you've spent per month or year more in front of your face. They may be < $5 each, but if a kid saw that to-date he had ran up $100 they might think twice. The parents sure would.

 

ATVI specifically is in trouble because their major franchises are all either flat growth or starting to decline. Now that they lost Bungie they're really in a pickle. Call of duty isn't going to really pick back up unless you totally overhaul things and make it more customer friendly, so I bet you they'll buy another studio.

 

So thats really the basics of how this business is changing. It extends further along certain verticals which I'm happy to go into more if you want.

[Jurgis]

Thanks for a detailed reply.

 

I agree with you regarding

 

ATVI specifically is in trouble because their major franchises are all either flat growth or starting to decline. Now that they lost Bungie they're really in a pickle. Call of duty isn't going to really pick back up unless you totally overhaul things and make it more customer friendly

 

I also understand what you are saying about game pricing, DLC pricing, and MTXes.

I somewhat agree with you, but I would not be so certain as you are about what the future holds. I've heard a narrative similar to yours multiple times in the past. Maybe this time is different, but I would not be certain about it.

 

Yes, there are free-to-play games that are good/great. I don't really know if they gonna take over a large percentage of marketplace. It's not so easy to come out with a new Fortnite as it might seem. There are a lot of games even from known developers that bomb or just do not make a dent. ( I am currently playing a f2p game and I have played f2p MMOs in the past. ). The narrative that f2p will kill purchased games market is not new. f2p mostly killed single game subscriptions. But now there are per-company game catalog subscriptions that you did not touch upon and that are possibly doing well (? not sure ?).

 

I think your narrative regarding MTX is a bit self contradictory. If you expect MTX restrictions and regulation, then big publishers will do better than f2p companies, since this will hit f2p more than the purchased games and DLC sales. IMHO there won't be any measurable regulation, but that's just MHO. ( Overall, I bet against there being a regulation in a number of areas in US... not just in MTX ).

 

Regarding retail game pricing. Personally, I am cheap, so I don't buy anything for full price. There are already sales, bundles, etc. where you can get premier games with DLCs (after some time) at 20-50-70% off. And yet, if your friends are playing new game(s), you're likely not gonna wait (1-2 years?) for that sale. Yes, it's possible that ATVI/EA/etc. may drop the ball and lower new game prices. I think they won't, but we'll see.

I agree though that it is easier to sell something that is a part of huge franchise. And ATVI has issues with aging franchises and losing new(er) Destiny. I wonder if they can manage to make Overwatch into a large franchise.

 

Still, thanks a lot for your post and I'd be interested to read any further thoughts you have.

 

Best

 

[cameronfen]

Thanks 5x and Jurgis for your insights.  I know a lot less about this than you two but I thought I'd offer my 2 cents and my opinion.  Honestly, I think the freemium model will take over.  I think in the past, people didnt have the revenue model down, so people would only risk that model on a low budget game.  However, starting in Asia, the freemium model has taken over, because companies figured out how to make the top 1% gamers purchase massive amounts of in game prizes.  I have a friend who worked at one of the big Korean game companies, think Nexon or DeNA, I forget which, and he spent his time trying to make the top spenders the top .5% of in app purchases, spend more than the 100k or so they spent on lootboxes.  The freemium model is basically a casino. They really dont care about what the rest of us do even if you purchase a little here or there.  The only reason we exist is to build a moat to keep the people addicted to buying lootboxes from going anywhere else (either playing another game or just eating dinner).  Right now freemium games are pretty modest in their ambition compared to like WoW or GTA.  But they are getting more and more ambitious as they figure out how to monetize correctly.  EA and ATVI are very much behind the curve on this, and the hybrid strategy is just making things worse in the long run.  As going the freemium route will be a huge short term blow as ARPU  will go way down, the popularity of games like fortnight will pave the way for even more ambitious f2p games.  Meanwhile the paywalls in front of games like CoD and SW Battlefront II will be shooting them in the foot in the long run as they will have way less purchasing data for in game purchases and will not be able to optimize lootbox placement, content and advertisement as effectively as these companies that have huge purchasing data advantages.  This is my opinion, but I dont really follow the space much.

[Spekulatius]

I agree with the freemium model taking share. The nice thing about freemium is that it reduces the hurdle to try it and games gain critical mass quicker. For a MMO game, critical mass is important and this is now way easier to achieve using a freemium model. both ATVI and EA seem stuck milking their existing franchise until a declining user base very likely causes quicker and quicker decline at the tail of Games lifecycle.

[Lakesider]

I would argue that the best franchises don't decline for ever, they over milk it and then retire it for a while. Then there is a come back a few years down the track. These franchises have future value still.

 

The problem with EA I think is execution, Executives ordering the games are not gamers, sometimes they can impair their franchise by producing a sub par game in a hurry.

[Jurgis]

If someone put a gun to my head and made me choose F2P vs purchasable games @ full price, I would choose purchasable games @ full price.

 

If I had to list ten best games, it would all be purchasable games.

 

But that's just me. I'm very likely contrarian indicator.  8)

[Paarslaars]

I'm still convinced this model will become illegal eventually, it's really nothing more than slot machines accessible to minors.

[5xEBITDA]

The narrative that f2p will kill purchased games market is not new. f2p mostly killed single game subscriptions.

 

The way that I look at the current F2P market isn't that they're going to completely destroy the paid market as is, just that the barriers to entry for F2P games have come down enough to where the current slate offers a fine substitution vs. AAA titles that is beginning to show cracks in the current model.

 

But now there are per-company game catalog subscriptions that you did not touch upon and that are possibly doing well (? not sure ?).

I do think eventually the publishers will release everything on a Netflix-ish type of subscription model, but I don't think internet speeds are where they need to be currently to stream something like a Battlefield, so theres a way to go on that front.

 

 

I think your narrative regarding MTX is a bit self contradictory. If you expect MTX restrictions and regulation, then big publishers will do better than f2p companies, since this will hit f2p more than the purchased games and DLC sales.

 

I probably didn't make it clear in my other post. I think the MTX strategy, as is, is enough to invite regulation and I can think of a few ways how that would be implemented. However, I think the up-front pricing is more likely to be the peg they decide to go down rather than nix MTX. Its hard to do a per content analysis, but take a call of duty or battlefield. The content that comes with the game when you buy it retail is really only a small % of the total content over the life of the game, yet you're paying a disproportionate amount up front. Basically for the privilege to spend more money later on. The gaming community recognizes the up front amount of content has been declining, and I don't think its very fair to the consumer.

 

Thats kinda the point I was trying to make about Fortnite. If you have a fun game thats free, the skys the limit on MTX and I don't think anyone really cares at that point because its a discretionary purchase.

[Jurgis]

5xEBITDA, OK, I understand what you are saying. Thanks for posting. Let's see how it all works out.  8)

[5xEBITDA]

5xEBITDA, OK, I understand what you are saying. Thanks for posting. Let's see how it all works out.  8)

 

Yep! FYI, I'm very bullish on TTWO.

[Pelagic]

 

But now there are per-company game catalog subscriptions that you did not touch upon and that are possibly doing well (? not sure ?).

I do think eventually the publishers will release everything on a Netflix-ish type of subscription model, but I don't think internet speeds are where they need to be currently to stream something like a Battlefield, so theres a way to go on that front.

 

EA's origin access already offers this at $100/year for full access to their premier titles. They have a lower tier option for $30 for older titles. Whether it's profitable or not remains to be seen.

 

https://www.origin.com/usa/en-us/store/origin-access

 

I do however see a problem with the subscription model. Gamers, like a Netflix binger, can pay for a single month, play a title when it's hot and decide whether they like it or not, all for significantly less than $60 cost of the full game purchase.

 

As far as pricing goes, $100/year is fairly reasonable for full access to EA's premier titles, they must feel they're able to make up the sale price with in game transactions across more games that subscribers have access to.

 

Good discussion. A bit on Fortnite and its success, I'd attribute a meaningful portion of it to its cross-platform functionality. It's one of the first major games where gamers on different platforms can play together which has had a huge impact on recruiting new players to the game.

[5xEBITDA]

 

EA's origin access already offers this at $100/year for full access to their premier titles. They have a lower tier option for $30 for older titles. Whether it's profitable or not remains to be seen.

 

https://www.origin.com/usa/en-us/store/origin-access

 

 

Thanks yep you're right. The problem with this is that you still need to download the games to your PC before you can play them. When these services move to the cloud, and you can comfortably play a huge content game like Battlefield seamlessly via that platform, the industry will be turned on its head. But as I mentioned, the tech just isn't there yet for the average consumer. They are working on it though.

 

A bit on Fortnite and its success, I'd attribute a meaningful portion of it to its cross-platform functionality. It's one of the first major games where gamers on different platforms can play together which has had a huge impact on recruiting new players to the game.

 

Yeah this is another huge point which is very bad for Microsoft/Sony. Those guys earn royalties from the publishers for allowing games to be compatible with the Xbox/Playstation. Fortnite disrupted the back end of this tech by allowing cross platform play. If Fortnite can do it, every one can. So this really harms the guys manufacturing the consoles. In fact, its a reason why I've started to hear some chatter that Sony and Microsoft are thinking about acquiring publishers because thats the only way they may be able to continue making money off of video games.

[SHDL]

This is a very nice discussion, thanks. 

 

My own hunch is that the video game market for adults will evolve somewhat differently from that for kids, with a pure subscription-type plan taking over the latter.  I have no idea who's going to win the former market (or whether there will be any big winners at all), but I do think that Nintendo has an excellent shot at winning the latter market - so that's where my money is.

[Pelagic]

 

EA's origin access already offers this at $100/year for full access to their premier titles. They have a lower tier option for $30 for older titles. Whether it's profitable or not remains to be seen.

 

https://www.origin.com/usa/en-us/store/origin-access

 

 

Thanks yep you're right. The problem with this is that you still need to download the games to your PC before you can play them. When these services move to the cloud, and you can comfortably play a huge content game like Battlefield seamlessly via that platform, the industry will be turned on its head. But as I mentioned, the tech just isn't there yet for the average consumer. They are working on it though.

 

A bit on Fortnite and its success, I'd attribute a meaningful portion of it to its cross-platform functionality. It's one of the first major games where gamers on different platforms can play together which has had a huge impact on recruiting new players to the game.

 

Yeah this is another huge point which is very bad for Microsoft/Sony. Those guys earn royalties from the publishers for allowing games to be compatible with the Xbox/Playstation. Fortnite disrupted the back end of this tech by allowing cross platform play. If Fortnite can do it, every one can. So this really harms the guys manufacturing the consoles. In fact, its a reason why I've started to hear some chatter that Sony and Microsoft are thinking about acquiring publishers because thats the only way they may be able to continue making money off of video games.

 

Are you familiar with Nvidia's GeForce Now?

 

https://www.nvidia.com/en-us/geforce/products/geforce-now/

 

I just found out about it after doing some research on cloud based gaming. I discovered I have an account already with access to it so am going to try it out, initial research into it seems quite promising though with people reporting quality game play through their cloud based gaming service. Big name games like PUBG and Fortnite are playable through it, effectively eliminating the need for an expensive PC to play them. I honestly had no idea this was already possible but quite excited to give it a try. I don't see any of the AAA titles like BF:V or CoD in their library but I suspect they'll be able to include them as their user base grows.

 

Your point regarding the death of hardware manufacturers is well taken, why spend $400 on a console if you're in an area with good broadband. Just apply for (it's currently free) Nvidia's Now experience and play like that. When they end up monetizing it, likely through a subscription package, pay for that instead of the hardware and then Nvidia will have leverage over game designers that want to target users on their Now platform.

[5xEBITDA]

 

EA's origin access already offers this at $100/year for full access to their premier titles. They have a lower tier option for $30 for older titles. Whether it's profitable or not remains to be seen.

 

https://www.origin.com/usa/en-us/store/origin-access

 

 

Thanks yep you're right. The problem with this is that you still need to download the games to your PC before you can play them. When these services move to the cloud, and you can comfortably play a huge content game like Battlefield seamlessly via that platform, the industry will be turned on its head. But as I mentioned, the tech just isn't there yet for the average consumer. They are working on it though.

 

A bit on Fortnite and its success, I'd attribute a meaningful portion of it to its cross-platform functionality. It's one of the first major games where gamers on different platforms can play together which has had a huge impact on recruiting new players to the game.

 

Yeah this is another huge point which is very bad for Microsoft/Sony. Those guys earn royalties from the publishers for allowing games to be compatible with the Xbox/Playstation. Fortnite disrupted the back end of this tech by allowing cross platform play. If Fortnite can do it, every one can. So this really harms the guys manufacturing the consoles. In fact, its a reason why I've started to hear some chatter that Sony and Microsoft are thinking about acquiring publishers because thats the only way they may be able to continue making money off of video games.

 

Are you familiar with Nvidia's GeForce Now?

 

https://www.nvidia.com/en-us/geforce/products/geforce-now/

 

I just found out about it after doing some research on cloud based gaming. I discovered I have an account already with access to it so am going to try it out, initial research into it seems quite promising though with people reporting quality game play through their cloud based gaming service. Big name games like PUBG and Fortnite are playable through it, effectively eliminating the need for an expensive PC to play them. I honestly had no idea this was already possible but quite excited to give it a try. I don't see any of the AAA titles like BF:V or CoD in their library but I suspect they'll be able to include them as their user base grows.

 

Your point regarding the death of hardware manufacturers is well taken, why spend $400 on a console if you're in an area with good broadband. Just apply for (it's currently free) Nvidia's Now experience and play like that. When they end up monetizing it, likely through a subscription package, pay for that instead of the hardware and then Nvidia will have leverage over game designers that want to target users on their Now platform.

 

Thanks that looks like some really cool tech, I wasn't aware of it. The guys providing the hardware for the consoles are in a tricky spot, I wonder what they'll do.

[Jurgis]

I think you guys are way underestimating consoles and Microsoft/Sony.

 

First of all, consoles are still way cheaper than gaming PC. They also are multiuse, so you can use them for other things than just gaming. Although I agree that other uses are less attractive but still valuable.

 

Second, Microsoft/Sony both have multiple subscription services for getting various games for free. From the low level casual (Microsoft Games with Gold) to bigger comprehensive subscriptions.

 

Thirdly, especially Sony has a great lineup of Sony/PS4 exclusive games. It sucks for me since I don't have PS4. I have Xbox, but I am thinking of buying PS4 just because of Sony exclusives. There are really top games there.

 

Fourth, consoles are easy-set for gaming. PCs are not. There are issues with installing, setting up, etc. It's all cool for technical users, but not all users are technical.

 

Fifth, consoles are aimed for living room with huge TV and controller. PCs are not so much.

 

Theoretically Nvidia's Geforce-Now is aiming to address points one and four. Practically, this is just another layer of payment. At least now you have to buy the game to play it on Geforce-Now. Then you have to pay for Geforce-Now (free in beta, who knows what it will cost after beta). Also, you have to setup a PC in your living room with your 70" TV. Hey, you can do it... but it brings back the fourth and fifth points. Personally, I'd rather just have console connected in my living room than connecting/disconnecting a PC every time I want to play (or having two PCs).

 

There are drawbacks to consoles, I agree, but I doubt that consoles will be killed by Geforce-Now.

Edit: gaming PCs may be more impacted by Geforce-Now - if the quality/frames-per-second/latency in Geforce-Now are good/great.

[Foreign Tuffett]

 

EA's origin access already offers this at $100/year for full access to their premier titles. They have a lower tier option for $30 for older titles. Whether it's profitable or not remains to be seen.

 

https://www.origin.com/usa/en-us/store/origin-access

 

 

Thanks yep you're right. The problem with this is that you still need to download the games to your PC before you can play them. When these services move to the cloud, and you can comfortably play a huge content game like Battlefield seamlessly via that platform, the industry will be turned on its head. But as I mentioned, the tech just isn't there yet for the average consumer. They are working on it though.

 

A bit on Fortnite and its success, I'd attribute a meaningful portion of it to its cross-platform functionality. It's one of the first major games where gamers on different platforms can play together which has had a huge impact on recruiting new players to the game.

 

Yeah this is another huge point which is very bad for Microsoft/Sony. Those guys earn royalties from the publishers for allowing games to be compatible with the Xbox/Playstation. Fortnite disrupted the back end of this tech by allowing cross platform play. If Fortnite can do it, every one can. So this really harms the guys manufacturing the consoles. In fact, its a reason why I've started to hear some chatter that Sony and Microsoft are thinking about acquiring publishers because thats the only way they may be able to continue making money off of video games.

 

IDK about publishers, but Microsoft has been VERY active in acquiring developers.

 

https://screenrant.com/xbox-acquires-more-game-studios/

[Spekulatius]

I use my PS4 mostly for Streaming and secondly for gaming. The user experience for Netflix and Amazon video is much much better than via the crappy TV app. I also have set it up via a receiver for a great sound ( I have high end loudspeakers and a sub).

 

The multi platform F2P  with ingame goods are a big problem for platforms ( iOS, PlayStation, Android etc) because these platform typically charge 30% of the purchase and now the game company can reduce this buy incentivusibg purchases on lower fee platforms ( like Amazon fire). Once purchased, the virtual goods are available on all platforms , if the game company allows it. This is great for the user and pot. game company, but not at all for the rent charging platform company.

[Foreign Tuffett]

Interesting excerpt from a interview with CCP Games CEO Hilmar Pétursson:

 

"The failure of CCP’s move into VR begs a question: Why can’t they find success like they did with Eve Online, their first videogame? “It’s just hard to make computer games,” Pétursson says. “In the beginning we thought it was easier because, I wouldn’t say we got lucky with Eve but it was a case of talent meets opportunity, but now that we have been branching into other games for quite a lot of time, I can attest, it’s quite hard.

 

“It’s extraordinarily difficult to find a similar success to Eve – judging [our other games] by those standards may be a little unfair. It’s not like we’re the only company that cancels projects or misses their goals when it comes to releasing product, we see other companies also struggle with that.

 

“I can certainly say for our VR titles, we had excellent executions, the games are phenomenal, [but] the market is smaller than we estimated, even though we had humble outlooks on it. Judging by that, we’re getting incrementally better.”

 

https://www.pcgamesn.com/eve-online/why-ccp-can-t-repeat-eve-online-s-success

 

Eve Online was released way back in 2003. I think there's a good chance that none of CCP's other projects have been profitable. Many of them were canceled before ever being released. Making financially successful video games is hard.

[Foreign Tuffett]

ATVI has been a good short but I wouldn't go long them or EA at this point, they are both facing business model challenges that aren't even close to being fixed right now.

 

Would you care to elaborate on this? Thanks.

 

Sure, there are a couple points to this. I've been following the industry for ~5 years.

 

First, the traditional business model is known as gaming as a product (GaaP). You buy the game retail and aside from maybe a DLC or expansion pack, the company's engagement with the customer ended there. This is shifting to gaming as a service (GaaS) which is focused on extending the interaction between the company and the customer by keeping them engaged in games longer. This is done by 1) having more "bite sized" DLCs (maybe 4-5 total over ~1.5 years), 2) micro-transactions (MTX), and 3) subscriptions.

 

Subscriptions are tough, you don't really see that anymore except for mobile games.

 

DLCs and MTX have been the bread and butter for EA/ATVI since 2012. I like using Battlefield as an example. Retail price is $60 and the life cycle is 1.5 - 2 years. Over that time, you have 4-5 DLCs and then MTX purchases which, all in, brings your total revenue per customer to ~$300 over that time period. Aside from MTX, you actually need to buy the DLCs because if you're in a group party with friends and the map rotates to one you don't have you'll get kicked out of your group. So the customers have been fairly captive from that point of view. Its been an amazing strategy since this first rolled out, but its falling apart now which I'll explain.

 

An interesting note on the $60 base price tag. There's not really a good reason for it to be $60 anymore. Gaming cartridges (back in the 90s) used to actually cost around $90, but after the industry switched from cartridge to CD-ROMs they dropped the price to $60 since it was a big manufacturing cost savings. Another smart thing the gaming companies have done is offer digital downloading at the same $60 because the margins are much bigger. But I don't think this $60 is here to stay much longer.

 

The player base has been increasingly alienated by these pricing practices, and for a long time it was just something they needed to suck up and deal with. However, as the # of people with CS backgrounds have grown the barriers to entry to make games has plummeted and independent studios are putting out fun games with graphics not so far off from the tent pole, AAA titles the big studios put out. So, now the player base have alternatives and are beginning to revolt against these prices. You've seen this with backlash against Star Wars Battlefront II, for example. These independent games are primarily all free to play, or maybe cost like $10.

 

The moment this industry actually changed was the success of Fortnite. So many people think Fornite is popular because the battle royale mode is fun. They couldn't be more wrong. The reason Fornite is such a big deal is because its shown this "GaaS" model really working. The wikipedia page for Epic Games actually spells out this strategy, which is why I'm surprised no one really seems to get it. Fornite is a fun, free to play game and only makes money from in-game MTX purchases. You can google around and see just how much money this game is making off of this...

 

That success signaled to me that ATVI/EA had a real problem on their hands because they both wanted to capture that success, but don't really know how to do it. I specifically shorted ATVI because they were implementing battle royale mode into Call of Duty, but it was clear to me that wasn't going to make a difference to the customer because the pricing structure was staying the same. Low and behold, ATVI has been disappointed by call of duty this year.

 

So basically, ATVI/EA are massively over-earning here due to DLC/MTX purchases. ATVI is the worst offender, I think something like 60%+ of their EBITDA comes from these purchases.

 

They have a pricing problem here. I don't think they want to do away with in-game purchases which is why I think they're going to start cutting the up front price tag of $60.

 

You'll see a lot of things in the news about "loot boxes" and regulations on that which I think are kinda overblown. I do think this product will be regulated, just not in the way people think. No one is going to actually ban it out right. What you're going to have is the ESRB (video game rating agency) begin issuing notices on boxes that in-game purchases are enabled for games, and I wouldn't be surprised if you'll need an adult to purchase it for you if you're younger than 15 just like how it is with M rated games.

 

I think this is going to be a big deal because, and I don't have hard #s for this, I think the majority of the in-game DLC and MTX purchase volume is coming from kids who have their parents credit cards on their play station / xbox. These transactions are so small, like maybe < $5 each, that it never sets off any charge alerts. However, because they're so easy to make the volume starts to really add up. You see news articles about guys blowing $10k on characters in FIFA, and while that exists, I think it makes up a small % of fanatics and isn't really a big deal. I wouldn't be surprised to see gaming consoles and PCs start to require a two-step authorization with your phone to make these purchases. If this doesn't happen, maybe a screen pop up that just keeps the amount of $ you've spent per month or year more in front of your face. They may be < $5 each, but if a kid saw that to-date he had ran up $100 they might think twice. The parents sure would.

 

ATVI specifically is in trouble because their major franchises are all either flat growth or starting to decline. Now that they lost Bungie they're really in a pickle. Call of duty isn't going to really pick back up unless you totally overhaul things and make it more customer friendly, so I bet you they'll buy another studio.

 

So thats really the basics of how this business is changing. It extends further along certain verticals which I'm happy to go into more if you want.

 

Bumping this very smart post in light of the weak guidance ATVI provided yesterday.

[Foreign Tuffett]

Anyone else think that ATVI has a talent development and retention problem?

 

Last year Blizzard co-founder, President (since 1998), and CEO (since 2007), Mike Morhaime left the company.

 

Infinity Ward never seems to have recovered from losing Jason West and Vince Zampella in 2010 and Robert Bowling in 2012. Its COD games "Ghosts" and "Infinite Warfare" are regarded as two of the weakest entries in the series.

 

Just a few days ago news broke that Sledgehammer Games is no longer the lead developer on the COD game scheduled for 2020 release.My guess is that Sledgehammer's issues are, at least in part, due to its co-founders departing early last year.

 

https://kotaku.com/sources-call-of-duty-2020-in-upheaval-as-treyarch-take-1834858368

 

 

[5xEBITDA]

Read any article or AMA from a game developer at any major studio - its almost universally an awful job with hours that would make an investment banking analyst cringe.