The Players

tauringhuang.

Video game CFOs reach the next level.
Tim Burke - CFO Europe Magazine
September 3, 2008

Even a successful strategy can benefit from a fresh twist. For five years, US video game publisher Activision entertained gamers with its Call of Duty series, pitting good against evil during the second world war. Last year it took an unexpected step and gave the latest game a contemporary feel, replacing Nazis and B-17 bombers with terrorists and stolen nuclear weapons. The new game sold more than 10m copies, beating all its predecessors, and helped Activision achieve record revenue and an industry-leading profit margin.

In July the company gave its business a similar shake-up. After satisfying shareholders with 16 years of revenue growth, it merged with the games subsidiary of French media group Vivendi. The newly named Activision Blizzard — Blizzard Entertainment was Vivendi Games' celebrated development studio — has pro forma revenue of $3.8 billion (

tauringhuang.

The bigger, bolder Activision Blizzard speaks volumes about the games industry's growing significance in the media world. The industry will be worth $48 billion this year and nearly $70 billion by 2012, predicts PricewaterhouseCoopers. Compare that with the music industry's sluggish performance, or the record $158m taken by The Dark Knight — the latest Batman film — on its opening weekend with the $310m pulled in by the Grand Theft Auto IV game on one day in April.

But don't think the CFOs of games companies have it easy. Even as the spotlight shines favourably on the industry, the cost and complexity of developing new game after new game are rising. So while their creative counterparts are trying to keep gamers glued to the screen, the finance chiefs of games publishers worry about many of the same issues as CFOs in other industries — getting stronger balance sheets, greater scale and improved operational efficiency, all of which help them develop more titles, push more products and make more money.

The growth of leading games companies — Activision Blizzard, EA of the US and French rival Ubisoft — show finance chiefs in other sectors just how quickly they can respond to rapid-fire industry changes. The way the finance chiefs themselves tell it, the key is a combination of solid risk management and savvy research and development. But not all have succeeded (see "You Got Flagshipped!" at the end of this article), and even big names have stumbled. Can their CFOs now help see the companies through the economic downturn in their key markets?

tauringhuang.

Just Grow Up
Steering a company's finance strategy can be tough, especially when the very consumer base around which its business model is built morphs so rapidly. But while a recent study in the US found that the average age of a gamer is now 35, far from the stereotypical teenager on whose pocket money the industry once relied, the new demographic is in fact a blessing — older players have more money to buy more games. "It's no longer a very young demographic without much purchasing power," says Phil Stokes, a London-based partner in the entertainment and media division of PwC. "That demographic is grown up and used to buying games, and as they get more money in their wallets they go out and invest in new games — it's what they've always done."

But connecting with these gamers consistently — through the current wave of games consoles such as Sony's Playstation 3 (PS3), Microsoft's Xbox 360 and Nintendo's Wii, or through online and mobile gaming — now requires companies to operate on a very different scale.

The importance of scale wasn't lost on dealmakers at Activision and Vivendi. It certainly made sense to investors — ahead of a late August stock split, Activision Blizzard's share price was about $37 in mid-July, compared with Activision's standalone price of $22 when the deal was announced last December.

Activision was no slouch on its own though. Founded in 1979, it was the first independent games developer. Following an ill-judged move into business-application software in the 1980s that saw the company file for Chapter 11, it refocused on games in the early 1990s. Acquisitions have helped the company expand and successful long-running titles encouraged steady sales. During the last fiscal year to April 2008, the company nearly doubled its revenue to $3 billion and achieved an operating margin of 16.5%.

tauringhuang.

For Tippl, Activision's CFO since 2005, it's by design, not accident, that the company is reaping the rewards of its current strategy. "There's this concept that this is a hit-driven business where you throw a lot of things on the wall and hopefully something sticks," says the 41-year-old Austrian, a 14-year veteran of Procter & Gamble. "That's not how we run the business. Our job and our strategy have always been to make sure we have a plan in place that grows our existing franchises every year."

Easier said than done these days. It was once fairly straightforward to hit growth targets with frequent product updates to tried-and-tested franchises, such as Call of Duty and a series involving celebrity skateboarder Tony Hawk. But just as the gamer profile has changed, so have the types of games that become hits. Traditional console titles helped make Activision an industry leader, but now newer markets are showing the biggest growth prospects. This requires lightning-fast strategy shifts.

tauringhuang.

Why Casual Is Smart
One of the new markets involves subscription-based online offerings. The beauty of these games for CFOs is that they help to smooth the industry's notorious sales peaks and troughs around the lifecycles of traditional consoles. "This has been a super-cyclical industry, and the thing CFOs want the most is predictability," says Jason Mauricio, an analyst at Arete Research in London. "They don't want surprises, they want smooth earnings. Some of the newer developments coming up in the video game industry are allowing that to be more of a reality." For its part, Activision Blizzard generates more than $1 billion in revenue and more than $500m in profit from subscription businesses, thanks largely to its ownership of the Blizzard-developed World of Warcraft, an online game with some 9m monthly subscribers. EA, meanwhile, also sees this as a growth area, and expects online revenue to rise by some 50%, to more than $285m, in the year to April 2009.

Another new focus is what gaming execs call the "casual" market. It's a loose term covering simple games that anyone can pick up and play, such as sports simulations played with the Wii console's motion-sensitive controller. The market has introduced new consumers to the industry. Casual gamers might be put off by the array of buttons on a normal console controller but, as Tippl says, "everybody knows how to swing a tennis racket." Activision's hit here is Guitar Hero, a franchise it acquired when it bought publisher RedOctane in 2006. Players press buttons on a plastic guitar (sold with the game) in time with on-screen prompts. The franchise has brought in more than $1 billion of revenue, and this year the company released a new title in partnership with rock group Aerosmith, as well as a version designed for Nintendo's handheld DS console.

Casual gaming has also been a hit at Ubisoft, a 22-year-old,

tauringhuang.

That kind of growth has made Ubisoft a sturdy performer. When Martinez joined the company, annual revenue was less than

tauringhuang.

Studio System
Like Activision Blizzard, Ubisoft's focus is on size, which in turn allows it to make more titles. In 2000 the company owned only one brand, while today it has 14 multi-million selling franchises, with more on the drawing board. "The cost of development and the ambition of these projects are getting higher all the time," says Martinez. "Therefore fewer companies are capable of taking risks on several projects like we do."

Ubisoft has 3,500 developers working in 19 studios in 15 countries, many in regions where the company benefits from lower investment costs, such as Romania, Morocco and China. In June it announced plans to open a 20th studio in Sao Paulo. As for development and production costs, Martinez says the company can spend

tauringhuang.

Another key factor for games companies is to own most, if not all, of the intellectual property (IP) in a company's portfolio, the CFO says. While Ubisoft has made games based on the TV show Lost and the film King Kong, it normally focuses on in-house brands from which it takes all revenues rather than paying royalties. Owning the licence for a game based on the next popular Pixar movie is good, Martinez admits, "but if you're capable of creating your own IP that can [be equally as popular as a movie], that's even better."

To this end, Ubisoft struck a deal earlier this year with American author Tom Clancy to buy the rights to all IP using his name, having previously developed action games over the past ten years such as Tom Clancy's Rainbow Six and Tom Clancy's Splinter Cell. The deal gives the group a chance to develop the franchise in new ways. Initially it went from books to films to games, but Martinez sees no reason why the newer games can't be made into books and movies under Ubisoft's ownership.

This kind of multimedia thinking led to Ubisoft's acquisition in July of Hybride Technologies, a Montreal-based special-effects studio known for its work on films such as 300 and Sin City. Martinez believes the move should bring Ubisoft several benefits: along with new technology the games group can use, Hybride has contacts in Hollywood that he hopes will allow Ubisoft to obtain new licences, as well as turn its own IP into movies.

tauringhuang.

Back on more familiar ground, Ubisoft's challenge is to repeat the success of last year, when the company had a runaway hit with Assassin's Creed, a game which allows users to pretend they're assassins in 12th-century Jerusalem. Martinez isn't worried about the pressure. Assassin's Creed was hugely successful, but it was the only new Ubisoft franchise launch last year. This year the company expects to launch five, giving it reason to raise its full-year revenue forecast from

tauringhuang.

Clean Slate
Publishers need to sell about one million copies of a game on the PS3 or Xbox 360 just to break even. But as in the film industry, ploughing money and time into a new title is no guarantee that it will receive good reviews or attract consumers. So if Ubisoft's slate of five new franchises looks ambitious, what does that say for the 14 new brands scheduled at its $3.7 billion American rival, EA?

One of the best-known names in the games industry, EA hasn't had it easy. "We were essentially flat in our performance [in fiscal 2007] in an industry that was growing nicely with the console cycle," says its California-based CFO, Eric Brown. "The net result was that we lost some share. That's not something EA is accustomed to."