VideoEven 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 (€2.4 billion) and is giving industry leader Electronic Arts (EA) a run for its money. According to CFO Thomas Tippl, it will be the most profitable games publisher in the world.
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?
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%.
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.
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