VideoWhen The Dark Knight was released in July, the much-hyped Batman flick grossed more than $155 million in its opening weekend, a box-office record. Yet three months earlier, the release of the video game Grand Theft Auto IV hauled in twice that sum — in a single day.
Such is the state of the computer/console-games industry today, where corporate revenue is counted in billions and companies compete fiercely for the attention and dollars of a rapidly expanding customer base. The industry will be worth $48 billion this year and nearly $70 billion by 2012, predicts PricewaterhouseCoopers.
But don't think the CFOs of these companies have it easy. Even as the spotlight shines favorably on the industry, the cost and complexity of developing games are rising. As their creative counterparts try to keep gamers glued to the screen, finance chiefs worry about many of the same issues as CFOs in other industries — achieving 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 quest for scale prompted Activision to merge with the games subsidiary of French media group Vivendi in July, resulting in Activision Blizzard, a $3 billion giant nipping at the heels of industry leader Electronic Arts. For its part, EA has been aggressively pursuing Take-Two Interactive Software, but that deal seemed to fall apart last month when Take-Two announced that, after a strategic review of all of its options, it would refuse EA's hostile advances and remain independent.
Success in this industry, CFOs say, hinges on a combination of solid risk management and savvy research and development. "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 Thomas Tippl, the 41-year-old CFO of Activision Blizzard. A 14-year veteran of Procter & Gamble, Austrian-born Tippl says "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. The industry has been driven largely by franchises, be it the Grand Theft series, Call of Duty, Tony Hawk skateboard-oriented games, or what have you. But these days it's less about sequels and spin-offs and more about tapping into new markets with new products. That can require lightning-fast strategy shifts.
One new model involves subscription 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 such as Sony's Playstation 3, Microsoft's Xbox, and Nintendo's Wii. "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. "Some of the newer developments coming up in the video-game industry are allowing that to be more of a reality." Activision Blizzard already generates more than $1 billion in revenue and more than $500 million in profit from subscription businesses, thanks largely to its ownership of the Blizzard-developed World of Warcraft, an online game with some 9 million monthly subscribers. EA also sees this as a growth area and expects online revenue to rise by 50 percent, to more than $285 million, in its current fiscal year.
Another new focus is what gaming executives call the "casual" market, 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. 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." Or play air guitar: Activision's Guitar Hero is perhaps the signature title in this market.
Casual gaming has also been a hit for Ubisoft Entertainment, a $660 million French publisher and developer. According to Ubisoft CFO Alain Martinez, one major appeal is the relatively low cost of development. Because casual games made for the handheld Nintendo DS device, for example, can be developed far more cheaply than those for consoles, Ubisoft can experiment in ways it couldn't afford to do for the Playstation or Wii. "You can make 30 games for the price of one and try different things," Martinez says.
In 2000, Ubisoft owned only one brand; 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, often in regions where the company benefits from lower costs, such as Romania, Morocco, and China. In June it announced plans to open a 20th studio in Sao Paulo, Brazil. As for development and production costs, Martinez says the company can spend €300 million each year. But despite its ambitious plans, last year the company managed to cut R&D spending to 28 percent of sales from 34 percent, thanks to strong sales.
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