Why Activision and EA have dropped over 40 percent

Both Electronic Arts and Activision have plummeted more than 40 percent from their 2018 heights and the underlying causes provide important lessons for other game companies. An article in Barrons, Electronic Arts and Activision Are Struggling to Survive a Fortnite World, highlights the key causes.

Look at the competition holistically

Many companies are focused on the competition but they fail to define the competition properly. While your direct competition can have the biggest short term impact by increasing marketing or adding a new feature, your entire business can be disrupted by a company that you did not realize is a competitor.

Netflix views Hulu and Amazon Prime as their primary competitors, and then the broadcast and cable networks. It was, however, Fortnite from Epic that had the biggest impact on Netflix last quarter as consumers shifted their entertainment focus from television to the massively popular game. The failure of Netflix to anticipate this competition from a non-traditional competitor has left them unable to respond promptly, adding more scripted content does not negate the appeal of a game like Fortnite.

As the article shows, it was not just Netflix who misread the competition, as it was a key driver for EA and Activision’s decline. These companies were focused on each other (as well as the other console games coming to market) and did not anticipate a free to play gaming changing the ecosystem so dramatically.

Outside of gaming, we have seen this phenomenon repeatedly, from the classic horse buggy companies that went bankrupt as they did not realize the impact of automobiles to the decline of retailers who were slow to respond to online shopping. Blockbuster focused on Hollywood Video and mom and pop video stores before realizing that Netflix was the real threat, realizing too late. In the 1990s, GM and Ford and Chrysler were so focused on competing with each other they all faced bankruptcy when Asian manufacturers gutted their market with a new breed of high mileage vehicles. Dell and Compaq were so fixated on providing better PCs at a more competitive price that they are now afterthoughts to Apple and Samsung.

The game and iGaming space is littered with similar examples. The THQs and Acclaims did not consider free to play a competitor until it was too late. Many land-based sportsbooks did not consider online a threat until they saw their businesses disintegrate. When Sega was looking at building the next Dreamcast, they focused on Nintendo and Sony, not Microsoft.

The lesson is the true threat to your business is not the competitors you recognize as competitors, but companies who provide an offering that your customers can use to replace yours, even if it is a very different product. By not realizing who your potential competitors are, you will not be positioned to retain your customers when they shift.

Franchises are not forever

The article points out how underperforming franchises have also negatively impacted Activision and EA. Destiny was one of Activision’s cornerstone franchises and as soon as Destiny 2 showed the franchise was in decline, the stock fell 12 percent.

Destiny is not the only example of a declining franchise pulling down its stock. When Zynga went public in 2011, Farmville and Zynga Poker helped drive a share price to over $12. As both “franchises” slipped, Zynga has struggled to remain relevant, with a share price about 65 percent lower than at its peak.

These examples show that franchises do not continue indefinitely on their own. You need to work at maintaining and growing them by keeping up with current customer needs, as well as anticipating shifts in the market place.

It also shows a growth strategy focused on acquiring franchises runs the risk of overpaying and failing. Almost by definition, you are buying at a peak because it is only a franchise when it is doing very well (then it is defined is a declining product). If the acquirer cannot grow the franchise, their large investment (and franchises do not come cheap) can crumble.

You need a pipeline of new products

The third lesson from the fall of EA and Activision is the need for a robust product pipeline. Given the risks of franchises declining, you need to have new products ready to replace them. As an analyst wrote in the Barron’s article, “the main issue [for Activision Blizzard] is an underperforming pipeline of games.” In EA’s case, the poor performance of its Battlefield franchise has left it with little to drive growth. Both EA and Activision have built their business by refreshing franchises, so when those fail, they have nothing to fall back on.

While the need for a pipeline of new products (for any industry) seems obvious, it requires a commitment, and not just money. This commitment often feels unnecessary when franchises are driving growth and revenue. Even if a company is willing to invest in new products, if they do not have a commitment from on top, it will still fail as their best people (marketing, tech, design, etc.) will be working on the existing franchise products. In a competitive industry (and every industry these days), your B team is not going to beat other companies who are focused on winning with new products.

What Activision and EA teach us

Rather than feeling sorry for Activision Blizzard and Electronic Arts (they are still valued at over $25+ billion each), you can learn from them to avoid the dramatic declines they have faced recently. Most importantly, when looking at the ecosystem and your customers, realize that customers are not simply deciding between you and your closest competitor, they are looking at the best use of their time. For a game company, that means not worrying about competing games (primarily), but Netflix, music, movies and other form of entertainment. You may create a better product than your competitor to find there is a much smaller market for both of you.

As you are anticipating your customers’ needs, you also need to anticipate they will be different, so you cannot rely on today’s franchises. You need a stream of new products that anticipate their new expectations.

Key takeaways

• Activision and Electronic Arts shares have fallen more than 40 percent in the past twelve months, driven by a combination of misjudging the competition, relying on franchises and having a weak product pipeline.
• When surveying and reacting to the competition, you must look beyond the direct competition and understand who else could take your customers.
• While franchises are important revenue sources, you need to nurture them and have alternatives as they eventually will degrade.