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What Real Money Gaming companies should learn from the problems faced by EA and Activision Blizzard

What Real Money Gaming companies should learn from the problems faced by EA and Activision Blizzard

In January, I wrote a post on why Electronic Arts and Activision Blizzard’s stock had plummeted and what other game companies could learn from their challenges. While the lessons are relevant to social gaming companies, in many ways they are more germane to Real Money gaming companies, many of whom have also struggled to maintain their share prices.

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Look at the competition holistically

The first problem I identified with EA and Activision was that they focused solely on each other and other console game manufacturers when considering the competition and generating competitive responses. As Netflix stated in its shareholder letter in January, “we compete with (and lose to) Fortnite more than HBO,….When YouTube went down globally for a few minutes in October, our viewing and signups spiked for that time…There are thousands of competitors in this highly fragmented market vying to entertain consumers and low barriers to entry for those with great experiences.”

Real Money Gaming companies do not seem to have gotten the memo, they still focus primarily on each other. Most Real Money online casinos measure their competitiveness by how many games they have versus other online casinos. Sportsbets list their breadth of betting options and in-play bets versus other sports betting apps.

When the US market began to open last year, most Real Money operators looked at each other when developing their American strategy. They copied the partnerships other operators were entering into. They built similar go-to-market strategies. They took their European apps and “adapted” them for the US market.

The sole focus was outdoing their direct competitors. They did not look at how Americans consumed entertainment, how it was different than in their core markets and then build a strategy to compete with these other forms of entertainment.

The US is an example of how the Real Money operators fail to look holistically at the entertainment ecosystem and simply focus on each other. It is why margins continue to decrease and why fewer and fewer new customers enter the ecosystem. It also leaves them very vulnerable to other forms of entertainment appealing to their customers.

Franchises are not forever

The second lesson that Activision Blizzard and Electronic Arts learned the hard way is that franchises are not forever. Many of the biggest Real Money operators still rely on their existing franchise and have not built a sufficiently robust business to deal with downturns in the franchise. You can broadly define a franchise, as I would consider William Hill’s retail locations the same as Farmville, a formerly ubiquitous product that declines over time.

The Real Money space is dominated by one product companies, which leaves them particularly vulnerable to franchise erosion. Many of the operators (both large and small) rely on an individual product for success (often the product and company name are synonymous), and when that product decreases, they are in a very vulnerable position.

You need a pipeline of new products

Consistent with the above point, not only do many Real Money operators rely on one product, they do not have a green light process or plan to bring new apps to market. Often, their product development is focused on improving and optimizing their core offering. If the macro-market for that offering decreases, they do not have alternatives available to compensate.

As I wrote last month, companies need a robust green light process to identify market opportunities, particularly prospects to appeal to non-customers of the industry. Creating skins of existing products do not achieve this result; they simply provide a marketing tool and potentially nudge your product positioning. Yet very few Real Money operators launch entirely new products that have a different feature set and market appeal than their existing products.

These opportunities exist if Real Money operators will look outside of their current offering. There is no reason a Real Money sportsbook cannot offer a standalone eSports app or a Crypto sports betting solution or hypercasual sports betting games. A Real Money casino can look beyond its integrated casino to create a Live Dealer app or an app that has progression or social features. The key is for companies to assess the market opportunity, their strengths and weaknesses and create a product pipeline that will help them grow.

New products and new markets are the key to success

As the above analysis shows, Real Money gaming companies suffer the same issues as video gaming companies and firms in many industries. They lose the forest for the trees, focusing on their direct competitors and existing customers, rather than how the industry and world is evolving. These blinders leave them vulnerable as people’s preferences evolve and miss an opportunity to grow exponentially.

Key takeaways

  1. Real money operators need to avoid making the same mistakes that Electronic Arts and Activision Blizzard committed if they want their stock to be resilient.
  2. Real Money gaming companies should not simply focus on each other but realize they are competing with all entertainment companies and build products that expand their market.
  3. Real Money operators normally rely on one offering and do not have a robust product pipeline to deal with declines in their core product.

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Author Lloyd MelnickPosted on April 9, 2019March 20, 2019Categories General Social Games BusinessTags Activision, competition, Electronic Arts, Green Light, green light process, real money online gamblingLeave a comment on What Real Money Gaming companies should learn from the problems faced by EA and Activision Blizzard

Why Activision and EA have dropped over 40 percent

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.
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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.

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Author Lloyd MelnickPosted on January 19, 2019January 19, 2019Categories General Social Games BusinessTags Activision, competition, Electronic Arts, franchises, Green Light, new product development1 Comment on Why Activision and EA have dropped over 40 percent

The most important company in the game industry

The most important company in the game industry

Key takeaways

  1. The most significant company in the video and computer game space is one that people do not frequently think of Tencent, which has a market value of $229 billion (more than the market value of Apple, Google, Microsoft, Sony and EA combined).
  2. Tencent’s game properties include the biggest PC game (League of Legends), the strongest mobile franchise (Clash, as in Clash of Clans and Clash Royale) and the most important console game company (Epic, maker of Unreal and Gears of War).
  3. Tencent is also a very progressive company, allowing is investments the autonomy to make decisions and grow.

The most important company in the game industry

I was doing some research last week, when I was surprised at a company with a $200+ billion market value (market capitalization). The company was Tencent, with a market cap $229 billion. For comparison Microsoft has a market value is $479 billion. Apple is at $614 billion. It is definitely more than Sony, who only has a $37 billion market. Want to try EA, forget it, only $24 billion.

While you can argue that Tencent is not a game company (and the bulk of its income does come from other operations), looking closely it becomes apparent that they also dominate in the (western) game space. Among their assets in the game space:

  • Clash of Clans and Clash Royale from Supercell. Tencent acquired Supercell this Spring.
  • Unreal and Gears of War developer Epic Games. Tencent is the largest shareholder in Epic, probably the most important developer in the console game space. Unreal is the engine (a suite of game development tools) used to create many of the most popular games in the world, from Dragon Quest and Final Fantasy to Moto Racer to Street Fighter to Assassins Creed to Brothers in Arms to…. Not only is it the most successful game development engine, Epic’s first party titles include Unreal (big surprise), Gears of War and Infinity Blade.
  • League of Legends creator Riot Games. Tencent controls the largest PC game in the world, League of Legends.
  • 8 Ball Pool and Agar.io developer Miniclip is another Tencent company. Miniclip always sems to have multiple games in the top-10 mobile charts and has tens of millions of daily players.
  • Kim Kardashian Hollywood developer Glu Mobile. Tencent is a minority investor in the most prolific mobile developer that uses big name IP, such as Kim Kardashian, Nicki Minaj and Gordon Ramsey.
  • QuizUp from Plain Vanilla is another part of the Tencent empire, as Tencent is one of Plain Vanilla’s largest investors.
  • Skylanders, World of Warcraft, Destiny and Call of Duty owner Activision/Blizzard is also part of the Tencent empire. Tencent owns 25 percent of Activision/Blizzard.
  • And there is more. Tencent is also one of the largest shareholders in PocketGems, Dots, Robot Entertainment and I am sure some I have missed.

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When you look at the properties that Tencent controls (Clash of Clans, League of Legends, etc), it is clearly the most important company in our space.

The other interesting element of Tencent

In my conversations with people at some of the companies above (and this data is totally anecdotal), Tencent is a very interesting parent. People often group it with Japanese and Korean companies, which are often very challenging to work at. My friends who have worked for Japanese companies complain about how western employees and executives had virtually no autonomy to make decisions (they were all made at the Japan level) and even then decision making was excruciatingly slow.

From what I have heard, Tencent, and Chinese companies in general, are pretty much the opposite and often more progressive than western companies. Tencent has left the companies above very autonomous and business has barely changed on the day-to-day level. Tencent, however, has helped these companies grow by expanding into the Asia. Most surprisingly, in the incredibly cynical game space, I have not heard anyone say anything bad about working for Tencent.

Chinese multinationals are often much more progressive than other Asian and often western competitors. In 2013, I wrote about how Haier (a Chinese white goods manufacturer) eliminated all of its middle management, a concept here that companies (other than Zappos) are just starting to look at. I have never worked at a Chinese company and have actually interacted very little with them, but between Tencent, Haier and Alibaba (the world’s most successful retailer), Chinese companies show many progressives traits that lead to success in the game industry.

The game industry’s most important player

When you combine Tencent’s market valuation with its network of the most important game properties, it is clear that they are the most important game company in the world. Over time, Tencent’s performance will be more parallel to that of the game. When Tencent does well, the game industry does well. When the game industry does well, Tencent will do well.

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Author Lloyd MelnickPosted on December 14, 2016December 14, 2016Categories General Social Games BusinessTags Activision, clash of clans, clash royale, epic games, Glu Mobile, Kim Kardashian, league of legends, miniclip, Pocket Gems, quiz-up, riot games, supercell, Tencent1 Comment on The most important company in the game industry

Physical virtual goods prove their value to game publishers

Activision’s earnings announcement yesterday shows how attractive successfully conquering the physical virtual goods market is. On November 27, I blogged that Activision would be the big winner Q4 2012 on the strength of the Skylanders franchise and its reliance on a new business model, selling physical versions of virtual goods. I elaborated on that post earlier this month, commenting that the emergence of the Physical Virtual Goods monetization model was one of the most exciting developments in the gaming space in years .

Image from 5minutesformom.com

Today, Activision’s stock rose 14 percent because earnings tripled from the fourth quarter last year (in a period in which overall video games sales slumped). Net income increased 257.58 percent to $354 million in the quarter versus a net gain of $99 million in the year-earlier quarter. Revenue rose 25.66 percent to $1.77 billion from the year-earlier quarter (unfortunately, some of that is due to my family).

This report affirms my belief that physical virtual goods are an incredible opportunity. While I do not advocate trying to copy exactly what Activision has done (I believe in blue oceans, not fast following), there are many elements in this space (e.g., product type, demographic) that represent incredible opportunities for game companies.

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Author Lloyd MelnickPosted on February 8, 2013February 19, 2013Categories General Social Games BusinessTags Activision, monetization, physical virtual goods, SkylandersLeave a comment on Physical virtual goods prove their value to game publishers

Skylanders Franchise Reaches More Than $500 Million in U.S. Retail Sales

As an update to my post yesterday on Physical Virtual Goods as exemplified by Skylanders, Activision just announced that Skylanders generated over $500 million in retail sales in the US and generated more revenue than the holiday box office for kids’ films.

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Author Lloyd MelnickPosted on January 11, 2013January 11, 2013Categories General Social Games BusinessTags Activision, physical virtual goods, SkylandersLeave a comment on Skylanders Franchise Reaches More Than $500 Million in U.S. Retail Sales

Physical virtual goods

The use of virtual goods in a physical form is one of the most interesting (and profitable) monetization techniques that I have seen. By “physical virtual goods” (my term), I mean taking a virtual good that is normally sold through an in-app purchase and making it into a physical retail item that is used to unlock the virtual good inside the game (with no functionality for the physical product).

The Skylanders example

Activision’s Skylanders are the perfect example of this monetization strategy. Activison has two video games, Skylanders Giants and Skylanders Spyro’s Adventure, that sell at retail, just as you would purchase Call of Duty or Super Mario Bros. However, instead of selling downloadable content or offering upgrades through in-app purchases (depending on the platform), players must purchase Skylanders characters at retail, place them on a game-specific portal (a device that plugs into the game console) or enter a code that comes with the character (again, depending on the platform) to unlock the character in the game. Continue reading “Physical virtual goods”

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Author Lloyd MelnickPosted on January 10, 2013January 22, 2013Categories General Social Games Business, Lloyd's favorite postsTags Activision, monetization, physical virtual goods, Skylanders3 Comments on Physical virtual goods

Two losers and one winner this holiday season

Skylanders GiantsAlthough this is by no means a prediction based on any scientific data, I am already seeing big trends this holiday gift season that will impact game companies significantly. By talking to my children and their friends, visiting major retailers and getting virtually every online retailers newsletter, it is becoming clear there will be some big winners and losers this holiday season that also show how the industry will continue to evolve.

Nintendo and Microsoft look like the losers

I expect two companies that I respect greatly, Microsoft and Nintendo, to have poor Q4 product introductions. Unlike the iPad and some of the Android tablets, nobody is advertising or discussing the Surface. Although Microsoft has set up stands at malls and is leveraging retailers that normally sell PCs, most consumers who are in the market for a tablet are deciding between the iPad or the Kindle Fire (at least the people I spoke with). Retailers are drawing traffic by selling cut-price Android tablets (normally under $100),showing that they believe consumers will go out of their way to buy such a tablet (say what you want about traditional retailers, but they still understand their customers very well). Worse for Microsoft, the Surface is not even on people’s radar; outside of Microsoft ads I have not heard it mentioned once. Continue reading “Two losers and one winner this holiday season”

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Author Lloyd MelnickPosted on November 27, 2012December 4, 2012Categories General Social Games BusinessTags Activision, ATVI, Microsoft Surface, Nintendo Will U, Skylanders, social games1 Comment on Two losers and one winner this holiday season

Get my book on LTV

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This is Lloyd Melnick’s personal blog.  All views and opinions expressed on this website are mine alone and do not represent those of people, institutions or organizations that I may or may not be associated with in professional or personal capacity.

I am a serial builder of businesses (senior leadership on three exits worth over $700 million), successful in big (Disney, Stars Group/PokerStars, Zynga) and small companies (Merscom, Spooky Cool Labs) with over 20 years experience in the gaming and casino space.  Currently, I am on the Board of Directors of Murka and GM of VGW’s Chumba Casino

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