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Why Activision and EA have dropped over 40 percent

by Lloyd MelnickJanuary 19, 2019January 19, 2019

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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Great products fail, here is why

by Lloyd MelnickOctober 5, 2016September 25, 2016

Key takeaways

  • Creating a great new innovative products does not guarantee success, people have to find and try it.
  • The first key is to build something that people will search for. If there is little innovative or differentiated products, people will not even search for a new product.
  • If customers will not find a product via search, you need to develop cues so they will infer that the product is different and valuable to them.

One of the most frustrating results in business is launching a great game or product and then seeing it fail. Unfortunately, this phenomenon happens more often than not. In the game space, at least 80 percent of new launches (from established studios, new studios have a worse rate) are never ROI positive (that is, they never have an LTV that allows for ad spend). Even in retail, according to a recent study of 9,000 new products that generated strong distribution, only 40 percent were sold three years later.

Although I am a huge advocate of Blue Ocean Strategy, one central challenge is getting customers to adapt the new product. In the game space, many innovative and extremely fun products fail because they never gain traction with players.

A recent article in the MIT Sloan Management Review, Why Great New Products Fail by Duncan Simester, shows why so many good products fail and how you can reduce the risk of experiencing this fate. What Simester shows is that while most companies focus on customers’ needs, they do not understand how customers decide what to purchase. By understanding the customer search and inference processes, you can build a better strategy for the customer to discover a new, innovative product.

People don’t search for innovation

The first thing you need to realize is that in a market with little innovation the customer may not realize the value of looking for a better solution, they do not even think they exist. Thus, they may not find your innovative product because they do not know to look.

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People Do Not Know To Search for Innovative Products

Alternatively, people may think the cost of searching for an alternative or innovation is too high despite knowing of the benefits. Somebody may realize there is a game in the App Store they would prefer to what they are currently playing but do not believe it is worth the effort to search through the thousands (or millions) of alternatives, download and test tens (or hundreds) and then find the innovative product they prefer.

Additionally, your best customers are the ones least likely to search. Research cited by Simester shows a strong relationship between the amount of prior expertise a consumer has about a product category and the extent they search for information before making a purchase decision. Effectively, the person feels they already know what is best so they see little incentive to search.

Compounding this problem is that potential customers with virtually no knowledge also will not search. They do not know what questions to ask, where to find answers or how to interpret the information if it arrives. Potential customers also do not understand the features that would benefit them. Thus, innovation would not increase the chance of a sale to this type of customer, no matter how much value the innovation adds, because the customer does not understand the value of the innovation.

Customers’ Inference Process

When search is incomplete, customers shift to forming inferences. They use what they observe to infer what is too difficult or costly for them to search for. A good example Simister uses is McDonald’s obsession with keeping parking lots clean. While customers do not really care if the parking lot is messy, if they see a dirty parking lot they will infer that the restaurant itself is dirty and go somewhere else. As Simester writes, “Although purchasing decisions are a different neural process than the visual process, a similar phenomenon occurs when customers are evaluating different products or services. Customers often do not realize they are forming inferences, and even if they do, they are powerless to stop it.”

Branding and inference

The most common cues customers use to infer product value are brand and pricing. Brands infer more than only product quality as consumers use brands to signal information about themselves.

The importance of brands differ by the market and consumer. When it is easy to search and generate information about the product, brands take on less importance. This is particularly the case with the sophisticated customers described above, as they can process the product information and make informed decisions about the opportunity. Conversely, an unsophisticated customer is likely to rely on the brand because they do not know how to process the product information.

In the game space you see very little value of brand because so much information is available to players. They can look at an AppStore description, process screenshots and watch videos to determine if they like a product, rather than care whether the game is from King.com or Supercell.

The role of the brand also varies across product features. Features that are on the spec sheet typically can be discovered by search. Other features, however, such as reliability and ease of use, are not easily available and thus it is these features where the brand’s role are most prominent. Going back to the earlier game example, a player may rely on their perception of a brand to determine how aggressive monetization will be, how often the game will be updated and how reliable the back-end is.

What you should do differently for innovative products

Given the challenges of conveying to users the value (or existence) of an innovative product, you need to build new products where customers can recognize their value. Thus, during your green light or incubation process, you should look at three aspects of the potential product.

  1. Motivation to search. Will customers discover your innovation? An innovative offering will not succeed if customers do not discover it. First, are customers motivated to search? Are they willing to invest time to find a better option than they are currently using?
  2. Ability to search.Can customer search effectively? Can reviews, customer or professional, help alleviate the issue.
  3. Customer inferences. If customers cannot or will not search, you need to understand what cues consumers will use to infer the absent information. You may want to create cues to help customers with this inference process.

Innovation is not just about great products

The key is that innovation is not just about building a great product. When you are planning your new products, you need to understand if and how customers will find out about it. Build that into the product, or possibly seek an alternative if there is no clear way to educate users.

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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 the GM of VGW’s Chumba Casino and on the Board of Directors of Murka Games and Luckbox.

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