A Tale of Three Worlds

It was announced earlier today that Activision is merging with Vivendi Games (the interactive entertainment division of Vivendi that includes Blizzard) to create what is now the largest console video game publisher - Activision Blizzard. Jean Bernard-Lévy, CEO of Activision was said to have stated: “Blah Blah Blah, Share-holder value, blah blah significant opportunities, blah blah Growth Prospects”.

Every gaming blog in the world responded with “OMFG… merger… what does this mean for WoW?”.

I’m going to put in my vote for “not really a whole lot”. As far as Blizzard is concerned, despite the fact that their name is now on the publisher as well, it’s really just a changing of the guard above. Blizzard has over and over again proven itself to be massively successful and profitable, and any new executive management would be foolish to screw with that.

This is interesting news, but shouldn’t be really suprising. As in the music and tv/movie industry, video game publishing is what’s referred to as an oligopoly - a market in which there are a relatively small number of firms who control the majority of the market. Oligopolies tend to emerge in areas where the costs and risk are extremely high, but barriers don’t exist due to ownership of capital assets (e.g. telephone, power distribution) or intellectual property (e.g. operating systems). When an industry meeting these characteristics begins, the market is very fragmented, and usually dominated by several start-ups who understand the particulars of that business. As the industry as a whole grows, more traditional investment companies will begin forming merges and buy-outs to conglomerate the small players into a larger, more financially stable whole. We have observed this happening in the music industry with record labels, and in the tv and movie industry with film studios.

Our industry is much younger, but already is dominated by six major publishers: Electronic Arts, Nintendo, Ubisoft, Take 2, Activision Blizzard, and THQ.

What I find interesting is that when you’re in an industry like these three, where the costs to distribute content are so high, and the risks of success equally so - management gets very risk adverse. They’re responsible for profit to shareholders, and they live in a very financial world. As a result, you begin to see trends towards blockbuster hit titles. This is the nature of action movies, highly paid brand name actors, top 40 pop music, sports games and high visual fidelity first-personal shooters. Publishers like these things because they’re safe, and any portfolio requires some safe bets to hedge the rest.

Which isn’t to say the people on the ground floor don’t put their heart and soul into these titles, it’s just that they’re primarily a business construct designed to appease the shareholers, and so creative control is somewhat removed.

Now, here’s the shakeup. What we’re watching unfold in the music industry right now is going to happen to film and is going to happen to tv and is going to happen to gaming. Once upon a time, production costs for music were extremely high, and the distribution channels even more so. Technology has completely eroded the first, and the internet the second, and now an oligopolistic industry is watching their barriers to entry come crashing down. A further kink in the puzzle is that music piracy is rampant, and there’s no real way to deal with that in a model based around selling individual units of content. Every single publisher in the music industry today needs to completely revamp their business model in order to compete, or be destroyed, plain and simple.

Piracy is also rampant in the film industry, although it hasn’t gotten quite as bad as the music industry. As bandwidth availability continues to rise, the film industry will be even more screwed than the music industry is now. The production costs for tv shows and movies haven’t dropped at all, and in fact, for those ultra-safe blockbuster titles, they’re increasing massively every year. The home theatre experience becomes more and more accessible and continues to equal if not surpass the cinema theatre experience in nearly every way. Today it is still possible to throw a quarter of a billion dollars at a blockbuster title and triple your money. That multiplier is shrinking on both sides every year. Television networks are also slowly sliding into irrelevance as it become possible to watch commercial free versions of all the content they deliver through digital delivery. This alternative becomes more popular every year.

Video games are a little further down the road than both of the previous. Production costs for video games are an order of magnitude lower than costs for film production. Additionally, pirating of console games is much harder than pirating music or film because it requires hardware modication of your system - a modification that could be detected by the manufacturer through online connectivity. On the PC side, piracy is a nightmare for traditional retail channels. Digital delivery mechanisms can aliviate this to a certain extent through the use of non-intrusive DRM (such as Steam). Attempts to shoehorn DRM into retail delivered copies of titles (using such abysmal tools as Stardock) has largely met with outrage.

The content sales model is not long-term viable. The internet enables piracy too easily, excessive measures to curtail it harm your legitimate customer experiences as well. Mergers like the one announced today are not exciting. It just means we’ve moved to the next chapter of the same old story. I’ll be excited when I see those top companies merging with companies who know how to change the business model. I want to see reductions in the cost of production, massively if possible. I want to see seamless end-to-end delivery models that enhance the customer’s experience, not detract from it. And I want to see people really innovating what you can do with the content, coming up with brand new genres of gameplay and game mechanics, and for publishers to see those as a necessary portion of a balanced title portfolio as well.

So when that merger happens, put it on the front page of Joystiq, and I’ll be reading.