At E3 last year, Disney Interactive Studio head Graham Hopper declared that games represented the “future of entertainment” for his company. A remarkable statement from a company with such extensive entertainment interests (ESPN, Pixar, Miramax), and one backed up by hard cash.
Disney has already committed to grow annual development spend at its DIS division alone from $175m expected this year to $350m by 2012 and the separate Disney Internet Group spent a potential $700m last year to add Club Penguin to its already sizeable list of network gaming assets.
However, they are not alone.
Both Viacom (MTV, Nickelodeon, DreamWorks, Paramount) and Time Warner (Warner Bros, New Line Cinema, AOL, Cartoon Network, DC Comics) have been staging their own assaults on the games market over the last few years and followed Disney’s E3 lead by throwing out equally big numbers to quantify their voracious intent.
Viacom, through its MTV Networks division, has spent over $650m acquiring 5 games businesses and last year announced it was going to spend a further $500m on its existing games initiatives in the next two years alone.
Not to be outdone, Time Warner stated its goal to grow its WBIE games division into “a $1bn business” by 2012 and promptly spent a nine figure sum acquiring Traveller’s Tales/TT Games.
This round of competitive statement-making was in part designed to impress a sceptical games industry that has witnessed so many failed market entry attempts by non-games media businesses. Their historic inability or unwillingness to understand the games industry frequently led to the application of TV/movie production and business logic to their games efforts which ultimately prevented even some of the world’s most IP-rich media companies from achieving much lasting games market success.
So, with such a vast amount of their capital being channelled into games, could these media giants possibly fail again and how will their strategies impact the rest of the market?
Since the companies’ last major games market sortie in the mid 90s, the games market has almost quadrupled in size, diversifying to access new demographic frontiers and open up myriad new market opportunities.
Whilst most traditional games publishers have remained focused on their core retail-based games competencies, Disney, Viacom and, to a lesser extent, Time Warner have listened to consumers and built their games strategies on reaching these new audiences and exploiting these new business models. Premium download sites, subscription services, virtual currencies and microtransactions, MMOGs and virtual worlds are already generating not only massive online communities for them but also rapidly accelerating revenues.
The three companies are also pursuing the console games market and with noticeably greater caution, acquiring, hiring and integrating experienced third party resource sensibly and, it would appear, showing a willingness to learn. Crucially, all three appear intent on not rushing along the value chain, choosing instead to undertake incrementally greater levels of risk step by step.
Disney, for example, having spent three years gaining experience of handheld development and publishing, has only recently begun a concerted move into the full console games business.
With a more patient attitude and such a diversified portfolio of games interests, these companies appear to be positioning themselves more intelligently than in previous efforts. Just as Microsoft’s $375m splurge on Rare served, in part, to demonstrate long-term intent to a doubting industry, we believe these media giants are similarly signalling their intent to stay for good. Whilst growing pains may be felt, individual projects fail and the companies’ games investment focus be rebalanced, we cannot see any of the companies wholly backing out of the sector this time.
In fact, we believe that all three companies may well end up as full PC and console games publishers competing directly with the largest of the current players in all major markets. Both Disney and WBIE have already voiced plans to reduce their use of licensing and increasingly handle major IP in-house. This will be a momentously disruptive move that will not only diminish some of the largest publishers’ currently substantial licensing revenue streams but potentially transplant it straight to their partner-turned-competitors. We believe that many of these publishers have sensed the change in the licensing climate, undoubtedly contributing to the noticeable increase in their original IP investment.
For independent developers this all augurs well. Not only is original IP being forced back on the publisher menu but the arrival of three financially stable, IP-rich new publishers with relatively limited in-house development resource (compared with the incumbents) and a proclivity for spending premiums to acquire partners also opens numerous doors of opportunity. As does, in stark contrast to most incumbents, the media giants’ huge appetite for online gaming and their willingness to target non-core audiences and trial alternative business models.