Learning from a video game publisher’s demise

An over-reliance on one customer, one business model or one market segment is toxic to a content company

So, it’s done. After years of speculation, THQ went under the Chapter 11 auction hammer, most of it going to rival publishers, with the majority of the remaining employees losing their jobs. (THQ’s letter to its employees, along with who got what, is here).

First up – a disclaimer – I’m an outsider looking in. Without being there, it is hard to discern what led them to make the decisions they made. Also, I had friends at THQ, and what has happened to them is lamentable. Those employees have had no input whatsoever into this post. In addition – there has been a lot of press on this case, do check out this link or simply Google “THQ bankrupt” to find all manner of opinions and “facts” on what really happened. Without having access to the books and interviewing staff, it’s difficult to point fingers or truly understand what happened.

However – we can look at the decay in a wider business sense, with some key takeaways as to what really takes to keep a content company afloat.

Good content does not always mean great sales

This is an obvious parallel with pretty much any mainstream content business, and will be echoed down the halls of publishers the world over.

Looking back over their lineup, the THQ “frontlist” product range was, in theory, a solid one. However, with the possible exception of Saint’s Row, none of their franchises achieved “breakout” status. Gamers received Darksiders, Company of Heroes, WWE , Homefront and Metro pretty well, but none achieved the utter frenzied fanbases of say, a GTA, Halo, or Call of Duty.

Therein lies one of the biggest risks to traditional games publishing. It is incredibly easy to believe that your product is the next GTA. We’ve all done it. Books are not immune to this by any means – the entire Booker prize list is regularly dwarfed in sales by Katie Price, or whoever the celeb-du-jour is at that point.

Just because it’s good doesn’t mean it sells. The trouble is, the development bets were, are, still as big as on those flagship titles. Tens of millions of dollars will be spent on making a game to challenge those big-hitters, and millions more on trying to convince the public that your new GTA-like product is actually better than GTA.

The dev budgets, on the whole, are driven by what the publisher believes the market can sell. The trouble is, the dev cycle on a AAA product could take up to 5 years, but is generally around 18 months to 3 years. This leaves a publisher making huge bets against a market that they are unable to predict accurately and potential exposure is massive.

It comes down, then, to making a product that people want to buy and telling people about it. If it’s an imitation of a superior product with a consistent fan base, your product will not be as huge as you think it should be. Community was, is, king when it comes to word of mouth. Cherish your CM’s…..they’ll be in big, big demand across all media soon. Rockstar figured this out very early on with GTA. Most book publishers have now made key hires in these positions. This is a good thing. Those that have not will soon realize that they have a lot of catching-up to do.

Market forces will disrupt your business. See the signs and adapt or die.

I left Midway just at the beginning of the app boom. I did so because, in my privileged position as resident stat monkey and book publishing aficionado, I saw big trouble ahead for the company I was at, and at the same time saw big opportunities in the ebook and mobile space.

It would appear that THQ faced the similar issues to those that we did at Midway, compounded by an over-reliance on low-margin, licensed product and a dependence on Day 1 retail numbers.

Traditional publishers of video games faced a quandary – did they go all-in believing digital (and mobile in particular) was the future and change workflows and lineups accordingly, or did they believe that their product lineup was strong enough to get them through to the next console cycle? The answer, of course, lies somewhere in the middle, and THQ were not, and are not, the only content publisher to have approached the digital marketplace with a “wait and see” gambit.

Of course, a few things then happened that changed things completely. Apple, Facebook and the rapid adoption of the Free-to-Play model happened. Console game sales peaked. Acceptance of smaller, downloadable games on Steam, PSN and XBLA became widespread. The bottom fell out of the NDS and Wii market and with it THQ’s revenue stream from kids licenses, nearly all of which were subsequently returned.

This meant that the games that were meant to save THQ in 2011/2012 were now releasing into a declining marketplace and the numbers that were probably forecast against 2010 benchmarks were never going to be achievable. THQ had bet the farm on boxed product pushing through new IP and keeping established IP afloat. It lost. The hiring of Jason Rubin was a smart move – but it came too late, as the damage had been done.

An over-reliance on one customer, one business model or one market segment is toxic to a content company. Entertainment publishers of all types need to consistently challenge their core models – I’m not saying replace them constantly, but be aware that the way you’re always done it isn’t going to be the right way forever. There is always an Apple, an Amazon, DeNA, or Steam waiting around the corner to steal your lunch if you stand still for too long.

Digital squeezes the middle

With the prevalence of the D2C business model, comes a squeezing of the middle ground (exactly where THQ were). 69p/99c apps, F2P games and episodic business models (I’m looking at you, The Walking Dead) are beginning to hoover up a rather large chunk of gamer dollars. At the top end of the boxed product scale, the numbers are falling year on year. Part of this is a natural decline towards the end of the console cycle, but an increasingly large part of this is due to a greater number of gamers consuming content in other formats.

This leaves those stuck without a niche in big trouble. If your product is essentially another take on a superstar franchise, without a rabid fan base championing your cause and extracting every last ounce of value per marketing dollar, you are in trouble. For as the numbers shrink at the top of the pile, those publishers discount quicker than they would have done normally. This, in-turn, dramatically shortens the life span of a mid-list boxed product. With downward pressure on price and shelf space from the big players, and a huge temptation from mobile, tablet, download and F2P products, the middle is left with a shrinking market in which to recoup their huge bets on development.

The way to distinguish yourself from the mass-market middle is to understand your niche, and surprise surprise, this comes back to community. If you build something they want, they will come, and they’ll tell others. Sounds so simple, doesn’t it?

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