The success of Fortnite’s free-to-play business model ($2.4B in revenue to date) has begun to negatively impact legacy gaming businesses. Despite posting a “record-setting” $7.26 billion in 2018 revenue, Activision Blizzard (ATVI) announced that it would be laying off +/- 800 employees (8% of workforce) and lowering 2019 full year expectations by -20% to $6.03B; should the company experience a -16% YoY decline, it would be the largest in their history. COO “Coddy” Johnson cited “weaker than expected retail demand” and the “slowing sales of micro-transactions” for the revised guidance. Fortnite’s cannibalization of the gaming sector has also begun to spawn successful copycats. Electronic Arts introduced a free-to-download, battle royale game entitled ‘Apex Legends’ that attracted 25 million players within a week of its release; for comparison purposes, it took Fortnite nearly 2 months to clear that benchmark.
Howie Long-Short: There is a case to be made that free-to-play games help to grow the overall gamer pool, bring younger gamers into the esports ecosystem and promote diversity amongst the gaming population, but let’s be clear – companies are moving towards the freemium model because “the most effective way to generate billions of dollars is to not require a player to spend a single one.”
The problem for legacy game-makers is that the free-to-play model relies on a game’s ability to draw mass participation, to keep gamers engaged and to monetize in-game add-ons, and historically, “legacy gaming companies have a hard time introducing games that have substantial and sustainable development.” Jefferies analyst Timothy O’Shea described the industry shift towards game-as-a-service, multiplayer titles as “the biggest gaming trend of 2019.” That’s a scary proposition for companies like ATVI that rely on upfront/one-time payment sales of marquee titles. Once consumer behavior changes, good luck getting gamers to “pony up and pay $60 for ‘Call of Duty’, when [competing studios] are offering high-quality games for free.”
ATVI failed to reach its “full potential” in 2018, but plans to double-down on its most successful titles – increasing developmental resources by +20% on Call of Duty, Candy Crush, Overwatch, Warcraft, Hearthstone and Diablo. It’s a risky decision because gamers have a finite amount of time to play and a limited budget to spend on games. If they’re invested in free-to-download games – as the trend indicates, sales are sure to languish; of course, what’s the alternative? The company is heavily reliant on those 6 titles to deliver sustained revenues. ATVI shares are down -35% since November 1st.
Apex Legends used “prominent video game streamers” to raise the game’s profile out of the gate – and the strategy worked, but the initial hype has begun to wear off and there are indications that the game won’t have the staying power; not uncommon for games that require minimal up-front investment from the player. Investors are yet to pick up on the trend, Electronic Arts’ (EA) shares remain +33% since the company announced Apex Legends had surpassed the 25 million player benchmark; they had declined -37% in the 6 months prior.
Fun Fact: Avatar is the ONLY movie to have grossed more than the $2.4 billion ($2.7 billion) Fortnite has brought in.
Fan Marino: One point that Howie missed, is that Fortnite’s cross-platform functionality (i.e. same experience available across all major consoles/PC hardware + mobile) has contributed to its massive success. Just about anyone can play, on any device; and the game allows for a shared experience, enabling any player to play with/against another (think: Drake/JuJu/Travis Scott/Ninja) – uncommon within the gaming world. As of November, Epic Games’ Fortnite had over 200 million registered users.
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