Creative Destruction in Electronic Arts

The videogame industry, like many of the protagonists in the games it creates, is under attack. The competition is fierce. Not only is there healthy competition amongst legacy companies – including Nintendo, Sony and Microsoft – but new devices are increasingly distracting consumers, and digital disruption elsewhere is changing the way these companies do business.

Part of the problem is cyclical; the market has gone longer than usual without a major new console launch from either Sony or Microsoft, which in turn makes game manufacturers hesitate from making new product. But the industry needs to be wary that their audience has changed, in multiple ways. Sony are now staring to talk about their PS4 (due to be released in around six months’ time), beginning with a dire two hour presentation recently that failed to reveal price, release date, or an image of the console. And the word over at TechCrunch? “A tired strategy… [O]verall the message was clear: Sony’s PS4 is an evolution, not an about-face, or a realization that being a game console might not mean what it used to mean.”

We’ve written before on creative destruction in other industries, and talked before about shifting parameters for companies like Nintendo. The inventor of NES and Game Boy is currently struggling with poor sales of its new console, while at the same the chief executive of Nintendo America recently stated that digital downloads were becoming a “notable contributor” to their bottom line. Companies like Apple are surrounded by perpetual rumours of developing their own videogame platform. New companies in their own right, such as the Kickstarter-funded company producing the $99 Ouya, is among several players shaking up the industry. The upshot of such turmoil – a “burning platform” as the Electronic Arts CEO described the situation in 2007, referring to the dilemma of holding onto the burning oil rig and drowning in the process, or risk jumping off into who-knows-what – is a loss of market share. Accenture in January published a report predicting the demise of single-use devices such as cameras and music players whose revenues would be eaten into as more and more consumers flocked to tablet and other multi-purpose gadgets. Videogame console purchase intent was not researched, but it is not hard to make the analogy.

It was enlightening and reassuring then to read McKinsey Quarterly’s interview recently with Bryan Neider, COO of Electronic Arts. Some interesting take-outs follow. First, in 2007, the company recognised there was a problem: “game-quality scores were down and our costs were rising”. The company wanted to shift from having a relationship with retailers to having one with gamers. This meant having a focus on digital delivery. This fiscal year, digital is forecast to represent 40% of the overall business. Neider recognises this closeness to the consumer makes them even more susceptible to their whims and preferences, so they’re relying far more on data-backed analysis than they have before, including a system with profiles of over 200m customers. This data is used for everything from QA to predicting game usage. Neider elaborates,

“Key metrics answer the following questions: where in the game are consumers dropping out? What is the network effect of getting new players into the game? How many people finish a game? Did we make it too difficult or too long? Did we overdevelop a product or underdevelop it? Did people finish too fast? Those sorts of things are going to be critical… However, the challenge is that parts of the gaming audience are pretty vocal—they either really like a game or they really don’t like it. The trick is to find ways to get feedback from the lion’s share of the audience that is generally silent and make sure we’re giving these people what they want.”

Interestingly, the company’s structure was changed to reflect individual fiefdoms according to franchise – be it FIFA or Need for Speed – the needs for which are managed in that line of business. Each vertical competes with the others to deliver the highest rates of return, while also being able to draw on central resources (marketing, for example). Electronic Arts, as a developer of software for other manufacturers, will to some extent always be at the mercy of which devices are in vogue and the cycle of obsolescence. It is impressive though to see that the company has recognised the need to change the way it does business. The operational and technological sides of business don’t seem to have distracted Neider from the key insight in the industry, “Ultimately, we’re in the people business“.

Beyond the Linear – New ways of entertaining

The days of P.T. Barnum and the sense of spectacle an audience received from seeing a live performance have long passed; codified, commodotised, sanitised and made instantly available. Or have they? The way we entertain ourselves nowadays has changed greatly, and keeps changing. But are our tastes evolving or revolving? Is there hope for such seeming anachronisms as the TV, the live performance and even the book?

Two years ago, Zeitgeist wrote a brief article on the nature of contemporary consumption of media. It began with the headline that 8-18 year olds in the US spend a quarter of their media time with multiple devices. Furthermore, almost a quarter of that age group use one other device most of the time while watching television. In 2013, this preference for multiple stimuli has only accelerated. 80% of UK smartphone owners (making up over half the phone-owning population) use their phones while watching the TV. Similar figures were reported in the US, and similar figures were also reported for tablet owners.  Such figures give marketers pause for thought as they begin to approach these complementary devices as ways to extend their brand from the television onto the second screen. JWT Intelligence has a great report on this.

However, it is easy to overstate the arrival of shiny, new devices, and the apparent death of television. The blame for this misconception lies partly with the media itself; journalism is less engaging when it merely reports on the maintenance of the status quo (i.e. ‘people are still watching TV’). Far more interesting to hear about what new objects are showing a bit of ankle at CES, and that us mere mortals might one day dare to dream of owning ourselves, at which point all other material objects become unnecessary. All the more so when the journalistic integrity is compromised by corporate meddling, as was the case with CNET’s reporting this year. It was refreshing then to read TechCrunch’s recent article with the headline, ‘TV still King in Media Consumption’. The article, quoting a recent report by Nielsen, was particularly interesting in noting the prevalence of TV when it referenced that almost half the homes with TVs in the US owned four or more sets. Startling. More startling, the average household spends six days a month watching television, far ahead of other media consumption (using the Internet on a computer, at a little over 28 hours a month, came a distant second). The FT writes,

Over the past decade, despite the proliferation of video content on the web, TV consumption in the UK has remained steady with the average person watching about four hours a day. Almost 80 per cent of this viewing is on the top five channels, virtually unchanged from 10 years ago.

Creative destruction is something Zeitgeist takes an active interest in and has written about several times before on this blog. It takes hold in some industries (and households in this case) more quickly than in others. The same Nielsen study found that over 55% of US homes still had working VCRs. Moreover, despite much editorial to the contrary over recent years, the PC has not yet been wiped out by creative destruction and remains a staple for several reasons in both Western and emerging economies. According to Deloitte’s recent publication, “Technology, Media and Telecoms Predictions 2013″, although the attraction of tablets – and now ‘phablets’ – mean powerful computing and a cheaper cost, allowing the potential for leapfrogging of PCs in emerging markets, qualitative research shows a small but significant demand remains for PC ownership. Moreover, many businesses in the West, currently struggling with the implications of BYO devices, are not about to jettison the PC either. Switching costs, Zeitgeist suspects, are at play here, as with those stubborn VCR owners. Click here for more of our thoughts on switching costs.

VCR owners though will one day cease to be in the majority. New avenues of distribution and consumption are opening up, though not as quickly as first thought in some cases, particularly in that of live, streaming TV, which has faced many regulatory hurdles. Variety elaborates, “Loudly trumpeted efforts have fallen short, victims of poor design decisions, overpriced services and/or confusion about the target audience”. Yet alternatives are there. One of the more interesting streaming TV options in the US currently is that of Dyle, with 90 stations in 35 markets. It is run by a partnership that includes Fox, NBC, Hearst Television and others. The really interesting thing about the service is that it neutralises the problem many smartphone users will have of returning data caps by streaming off a separate network spectrum, which doesn’t impact on data allowances. Nice thinking.

Is the increasing popularity of streaming, and the content viewers prefer to watch over such a channel, already beginning to effect the types of films being produced?

Though new technology has not created new tastes in content or viewing habits, it has undeniably acted as a catalyst to desires already present. Zeitgeist remembers hearing a LoveFilm representative speak last year at AdTech in London about the increasing share streaming films took in the marketplace. Nothing too extraordinary in that statement, especially from a purveyor of streaming content. The rub came when he went on to elaborate that people tend to stream films when they are in the mood for instant gratification, in the form usually of an action film or romantic comedy. The increasing popularity of streaming, and therefore the increasing popularity of these particular genres, means the way the medium is distributed may very likely have a very significant influence on the type of content in the future that is commissioned. It was no surprise then to see, on a recent cinema trip, trailers for three films that neatly fit into that category for instant gratification (see above). Zeitgeist wrote at length on the need for film studios to address arbitrary platform release windows at the end of last year. Our article was mentioned in the lead editorial of entertainment trade paper Variety. Part of our argument is beginning to be addressed already. The FT recently published news that studios had managed to stem the six year decline in home viewing figures for films last year. The article elaborates that this is in part due to the strength of digital downloads, with films sometimes being available for digital distribution before they were available on DVD. Taken 2, a superb candidate for streaming given the previous statement by LoveFilm, was released Christmas Day in the US on digital platforms, “weeks before its release on DVD”. Such thinking goes hand-in-hand with the new UltraViolet format, to which several studios are subscribing. This allows those purchasing a movie on DVD – such as the recent Dark Knight Rises – to watch it with ease on multiple platforms. Mashable carried an article last week stating that several electronics firms have now also signed up to the UltraViolet partnership. Consumers will receive ten free movies when they sign up to the service, as incentive.

The example of Netflix is an interesting one in trying to understand the balance between consumers’ desire for multiple media and instantly-accessible content, and content owners desires to drive maximum revenue from their product. The company has been making a bigger push into providing TV shows of late, and is being rewarded for it, particularly with regard to older shows. A cultural trend many a pundit has put their finger on since the credit crunch began to bite back in 2008, nostalgia has manifested itself in consumers’ desire for old shows, including Midsomer Murders and Rising Damp, reports the FT. This long tail effect is turning a tidy profit for Netflix, as well as the original broadcaster, ITV. As a complement to this, the company is also fostering new partnerships, first with Disney in December, giving it “exclusive rights from 2016 to movies from Disney, Walt Disney Animation Studios, Pixar Animation Studios, Marvel Studios, and Disneynature”. Then, at the beginning of this year, it inked a deal with Warner Brothers, to show new and old TV shows from the studio. It should be noted however, as with all these new deals and technological developments and marches into previously uncharted territory, regulatory wranglings have ensued, in this case with sister company Time Warner Cable. The problem in this situation is not perhaps so much that Netflix is trying hard to push its availability into lateral markets, but that it is not trying hard enough to create a cohesive platform that is available across all complementary platforms and devices. One thing which Netflix will want desperately to escape being accused of – and it has done so with much success thus far – is being a niche provider of content. Sadly, the days of the point-and-shoot camera, the dedicated games console, etc., are numbered, according to a recent report by Accenture.

It is evidently with such a strategic outlook in mind that Disney have recently announced their Infinity gaming platform. Variety describes it as an “online treasure chest”, featuring a plethora of Disney characters from over the years that can be interacted with over multiple platforms, whether on mobile or on videogame consoles. Importantly, the concept is designed to be an iterative, one that will grow and add characters over time, presumably as new IP is created. It certainly pays heed to the second screen phenomenon by recognising the need for multiple device access. It also plays off the trend started by the game ‘Skylanders’, which involves both physical toys and digital interaction. The same principle will apply with new toys developed for Infinity, which can then be used to create unique stories and drive narratives. The idea of having disparate characters from different Disney franchises is potentially a frightening one for those in charge of the individual brand essences of said titles, but the potential for success can be found by looking no further than the Toy Story films, which feature an assortment of different genre toys that mix well in situ.

We’ve discussed the changing models of consumption for most of the article, but it is worth noting briefly how our cultural tastes are also changing, brought on by technology (again), but also globalisation. Pundits are often quick to point out nowadays that there is a substantial demand for the live experience. Yet if we look at music, one of the most profound things to experience live, recent figures showed attendance to concerts had dipped. At the end of last year, in an insightful roundtable, The New York Times interviewed several talking heads, asking them to round up their thoughts on 2012 in the music industry. One of the more interesting points repeatedly made was that of the abundant opportunity that the Internet now provides for musical talent. Moreover, the Internet at large has become just as viable – if not a more viable – starting place for an emerging artist than signing with a record label:

“Now this year something’s been proven: Pop performers can become truly famous by building their careers themselves online, maybe more efficiently and faster than a major company can help them to do.

… you look at the first-week sales numbers of someone like Kendrick Lamar, who had an independent album that was digital only and is now on [the major-label] Interscope, but basically has no major radio hits, even if he is well-liked by mainstream hip-hop. He comes out and sells about 240,000 in his first week. A couple weeks later Rihanna comes out — not her first album and at the height of her pop fame — and sells a few thousand less than Kendrick did.”

The other trend, globalisation, has meant that voices increasingly other than those that are Western, are more easily heard. The irrepressible Psy had the honour of being the performer in the first YouTube video to cross one billion views. Conversely, in his home country of South Korea, ‘Gangnam Style’ has accrued a pitiful “$50,000 from CD sales and $61,000 from 3.6m downloads”. The point remains, however, that the fallacy of the West as the cradle of pop culture is being exposed. Christopher Caldwell illustrates this masterfully, writing for the FT in December.

Zeitgeist has written before about the upheaval new trends and preferences for media consumption – impacted significantly by the arrival of the Internet – have wrought on financial growth in the media and entertainment sector. Digital, in the form of Napster and its myrmidons in particular, has a lot to answer for. There was some relief then that at the beginning of the year when UK digital sales topped GBP1 billion for the first time (though still failing to off-set the physical media decline). Moreover, Boston Consulting Group predicted last month – in an excellent report entitled Changing Engines in Midflight: The 2012 TMT Value Creators Report – that by 2015 the digital services ecosystem will reach $1 trillion by 2015 (see above).

It is interesting to see where the ownership of content starts and ends across layers, and how content owners are trying to monetise these platforms and grab as much market share as possible from their competitors. Amazon recently began offering digital downloads of any CD you have purchased from them since 1998. It would be a great surprise to see if they do the same for books anytime soon. Fortunately, reading still constitutes an avenue of entertainment, for those of all ages. A recent piece by The New York Times reported that digital reading was on the rise for children. The article notes the numbers give some room for discrepancy, but states “about one-fourth of the boys who had read an e-book said they were reading more books for fun”, which is a desperately important emotional connection to maintain. While e-reading is a commendable past-time, is there any merit in pushing further, and advocating for interacting with a medium that does not involve a digital display? Such a turn of events, perhaps aided by the trend for nostalgia mentioned earlier, is presenting itself in the luxury hotel market, with physical libraries returning to shelves. It has been termed ‘rematerialism’.

So what does this all mean for consumer entertainment? There are evidently lots of new technologies being released, from smart TVs to new gaming devices, that will attempt to capture eyeballs. These devices, far from having to think of their natural competitors, still have the common television – and, as we have seen, even VCRs – to compete with and overthrow first. TV commands such a huge slice of viewing time, but it is under threat from distracted viewers who are now very comfortable – and more importantly socially accepting – of using a tablet, laptop or phone during a show. There are also regulatory implications t consider, which will most likely be shaped, ex-post, along the way. Taking consumers on a journey across multiple platforms and media in a seamless way will be key. Disney’s Infinity platform, when it is released, will hopefully serve as an excellent example to others of how to combine physical and digital entertainment.

Selling ‘Toy Story 3′

Orson Welles once said “If you want a happy ending, that depends, of course, on where you stop your story”. Many pundits thought that a third iteration of the popular ‘Toy Story’ franchise would be a step too far; could a film released eleven years after its predecessor still pull in the crowds? Any such questions were swiftly forgotten about when the film grossed a record-breaking $110+m in its opening weekend in the US, and held it’s number one spot this weekend just passed as well.

Apart from the enduring popularity of the series, as well as studio Pixar’s seemingly unending run of stellar films, the film (which has yet to be released in the UK to avoid clashing with the World Cup) surely owes some of its success to an excellent marketing campaign. As well as simple things like the teaser trailer, which handily features the ‘Toy Story 3′ logo in the middle of the clip (the image YouTube then uses as a thumbnail), and releasing apps for the iPhone et al., there are three examples in particular that Zeitgeist will be focussing on in this article.

The first example was intended to build some viral buzz around the film by releasing various videos on YouTube. These videos were commercials that featured old toys from the ’80s that appear in ‘Toy Story 3′, such as the Lots-o’-Huggin’ bear. The catch is that these commercials are fake, because the product itself exists purely in the film. The video however is so realistic, from the VHS-like video quality to the ’80s music, voiceover and clothing, it blurs the boundaries between fiction and reality, and takes you into the ‘Toy Story’ universe. As Mashable writes, “Thus far, Disney and Pixar have heavily marketed the film across different demographics, but there has a been a strong viral push to grab the attention of people in their mid-to-late twenties. For that reason, creating an ’80s-esque toy commercial makes a lot of sense, because we’re a generation that is obsessed with recollecting our past and relishing what once was.”

SEO has been under the microscope as well, to great effect thanks to Google and Twitter. eConsultancy ran an article on the film’s promoted Twitter presence, saying “the placement is great branding for the Toy Story franchise”. It’s presence was on the Promoted Trends slot, which brands have to “win” to be lucky enough to feature on. The article continues, “media mentions of its Twitter purchase are also working out to its benefit.” For Google’s part, the film jumped on the Search Stories bandwagon, creating a fun video of what results the user (in this case characters from the ‘Toy Story’ films) get when they type in certain words on the search engine.

Lastly and most impressively (because it is such a simple thought), there was the fantastic idea of allowing people to buy tickets to the film through Facebook. This is a first, and a great step. For too long, generic thinking has operated along the lines of “We’ll put together a site, make some great content, make it really engaging, and people will come to visit the site.” This example represents a shift to thinking more along the lines of “Let’s bring this content and functionality to where they already are.” It’s just a simple and superb idea, no doubt the first in a long line of such promotions from all the studios. One marketing head from a rival studio told Zeitgeist they were “all over Facebook now”.

Overall, great thinking and great execution have led to several promotions that not only make the consumer feel closer to the brand, but also, as with the latter example, help lead to direct monetisation.