The Flops Are Piling Up for Video-Game Titans

(Bloomberg) -- In recent years, the video-game industry looked like it had found the antidote to the boom-bust cycles that had long plagued the business.

Publishers focused on a few well-known titles and extended their lives through in-game purchases, expansion packs and online tournaments. Electronic Arts Inc., one of the largest players, doubled its market value to almost $45 billion last year as a new era of steady, predictable revenue seemed at hand. Then, like a wrong turn in Pac-Man, it was game over.

The biggest names in games have stumbled this year as marquee titles flopped and online spending came up short. Electronic Arts shares tumbled 13 percent Wednesday after the company confessed that some of its biggest releases disappointed. Take-Two Interactive Software Inc. fell by a similar amount after forecasting sales this quarter that were $100 million below Wall Street forecasts. The results are a reminder that video games are still a hit-driven business, rising and falling based on unpredictable consumers.

“The market is still healthy,” Chief Financial Officer Blake Jorgensen said in an interview. “The bad news, it's very competitive.”

Electronic Arts' latest Battlefield game was the biggest disappointment of the year, selling a million fewer copies than hoped, Jorgensen said. The company delayed the release by several weeks to correct some bugs, putting it in the thick of a competitive holiday season. Its core Madden NFL title also fell short, and the FIFA soccer game was flat from a year ago.

Electronic Arts, based in Redwood City, California, is looking to improve sales of Battlefield V by including an every-player-for-himself battle royale mode -- like the hugely popular Fortnite game -- but that won't come until later in the current quarter, Jorgensen said.

Similar Disappointment

Activision Blizzard Inc., down 48 percent from its October high, had a similar disappointment with Destiny 2 and an expansion of that shooting game. So much so, that the company cut its ties to the developer, Bungie, a move that could cost as much as $400 million in lost sales this year. Santa Monica, California-based Activision reports financial results on Tuesday.

The saga of Take-Two, which had last year's best-seller in Red Dead Redemption 2, illustrates how hard it can be to predict those recurring revenues the industry has been chasing.

On Wednesday, the New York-based game publisher reported quarterly sales that more than doubled and a fivefold jump in profit after selling 23 million copies of the new Red Dead Redemption game.

But Take-Two also said sales of its key Grand Theft Auto franchise would decline this quarter, both in physical units and online play. An online version of Red Dead, released in November, has been criticized by players for charging too much for in-game items such as decorative guns, raising questions about whether that product will enjoy the same success as the traditional game.

What's Next

“No one is saying selling 23 million units of Red Dead 2 is bad,” said Matthew Kanterman, an analyst with Bloomberg Intelligence. “The problem is, what's next?”

Take-Two Chief Executive Officer Strauss Zelnick said there could have been some cannibalization of the Grand Theft Auto business as players shifted to Red Dead. He also acknowledged glitches with Red Dead's online game, but said the company is learning and fixing what had been a beta launch.

“It's still the entertainment business and we will all fail or succeed based on the quality of our releases,” he said.

Lurking behind all of their woes is Fortnite, the phenomenally popular free-to-play game from closely held Epic Games Inc. The success of that game is forcing competitors to adopt similar models. Electronic Arts, for example, just released a free-to-play game called Apex Legends, that, like Fortnite, generates revenue from in-game purchases. On Thursday, the company said Apex signed up 10 million users in 72 hours, faster than Fortnite initially.

In-game spending and free-to-play are still working for social-gaming pioneer Zynga Inc. The company reported better-than-expected fourth-quarter sales and profit Wednesday and its shares rose in extended trading. The company credited franchises such as FarmVille and new titles like Merge Dragons! and Empires & Puzzles.

“Investments in these new games will pull margins lower in 2019 before expansion resumes in 2020, but Zynga has built a solid platform on which it can build scale profitably,” Bloomberg Intelligence's Kanterman wrote in a note.

CEO Frank Gibeau, a former Electronic Arts executive, draws a distinction between his company and those that make games for consoles, such as Sony Corp.'s PlayStation 4 and Microsoft Corp.'s Xbox.

The traditional console-based video-game business, even with its recurring revenue sources, “hasn't been as resilient as many people hoped.”

To contact the reporter on this story: Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Rob Golum, John J. Edwards III

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