MCV today reports that CHIPS has gone bust, with the loss of 29 jobs at head office and at its wholly owned stores. The company is at pains to point out that its franchise stores are not affected. I

My heart goes out to management and employees. I have seen businesses die and I have been made redundant (although in the end that was one of the best things that ever happened to me), and it is not easy.

I take huge issue with CHIPs stated reason for the liquidation though. In their official statement, they say:

Unfortunately, the recession has lasted far longer and bitten far harder than anticipated and Chipsworld Ltd has been unable to continue trading. Many of its customers, particularly in the North-east of England have been badly affected by the recession and to continue trading would only increase the company’s debts further.”

I just don’t buy it.

The recession has been bad, certainly. And i am sure that if CHIPS is saying that its customers are spending less money in store, that is true. I just don’t believe that the primary cause is the recession.

What caused CHIPs’ problems?

Just to be clear, I have no specific insight into CHIPs. MCV commenters have talked about the difficulties of getting credit insurance, poor merchandising decisions or not having the right stock. That may or may not be true, but it is CHIPS specific. I want talk about the malaise that is affecting retail.

Fewer, bigger products

Publishers are being squeezed and their response is to chase bigger, more impressive titles. Everyone wants to be a Modern Warfare 2, grossing half a billion dollars in retail in the first week. What does that mean for other titles? It means that if you are not a big title, you are not getting the retail sales. In short, we’re seeing fewer titles take a larger share of the revenue. And this will continue.The impact for retail is stark. Publisher strategies focus on people buying fewer titles and playing them for longer. That is not good for footfall or average basket size.

The role of online in boxed products

Increasingly, boxed products are not even that important in themselves. They are becoming the first stage in the publishers’ strategy of feeding the funnel. Boxed games may even become loss leaders for DLC: the publishers get free marketing in the retail store (paid for by the consumer) but aims to make most of its profits from upselling other elements of DLC.

Just to be clear, this is not viable yet – DLC is not yet a big enough segment of the market. But it is a sign of things to come.

The growth of other forms of gaming

For everyone complaining about a recession, there are other games business that are growing like crazy during the worst consumer slump for 20 years. Zynga with $400m+ of revenues. Playfish and Playdom with an estimated revenues of more than $100 million. Companies like GameForge, Jagex and Bigpoint with revenues of around $50 million. Lazard estimates that the global online market was worth $15 billion in 2009, growing to $20 billion in 2010.

That’s a lot of growth. $5 billion of growth in fact. Where is it all coming from? Some of it is coming from new users (see PopCap’s research on gamers on Facebook) but a lot of it is cannibalization of existing sales.

To illustrate the point, here is Nick Parker’s charts for boxed sales versus online games and streaming games. (Nick produces much of the games forecast for Screen Digest, among other things.) We hit the peak of boxed products in 2008 and we ain’t never coming back. It may have been kick-started by the recession, but, in Nick’s estimation, the only way for boxed products from here is down.

The erosion of the hardcore

This one is more of a belief than empirical evidence. I’m still researching it. But my belief is that the hardcore gamer market is stagnating. I wonder if we may have reached a plateau where the hardcore market has reached its maximum size.

As people get older, with families and other commitments, they are less able to dedicate time to gaming. they are still keen gamers, but will seek alternative, less-intensive ways of getting their gaming fix.

This is precisely what happens in the film / television industries. Single, dating, childless people go to the cinema more often. Older, married couples with kids watch television. They are still consumers of filmed entertainment: just through a different medium.

Of course, cinema went through its rough patch in the 80s and early 90s and has since recovered mainly by improving what it offered its consumers. The same may be possible for physical games retailers. But the easy assumption that people who liked games had to go to shops has long gone. And I’m not sure that retail is yet experimenting with how to replace it.

Conclusion

My point here is not to pick on Chips. It’s to challenge the assumption that games retailing is being hit by the triple whammy of a consumer recession, pressures on credit and competition from grocers. Physical retailing of games is definitely facing these things, but it is facing much more. When the economy recovers and credit comes back, there is nothing but a tough future ahead for physical retailers.

Added to the Job Loss Tracker.

Related posts:

1. GamerDNA halves its workforce as games advertising enters terminal decline
2. The death of single-A titles will challenge retail more than the rise of casual
3. The death of single-A titles will challenge retail more than the rise of casual

I was reading the TechCrunch report of Disney’s acquisition of Playdom and this comment leaped out at me:

This is a genuine problem for Disney. I can understand why they didn’t accelerate the vesting on acquisition: for many employees, the stock options are an important part of their remuneration and their commitment to the company. Paying too much out too soon and employees might take their windfalls and run.

On the other hand, most employees want equity so that they can get rich when the company goes public or gets bought. Playdom no longer has that carrot to dangle in front of people. At best, employees will have had their options transferred into a Disney option scheme that vests in safe, sensible Disney stock over time, and that is not the kind of equity that excites people who join fast-growing start-ups.

Against a background of a massive dearth of social gaming skills – and very high salaries for those who do exist – this is a problem for Disney.

How they handle this issue will be a critical part of whether this acquisition works or goes horribly wrong.

Related posts:

1. Disney buys Playdom, but will its IPs work in social games?
2. The Live Gamer/Two Fish acquisition signals the end of the distinction between social games and hardcore MMOs
3. Why EA’s acquisition of Playfish is still a steal at $400 million

The acquisition of Playdom by Disney is all about exploiting Disney’s IP on social plafforms. But will it work?

Disney has paid $563.2 million, mainly in cash, plus a $200 million earnout for Playdom. that’s a total value of $763.2 million if the targets are met. I don’t have insight into the financials of Playdom, but it’s a big number. Playdom had better deliver for Disney (Disney’s other big online acquisition has only partially worked out. Club Penguin failed to meet its earnout target, halving the acquisition price).

What are Disney buying?

Disney can see that social games are a large part of the media future. In Playdom, they are acquiring:

• Users: According to AppData, Playdom has 38.8m MAUs (not d-duped), making it the #4 Facebook app developer behind Zynga, EA/Playfish and Pencake.
• Revenues: Playdom expected to make “upwards of $50 million” in revenue in 2009, says Inside Social Games.Given the trajectory of virtual goods across the market, that seems like a conservative estimate. it wouldn’t surprise me if it were going to make 2-3x that figure in 2010 (although I have no insight into this at all).
• Management: John Pleasants, CEO of Playdom and ex-COO of EA has played his hand well, and particularly has managed the company’s transition back from its nearly-disastrous decision to back MySpace over Facebook as the platform for social gaming.
• Expertise: This is the biggie. In this market, there are few companies who really get social games, and finding employees who can make them is really tough (and very expensive). Disney is buying a head start.

What about IP?

Bob Iger, Disney CEO, had this to say:

So there is little rationale in buying the IP of Playdom (fair enough, there isn’t much yet) and more in bringing Playdom’s social gaming expertise to the Disney family, particularly Disney and the $4 billion acquisition of the Marvel mine.

Will it work?

For me, the jury is out. Playfish and now Playdom are now touting branded content as the next big thing on social games.

Well they would, wouldn’t they, being owned by massive brand owners who want them to exploit those brands in the social space.

The problem is that brands and “iterative development” don’t go together very well. It’s all very well putting out a low-budget test title with an unknown IP. It’s another thing to make a social game with Mickey, Thor or John Madden that dies on its arse.The proven model of social games has been to try – learn – iterate, which is not something that businesses steeped in old media thinking are naturally well-positioned to do.

So big publishers will try to make social game development like traditional development: risk-averse, driven by committee, full of focus-groups and arse-covering.

I don’t say that it won’t work, but I do say that these acquisitions are fraught with risk. i was much more comfortable with the EA/Playfish deal because I believe that John Riccitiello is totally committed to adapting EA to the new games market.

The jury is still out on Disney.

Related posts:

1. Has the acquisition of Playdom created a disgruntled workforce for Disney?
2. Social games – is the Facebook fad over?
3. Social gaming comes of age: Social gaming companies trouser half a billion dollars in just one week

Electronic Arts has decided to sell its 14.9% stake in Ubisoft.

The move makes sense. At the time of EA’s purchase, Yves Guillemot said “we consider this operation as hostile”. Matching actions to his words, Ubisoft started taking steps to ensure that EA could not determine the company’s future.

The Guillemot enacted a special rule: anyone who has owned shares in the company for more than two years magically gets double voting rights. (You can see the details in the Ubisoft 2010 Annual Report – and  just to be clear, I think that this was a direct response, but it may have been in place for some time.)

What does this mean in practice? Look at the table below:

So the Guillemot family have nearly twice as much control over the future of Ubisoft as their shareholdings would suggest. Plus, of course, the board of directors has six members: Claude Guillemot, Yves Guillemot, Michel Guillemot, Gerard Guillemot, Christian Guillemot and independent director Marc Fiorentino.

Even with the overhang gone from Ubisoft’s stock with the placement of EA’s holding in the market, anyone who thinks that Ubisoft is now vulnerable to a takeover is both wildly optimistic and fails to understand the efforts that the Guillemots have undertaken to ensure that they – and no-one else – determines the future of Ubisoft.

So what was my role in all of this?

It was pretty minor. In the early days of Lodestar Partners, I was hired, along with my partner Richard Williamson, by Talpa Capital, the investment fund of John de Mol, the founder of Endemol, inventor of Big Brother and extremely wealthy media maven.

The fund believed in the convergence of games, television and mobile and hired us to help them understand how the games industry worked: what are the drivers, who does what, and where is the value. (I still do this work. If you want to understand how the games industry works, email me).

We finished our project without making specific recommendations on investments (we were not positioning ourselves as investment analysts). But shortly afterwards, Talpa bought a big stake in Ubisoft. That was the stake which they eventually sold to Electronic Arts.

So in a small way, I helped kickstart the six year relationship between EA and Ubisoft which made investment bankers salivate over a deal to sell Ubisoft.

And now they’re salivating all over again. I imagine that they are dusting off their decks and visiting Activision, Disney, Warner and others to say “Electronic Arts have sold their stake; Ubisoft is in play again.”

I think they’re wrong. I think the market thinks that they are wrong (Ubisoft’s share price is down after the placement of a 15% stake and the removal of the overhang on the stock. It’s not as if the market is immediately pricing in an acquisition).

But something has to keep the bankers busy.

What do you think? Who should buy Ubisoft? Or should they stay independent? Let me know in the comments.

Related posts:

1. Hard-a-port! Is Riccitiello’s strategy to turn the Electronic Arts supertanker working?
2. 1,500 jobs to go at Electronic Arts as it replaces traditional games with social games
3. Investor in Nintendo? Five good reasons why you should sell your Nintendo stock now

Now that the UK Coalition government has nixed tax breaks for the video games industry, perhaps it is time to step back and ask what the objectives of video game tax breaks were – and whether they would ever be able to achieve them.

It’s all about Canada

The UK is reeling from Canada’s ascent up the global developer rankings. Despite the UK’s track record of development and rich creative heritage, Canada is overtaking us as a developer of AAA boxed products.

Canada has generous tax breaks. The logical response is for us to have generous tax breaks.

I have two issues with this argument. The first, as I argued last week, is that tax breaks may doom Canada to second-class status. The second, as set out by Jason Dell Rocca in GamaSutra, is that it is not all about tax breaks: it is much about infrastructure, education, a benign funding environment and being a good place to run a company. A number of US states have started to offer tax breaks, but without the additional elements seem unlikely to enjoy the success that Canada has to date.

It’s about protecting jobs

This, to my mind, is where the argument starts to fall apart. I fear that tax breaks are about protecting *companies*, not jobs. The long term future of games is not in AAA development. There will be a few studios making blockbuster titles for major publishers, but the majority of game development will be online, service-based developers creating games on the web, smartphones, the iPhone and, possibly, downloadable console platforms.

These companies are the companies we need to support. We need to help the next generation of games companies, not the last generation. If they can’t help themselves, then, in the spirit of Schumpeter’s creative destruction, they need to adapt or die.

The most exciting companies in the UK games sector right now are Playfish, Jagex and Mind Candy. Games like Restaurant City, RuneScape and Moshi Monsters are the future of our industry. We need to help them. It is conceivable that tax breaks will help new, innovative companies to create unthought-of business models.

It is more likely that they will help entrenched companies whose business models are failing, but who can get the ear of government.

It’s about the little guy

I don’t think I can make the counter-argument any better than Cliffski from Positech, the indie developer of Gratuitous Space Battles.

It’s about fairness

Canada offers tax breaks. France offers tax breaks. So the UK wants to offer tax breaks. Pretty soon, every economy in the world offers tax breaks.

Civil servants are employed keeping score, but the truth is that money that flows from taxpayers via bureaucrats to companies is money that is leaking out of the productive economy. Do we really want to encourage that? Especially when everyone else is doing the same thing. It’s just an increased tax burden, not a competitive advantage.

It’s all about the future

The tax breaks will be locked in time. They will be relevant to the games market as it is today (or perhaps yesterday) not tomorrow. Can you imagine any political party having the will to revisit the tax breaks in the next decade? I can’t.

That means that tax breaks will be about games in boxes or games as products. They are unlikely to be suited to agile development, to the emergence of the mobile Internet, to service-based gaming, to a world where consoles are a minor player in the gaming universe. Even if they are, can anyone expect them to be relevant in ten years time? Think back to the gaming landscape in 2000 and consider how much has changed from then.

It’s about games

This, I think, is my final criticism. Tax breaks will, inevitably, administered by civil servants. If you thought that it was bad that publishers were responsible for green-lighting what gets made, can you imagine how much worse it would be if it were civil servants?

Tax breaks tend to make companies develop for the government, not develop for the market. And to my mind that is a recipe for poor quality products that no-one wants, and hence commercial disaster.

Conclusion

Perhaps you can tell by now that I have some very real objections to tax breaks. I’ve kept quiet until now because the industry wanted them, and I have many friends, colleagues and clients in the games sector. I, perhaps cowardly, didn’t want to rock the boat (but nor did I lobby against them in private, unlike the alleged activities of some games publishing companies).

I disagree with tax breaks in principle. They smack of government belief that they can intervene to stem the tide of free markets changes. I am much more supportive of efforts to stimulate start-up activity and investment, particularly by helping with training and networking, and much less so of direct involvement in commercial decisions.

I fear that tax breaks would have helped the UK in the short term, offering publishers a bribe to place their development in the UK. But in the long-term it does not help us innovate, develop new business models and grow. Like Canada, we will become indentured serfs, dispatching our surpluses to foreign paymasters. The long-term is what matters, not attempting to stem the tide of change.

I would rather that the film industry was not subsidised. I would rather that Canada did not offer games tax breaks. But given that Canada does, my preferred solution is to make the UK the best place in the world for small businesses (low corporation tax rates, highly skilled knowledge workers, a creative community), not to offer tax breaks due to special pleading on an industry-by-industry basis.

I fear that may make me unpopular in the gaming community.

Tax breaks are a complex issue. What do you think? Please do let me, and other readers, know in the comments.

Related posts:

1. Are tax breaks dooming Canada to second-class status?
2. The case for tax breaks was never really made, says Simple Life Forms Tadhg Kelly
3. Be careful what you wish for: UK games industry gets parity with films as government abolishes the Film Council

According to TechCrunch, Google has secretly invested $100 million in Zynga. (Congratulations to Michael Arrington for that scoop.)

TechCrunch says:

This is more evidence that games are to social networks what free email was to portals during the dot com boom. To explain that better, let’s go back to first principles.

The growth of a social network

Most social networks move from early adoption to a mass market before petering out in a damp squib of shoulder shrugging from users. Early social networks such as Friendster and Friends Reunited blazed the trail for social networks, but offered little beyond the voyeuristic delights of seeing what people you didn’t like at school were doing now, and hoping that you were doing better than them.

After the schadenfreude passed, users realised that there was a reason why they didn’t stay in touch with the people they didn’t like, and moved on.

The same issue hit portals during the dot com boom. There were lots of portals competing on undifferentiated search (before Google) and content. Then they hit on a brainwave.

Offer people free email.

I was an equity research analyst helping investors understand the Internet sector back then, and I spent a lot of time explaining to bemused investors why offering a corporate -style service for free to consumers was good business:

• Frequency: email is something that you use every day. Portals were spending marketing money persuading people to come back every day, but they would check their email without needing to see an ad
• Loyalty: Moving an email account is a chore. You have to tell everyone your new address and maintain both for a while.

In short, free email offered “stickiness” to portals desperate for differentiation.

Games are the new email

At the start of 2009, Facebook faced the risk that it had passed its moment of zeitgeist. Certainly amongst my friends (I know – this is analysis by anecdote, but still), it was petering out.

Then it opened up its platform to developers and some companies built games. (Note: Facebook didn’t know that games were going to be big – they just let entrepreneurs experiment on their platform. Another example of open triumphing over closed).

Games turned out to be Facebook’s free email. As I’ve argued before, the emergence of games on Facebook provided a reason for some Facebook users to come back every day, possibly several times a day.

And each time they came back, they might update a status, comment on a photo, tag a friend…

Facebook provided the platform and the social graph. But games provided the stickiness for a critical mass of people that stopped Facebook petering into irrelevancy.

So what next?

On the one hand, anyone building a social graph knows now that games are key. If you own a platform, you want to make game-makers a vital part of your ecosystem.

On the other, Facebook has realised that while games are hugely attractive to a portion of their audience, the viral hooks and in-stream notifications are annoying to a much larger group. So they’ve canned the virality of their platform (of course, it helps that companies then have to spend lots of money buying Facebook ads).

So we could either see game developers moving en masse to Google (if it offers clever, cost-effective viral mechanics when it launches its games platform), or the cost of acquiring customers on Facebook declining in the face of the increasing competition.

Either way, the role of games as a critical component of a successful social network has been comprehensively proven.

Related posts:

1. Is Zynga just buying its success?
2. Why Facebook is dependent on Zynga, not the other way round
3. If QuakeLive can’t survive on advertising alone, who can?

In a detailed comment in response to a GamaSutra with David Braben about the UK government’s U-turn on tax break for video games, Simple Life Forms’ creative guru Tadhg Kelly weighed in with some strong comments. I reproduce them here with permission.

I’m not sure that it’s to do with the way that the new government values the games industry per se, but rather the Conservative attitude to government help for industry in general. Politically, they’d actually rather get rid of or reduce the amount of subsidy that flows into the UK film industry, but can’t as that would lose a lot of support.

However they have effectively ended or closed a variety of regional media development efforts and several other so-called austerity measures. The games assistance should be viewed among the backdrop of all of that activity rather than be seen as a special victimisation.

All that being said, the case for tax help for games has never really been properly made and it was a contentious issue. While TIGA and the like argued that it was a natural right (if film had it, why not games) yet the effect of such schemes on other media like film is repeatedly shown to affect the kinds of projects that get greenlit and – ultimately – make those industries utterly dependent on funding and the politics of funding. This is not something that I think would be a positive for the British industry overall, as the spectre of cultural tests and the like are bad.

The reduction in corporate taxation from 28% to 24% is thus more significant because it provides substantial savings of a generalised nature. It’s not an ultimate panacea but it’s pretty good and could provide much breathing room for UK publishing in general.

Lastly, it could simply be the case that the UK economy is always going to be more conducive to smaller-scale indie development. With the advent of App Stores and social platforms, the cost of publishing neat game ideas is rapidly declining and there is an opportunity for motivated developers to basically reboot the UK industry as a next generation of what used to be called bedroom coding. To add tax breaks into that mix thus seems more of a ploy to prop up the existing mid-sized difficult-to-find-viability companies that have been waning all across the UK in the last few years. And is there really a compelling case for doing that?

Related posts:

1. Are tax breaks dooming Canada to second-class status?
2. Video game tax breaks: Short term gain for long term pain?
3. Be careful what you wish for: UK games industry gets parity with films as government abolishes the Film Council

Earlier this year, a bunch of successful indie developers announced that they were going to invest in indie games – new ones, made by other people.

The people behind World of Goo, Braid, flow and other games think it’s time to give back. And now they have opened up the Indie Fund to applications from game developers looking to do something new and interesting with games.

The fund has a bunch of requirements:

• Innovation: Their phrase is “Does it add something new to gaming"?”
• Playability: This is only partly about checking it on the game; it mainly seems to test whether you are capable of getting a game design executed in some form.
• Cost-effective: World of Good cost $120,000 to make, Braid cost $180,000. If you are not small like that, the fund economics won’t work.
• Business-like: This is an investment. The funders want their money back.

It looks like a pretty cool fund. First step is to make a video. Go visit the Indie Fund application page and see if it is for you.

Related posts:

1. Four reasons why VCs won’t fund games companies
2. Where has all the VC money gone?
3. How much does the UK government spend on games?

The issue of tax breaks for the games industry is a live one.

Attractive tax breaks offered by Canada, France and many US states are drawing global publishers to build studios and recruit talent based on tax incentives, rather than broader commercial logic.

Britain, which does not offer tax breaks, is falling down the global rankings of games-producing companies from third to either fifth or sixth, depending on who you believe. TIGA, the games development trade body, has been a vociferous supporter of tax breaks for the games industry to “level the playing field”.

But is Canada actually benefiting so much? In the latest Develop 100 2010 survey of the world’s most successful game studios, one statistic leaped out at me:

Hold on. Are the tax breaks really doing what Canada wants? Are they creating a strong, domestic business with global exports and long-term potential? Or are they just creating a legion of indentured wage slaves who are only attractive to foreign investors because of the generous tax breaks?

What’s the long-term future of Canadian development?

I’m guessing that the purpose of the Canadian tax breaks are to build long-term value in the economy (not just keep people in jobs, which to my mind is the role of the market, not of government).

The question, then, is whether Canada’s economy will benefit from the repatriation of profits generated by its local development talent to the coffers of US, French and Japanese companies.

After all, a knowledge economy rests on Intellectual Property. And that IP is not being created for the benefit of Canadian companies but for their overseas paymasters.

Does this matter?

I think it does.

Ask any businessman whether he would be happy to compete on price alone, and he would look at you as if you were mad. Price is a poor differentiator, and a beggar-thy-neighbour one. As soon as high-quality development talent comes on stream in other countries that have lower costs-of-living or better tax breaks, Canada is in trouble. Unless it offers even bigger incentives.

For the long term, Canada needs to foster a spirit of entrepreneurialism and IP-generation that will stay in Canada. It needs to encourage its best and brightest to start new businesses, not to take attractive (and subsidised) jobs with global behemoths.

A quick test for you: can you name two global Canadian success stories in games in the last ten year? For these purposes, they need to be well-known to gamers, still independent, and have created intellectual property with a long-term future.

I’m struggling.  Maybe I don’t know enough about Canada.

Or maybe tax breaks have a hidden, and dangerous, cost.

Related posts:

1. Video game tax breaks: Short term gain for long term pain?
2. The case for tax breaks was never really made, says Simple Life Forms Tadhg Kelly
3. Be careful what you wish for: UK games industry gets parity with films as government abolishes the Film Council

The news that 888 Corporation has spent up to $48 million on gaming company Mytopia is, at one level, no surprise.

It’s all about CPA

Gambling companies are experts at two things: customer acquisition and understanding legislation. Given that customer acquisition is the sina qua non for online games companies, it makes sense for gambling companies to buy into games in a big way.

But (and it is a big but), there are very substantial differences. The lifetime value of a gambling customer can easily run into thousands of dollars. Paying over $100 CPA (cost per acquisition) is a sensible strategy, and gambling companies are set up to spend a lot of money (both gross and per user) to acquire customers.

Games companies are different. Broadly speaking, gamers spend less than gamblers. So a gambling company will have to get used to CPAs that need to be a whole lot lower (possibly by a factor of 10 or more).

That’s not impossible. It’s just that gambling companies will have to get cleverer. And they have a decade of experience at responding to the changing online environment.

I don’t expect this acquisition to be the last by a gambling company. Far from it. The online gaming space is about to get a lot more competitive.

(Thanks to Stuart Dredge’s iPhone Games Bulletin for the heads-up)

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