SBJ/August 30 - September 5, 2004/SBJ In Depth

It's no game

In a sports gaming landscape where buzz is difficult to achieve if you’re not named Electronic Arts, ESPN and Sega recently did the unthinkable: They dropped a “boom” that reverberated louder than any catchphrase delivered by announcer John Madden on Electronic Arts’ signature game.NFL 2K5, jointly produced by ESPN and Sega, hit shelves three weeks before EA’s Madden 2005 and with a drastically reduced price tag of under $20. Madden sells for $50.

Some industry experts saw the price drop as a desperate measure by a publisher that had run out of ways to differentiate itself from the competition. Others viewed it as a calculated business move to reach a larger market of gamers. Regardless, ESPN and Sega illustrated the steep price of competing in a market dominated by Electronic Arts.

In 2002, the Redwood City, Calif.-based company controlled 59 percent of the sports game market. In 2003, EA’s market share grew to 72 percent. Year to date, EA owns 71 percent of the market, and the prime selling season has not yet begun.

Meanwhile, much of the competition has waved the white flag, at least temporarily. Several smaller game publishers have either gone out of business or left the sports genre altogether. Even a few of the deeper-pocketed players have decided to take a step back while they figure out how to compete with EA.

“I think you’re going to see a huge amount of consolidation in our business. A lot of smaller studios are being forced to either sell out or get out.”
Bill Nielsen, Microsoft
“You’ve got major companies that aren’t in it right now,” said Steve Rabb, senior vice president of marketing for Visual Concepts, Sega’s sports studio. “Whereas other companies felt like they had to retrench, we felt like we had to get more aggressive.”

The dried-up competitive landscape is one of several trends that has sports leagues and their video game licensees grappling with how to approach the genre in a way that ensures continued growth through the next generation of game console.

Is success achievable for more than one or two sports game makers? If not, is that just as well for leagues that recognize that more young people get exposed to their sport through gaming than through any other medium, and that keeping a tight grip on the brand is critical?

In an effort to stay in the game, publishers have tried to diversify with new styles of sports games and by tapping new revenue streams such as online advertising.

How tight a grip the leagues decide to maintain on those efforts will help shape the gaming landscape over the next few years. Most leagues are staying out of their licensees’ way, but not so far away that they miss out on an opportunity to make money.

“Anyone who tells you they know where this business is going to end up,” said Howard Smith, Major League Baseball’s senior vice president of licensing, “is either full of it or lying.”

The price to play

EA’s Madden franchise has sold more than 35 million units in the 15 years since its inception, and in 2003 EA sold 5.4 million units, making Madden 2004 the top-selling video game title among all genres, according to market research firm NPD Group. EA’s sports titles accounted for about half of the company’s $3 billion in sales in 2003. Across the game publishing industry, sports was the second-highest-selling console gaming genre in 2003, with a 17.6 percent market share, behind only action games at 27.1 percent, according to the Entertainment Software Association.

Midway’s MLB SlugFest has drawn criticism from some parents who think the game’s hand-to-hand combat feature is too violent.
In short, sports titles represent an extraordinarily popular genre and an equally lucrative opportunity for publishers. Still, a publisher that enters the world of licensed sports games takes a substantial risk, considering the price of authenticity relative to other kinds of games.

Sports leagues and their respective player unions typically negotiate separately with game publishers for the right to use teams and players in their games. The exceptions are the NBA, where the league also negotiates player licenses, and individual sports such as NASCAR and skateboarding, for which licensing agreements are negotiated with each athlete separately. (EA has more than 500 licenses with NASCAR, including drivers, teams and tracks.)

The value of licensing commitments varies and leagues don’t make this information public, but a game publisher generally has to pay 10 percent to 15 percent of wholesale sales combined to the league and players. The publisher has to pay the two parties a royalty up front, a price of entry that also varies by league. For NFL-licensed games, which carry among the highest royalties, no game maker gets to use NFL players for less than $1 million going to the players association.

“Your guarantee buys you a seat at the poker table,” said Michael Jerchower, director of interactive licensing sales for the Beanstalk Group, which negotiates all of Ford Motor Co.’s licensing agreements for racing video games. “So there’s a lot of pressure. It’s really expensive.”

A game publisher also has to factor in a six-figure endorsement deal with a cover athlete, as well as the marketing commitments generally built into the licensing agreements with the leagues.

The cost to develop a game can range from $3 million for the most basic games to $12 million to $15 million for the most advanced, according to industry sources. EA executives said the company spends $2 million to $10 million to develop its games. A game maker, therefore, is deep in the hole before a game even hits stores.

Bill Nielsen, director of Xbox brand marketing at Microsoft, said that for the high-end sports games, a publisher has to sell at least 1 million copies “to make it a profitable enough business to stay in.”

“If you’re sliding in the 500,000 to 700,000 range, it makes it very difficult to make money,” Nielsen said.

Unfortunately for most publishers, EA is the only game maker consistently above that threshold. In 2004, Madden, FIFA Soccer, NBA Live, NBA Street, NCAA Football and the Tiger Woods PGA Tour franchises each sold more than 1 million units.

Fewer competitors

A year ago each of MLB’s eight licensees came out with a game for every console platform. Citing concerns that the retail industry would not support that many titles, MLB officials asked licensees to issue fewer titles this year.

They probably shouldn’t have bothered.

One-time sports game publisher 3DO went out of business, while Acclaim, which just a few years ago had a full slate of sports games, limited its 2005 lineup to All-Star Baseball 2005. Sony/989 Sports has given some of its sports titles a breather in recent years, and Microsoft this year announced it was taking a year off to figure out how to match EA in the quality and complexity of its sports games.

“It wasn’t comfortable for us,” Nielsen said. “I think you’re going to see a huge amount of consolidation in our business. A lot of smaller studios are being forced to either sell out or get out.”

More recently, Microsoft announced it was closing its XSN Sports studio, which produces team sports games for the Xbox. That ends development of such games as NFL Fever, NBA Inside Drive, MLB Inside Pitch and NHL Rivals.

The price-point drop by ESPN and Sega, whose games rival EA’s in terms of quality and complexity, has forced leagues to face some of the harsh realities of the business.

ESPN’s Rabb said that by dropping the price, ESPN not only will induce hard-core gamers to buy NFL 2K5 but also will expand the overall size of the market to include more casual gamers.

“When you play our games, you like them, and [one-time customers] continue to buy them,” said Rabb, who said there is no timetable for raising the price to previous levels.

EA Sports director of marketing Todd Sitrin called the price drop an “interesting” but not unexpected strategy for a game maker that had run out of ways to differentiate itself.

“When you see market shares dwindle to those numbers, you’re pushed into the corner to do some desperate things,” Sitrin said.

EA sold 1.3 million copies of Madden 2005 in its first week on shelves, the latest sign that there is no slowing this industry leader.

But while Madden was drawing most of the gamers’ attention, more industry eyes were on NFL 2K5, which has sold more than 700,000 units since its release, according to published reports.

For Sega and ESPN, that’s an early sign of a gamble worth taking.

See also:
Turnkey Sports Poll
Playing more than video games
Sales of sports-themed video games
Video game makers
Whether the strategy will work long-term is debatable, but the fact that it was deemed necessary is the more pressing issue for many industry sources.

League officials have expressed concern over what a shrinking pool of licensees will mean for the quality of their product and, ultimately, the bottom line.

“We don’t want to be stuck with one licensee,” said LaShun Lawson, assistant vice president of multimedia and interactive for Players Inc., the licensing and marketing subsidiary of the NFL Players Association.

Clay Walker, senior vice president at Players Inc., said that if competition continues to dry up over the next five years, so will royalties paid to the leagues and players.

For the time being, however, none of the leagues appears worried, at least not worried enough to take action. For one thing, not all leagues have seen a significant drop-off in licensees.

The NBA has had essentially the same group of licensees for the last eight years, led by EA, Sega, Konami and Sony, according to Greg Lassen, senior director of interactive and electronic licensing for the NBA.

“They just keep raising the bar on each other,” said Lassen. “[EA] really hasn’t knocked anybody out.”

Second, revenue continues to grow.

Lassen said the NBA in the last five years has more than doubled its revenue from video game licensing. For the NFL, licensed games now account for close to 50 percent of the league’s licensing revenue, second only to Reebok in terms of revenue generation, according to Gene Goldberg, vice president of consumer products at the NFL.

Players Inc. has averaged 8 percent to 10 percent growth in revenue from games in the last three years, according to Lawson. And after 8.5 million Players Inc.-licensed games were sold in 2003, the league expects that number to top 9 million in 2004 and generate well over $10 million in revenue from game sales, despite the reduced competition.

Still, some signs point to a curbing of growth. For the 12 months from July 2003 to June 2004, revenue from game sales was down in all four major sports, led by hockey (24.3 percent), football (17.2 percent), baseball (15.5 percent) and basketball (9.7 percent), according to the NPD Group.

Leagues cannot make the mistake of looking at the larger economic picture and determining the pot of gold is bottomless, according to Jack Tretton, executive vice president of Sony Computer Entertainment America.

Tretton said there is a tendency by some league officials to see that a game like Madden did $300 million in sales, more than most movies do at the box office, and determine they must be getting short-changed.

“I think that’s a mistake,” Tretton said, citing skyrocketing development costs. “I think leagues have to be more sensitive to the fact that it is a partnership.”

Smith said MLB has followed that path, even though it meant forfeiting revenue. Smith said his team took over what was an overlicensed category in the mid- to late 1990s.

“In the ’80s and ’90s, this wasn’t marketing,” Smith said. “We were order takers. It was just like a cash cow. Unfortunately, when the business cycled down, the error of our ways started to show. All of a sudden, there was no way to differentiate from one ware to another.”

MLB and other leagues have been proactive in treating the category as more than another source of licensing revenue, and to help publishers sell their games. MLB has made its licensees a centerpiece of the league’s sponsorship of several summer concert series. The NFL and NBA have become heavily involved in promoting and sponsoring nationwide tournaments in conjunction with the nascent but rapidly growing online gaming networks from EA/Sony (EA Sports Nation) and Microsoft (Xbox Live).

Whether they planned it or not, leagues appear accepting of a new landscape in which only true partnerships can keep the business viable.

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