Analyst: Big Time Franchises Still Risky

| 16 Feb 2010 13:06

A financial analyst said that it's still risky for big game companies to heavily invest in only its big games.

Tim Mercel is a director in the corporate finance division of IBIS Capital, and he specializes in watching the big media companies and how they are investing their money. He sees a lot more capital being placed in the videogames industry, hoping for the big return like what Call of Duty: Modern Warfare 2 provided last year. The big problem is that the men who hold the most capital are still scared of a bigtime flop.

"At the big end the major franchises are attracting increasing amounts of investment and generating increasing returns, but this doesn't come without risk," he said. "The gaming equivalent of Eddie Murphy's Pluto Nash ($100m cost, $4.4m revenue) is what scares the money men, so the risks of launching new franchises or making a mess of existing franchises becomes enormous."

This fear is pushing the industry away from innovation. "To state the obvious, the majors are doing exactly the right thing by investing in and acquiring big franchises," Mercel said. "In the short-to-medium term that makes perfect sense, but in the long term I think they're going down a very risky path." He continued:

If the gaming business is all about innovation and new unimagined gaming experiences driving growth, churning out the 25th incarnation of most franchises won't cut it.

If the majors effectively become utilities, then they run the risk of becoming like traditional media companies. Cash generative, but declining and cost driven.

In that case, the videogames industry could end up like Hollywood "with accountants and lawyers running the show and the creatives and techs being managed like execution monkeys."

Case in point, he tells the story of how Transformers was greenlit:

First, get Michael Bay to sign up to a General Motors bankrolled film where he could film lots of explosions. Second, get Hasbro to provide the core franchise and co-invest for licensing and merchandising. Third, get the production and distribution studios. Fourth, take Michael Bay out to GM's secret prototype facility where he could pick the cars as the stars of the film (if you watch, you'll see that the cars get more screen time than the actors, even Megan Fox!).

It was only at this stage that writers and actors were hired. The result is a 90-minute car ad.

Let's hope that that kind of scenario doesn't end up happening more with videogames.

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