What Is an Entertainment Company in 2021 and Why Does the Answer Matter? — MatthewBall.vc
We can tell how powerful gaming’s love-building (#2) advantages (i.e. immersion, agency, interactivity) are because most would argue the storytelling (#1) remains much weaker on average. Consider the fact that we laugh more in a movie theatre than when watching a movie at home — and more at home with a partner beside us than alone. Gaming is increasingly a medium that’s optimized around the very elements that explain this dynamic — the potency of social, collective storytelling experiences.
And crucially, game publishers aren’t licensing their IP for adaptation to film/TV to monetize (#3), but to instead to grow love for their content (#2) through new types of stories (#1). Microsoft, which has a $1.9 trillion market cap, doesn’t need a few million from $30B ViacomCBS for the rights to a Halo TV series (due on Paramount+ this year), nor is this fee going to exceed annual profits from the Halo game. There is no better evidence that power dynamics have changed from linear video to video gaming; game publishers are effectively paying Hollywood (via the majority of profits from adaptation) for building love and fans for their franchises. These are the stories of tomorrow.
Just as gaming seeks Hollywood to adapt their stories in order to build love, Hollywood seeks out gaming to adapt theirs. But in this latter case, Hollywood faces existential threats.
Five years ago, EA had only one Star Wars title. Now it has a multiplayer action title (Star Wars: Battlefront 2), a single player adventure franchise (Star Wars Jedi: Fallen Order), a multiplayer space combat title (Squadrons), a free-to-play mobile collectables RPG game (Star Wars: Galaxy of Heroes), one MMO (Star Wars: The Old Republic), and is reportedly working on a sequel to its best-selling MMO series (The Knights of the Old Republic) as well as remakes of the first two titles.
More broadly, several of the best stories told in the Star Wars universe since 1983’s The Return of the Jedi have been told in games, not film or TV (not all were made by EA, though several were). In 2020, fans spent more time with The Avengers in Fortnite than they did in 2019 with Avengers: Endgame. These experiences offer far more immersion, far more easily, and to far more people than Disney’s parks, consumer products, or SVOD can. It also made many characters, such as Doctor Doom and She-Hulk, familiar to and popular with audiences for the first time in decades.
In many respects, this is good for Disney: more stories, more love, more monetization. At the same time, EA has been responsible for an ever-growing share of Star Wars’ stories (#1), love building (#2) and profits (#3). EA owns the customer relationship and data, too. And it is, of course, building its own D2C consumer media platform and storytelling ecosystem.
Lucasfilm Games’ recent decision to diversify its Star Wars licenses to other publishers, such as Ubisoft, moderates the extent to which Disney’s Star Wars franchise will build up any one gaming ecosystem. But it does not build up Disney’s ability to meet consumers in the category telling the most inventive stories, generating the most new love, and that is rapidly becoming the best-monetizing entertainment category globally.
And unlike in streaming video, there’s no quick way to catch up — Disney can’t just buy a backend game service provider, reclaim the back catalogue of Disney-based games, and become a leader. Producing games, and live operating them, is a fundamentally different skillset than figuring out how to stream linear content over the Internet. And Disney does not own or ever “get back” the library of Star Wars or Marvel games that have been made over years — nor is there demand to replay them similar to that of the Disney Vault of films.
In contrast to licensing Captain America to Mattel for a plastic shield, video gaming is more narrative, more important, and differentiated. This is not an area where a media company can just pick to enhance” love”. It must own it, the story, and the fullest dollar. You also can’t learn how to tell a great gaming story or make a great videogame through licensing and without any real access to player data.
Furthermore, publishers typically do not assign their top creatives or concepts to licensed titles. Which makes sense! Publishers maximize their returns by focusing on properties they own royalty free and in perpetuity. This model can also suffer from the principal-agent problem. Licensees, after all, are less focused on the long-term strength of the underlying IP than instead maximizing the value they collect while its theirs to use. This led Disney to publicly condemn EA’s monetization model for Star Wars: Battlefront 2 and force change. And even when the principal-agent problem isn’t at work, licensees aren’t in the business of supporting their licensor’s other objectives (e.g. selling movie tickets or merchandise).
As this essay has likely made clear, Bob Iger was an astonishingly successful leader. One who led transformation in content, business model, and scale. But he had a large failure. And it wasn’t failing at video games, it was telling Disney that they would continue to fail and should stop trying to succeed in the category directly. Consider the following from 2019, which was delivered via a quarterly analyst call.
We’re obviously mindful of the size of the business. But over the years, as you know, we’ve tried our hand at self-publishing. We’ve bought companies. We’ve sold companies. We’ve bought developers. We’ve closed developers.
We’ve found over the years that we haven’t been particularly good at the self-publishing side, but we’ve been great at the licensing side, which obviously doesn’t require that much allocation of capital. Since we’re allocating capital in other directions, even though we have the ability to allocate the capital, we’ve just decided that the best place for us to be in that space is licensing and not publishing.
We’ve had good relationships with some of those we’re licensing to, notably EA and the relationship on the “Star Wars” properties. We’re going to continue to stay on that side of the business and put our capital elsewhere. We’re good at making movies and television shows and theme park attractions and cruise ships and the like. We’ve just never managed to demonstrate much skill on the publishing side of games.
There are many reasons to believe Disney can be good at games, but first, the company has to decide that it must be. Just as it did with streaming video and direct-to-consumer. If gaming had existed when Walt Disney drew his famous flywheel diagram, it’s impossible to believe he would have placed the category on periphery, let alone outsourced it to a rotating roster of third parties who oversaw both creative and distribution.
Love Changing #2 – Transmedia as the Final Frontier
When Netflix’s The Witcher TV series started streaming, The Witcher 3 video game saw its player count grow 3-4x, and the thirty-year-old book series returned to the New York Times Best-Seller list for the second time ever and received a 500,000-copy reprint for the US alone. George R. R. Martin’s A Song of Ice and Fire series had sold roughly 15MM copies over its first fifteen years. In the decade following the premiere of the Game of Thrones TV series, some 90MM more copies were shipped.
These are not examples of trans-media storytelling. They do, however, speak to the growing desire to keep experiencing a story world, even to the point of duplication. And with Star Wars, Marvel, and DC uniting their film, TV and comics universes (while Fortnite expands into comics), it’s clear the next “phase” of storytelling will extend into gaming. The rise of virtual production and real-time rendering via game engines will supercharge this trend. Suddenly, a physical studio backlot and digital backlot will merge to become a truly virtual, with assets shares across all mediums.
There aren’t many companies that can pull this off. It requires unique IP, diverse capabilities, plus unprecedented coordination across every business unit and creative. No one has this in place today, and the hands are fairly distinct.
The major tech companies, such as Amazon, Google, and Apple, are bad at IP, games, or video (if not all three). Disney excels at IP universes and is building up expertise in film-to-TV transmedia, but it has no interactive assets. At the same time, this could change quickly via acquisition — and the applicability of theme park expertise should not be overlooked. Warner Bros. is unique in that it excels in gaming, film, and TV — and has its own direct-to-consumer platform. However, it is comparatively earlier in cinematic universe building and social, world-based gaming. Done right, this “transmedia universe” could be the path to surpassing Marvel — just as Marvel’s Cinematic Universe model was used to surpass the rest of the industry.