Wednesday, January 28, 2009

Value Creation & Distribution

I read this interesting piece on Gamasutra today and it motivated me to write about the keynote I gave at the SMU-Guildhall conference on video game law and business earlier this month.

My topic was, broadly, the fallacy in the video game business that content innovation creates enterprise value. By enterprise value, I mean a return on equity for shareholders, usually at some multiple of revenue or earnings. Instead, I argued that while content innovation expands audiences and generates revenues, distribution innovation has historically driven outsized enterprise value creation in the video game business.

Here are my slides -- you can get the idea:


Ok, not that remarkable. I've spoken on this subject twice before -- once to an internal EA audience at their Vancouver online summit a couple of years ago, and I talked at some length on this topic on a panel that Dean Takahashi led at UC Berkeley last year.

But it's amazing how many people didn't get it. One person from a well-known market research firm challenged my thesis, arguing that "shiny disks are still a multi-billion dollar business." Well, so is the grocery business. So is the automobile business. But investors don't ascribe high multiples to those revenues.

Don't believe me? Do the math. THQ is currently trading at a $270MM market cap, despite $1B in trailing twelve month revenues -- .27X. Take Two is at .37X. Even EA is down to 1.22X.

The current valuation multiples in the video game business are predicated on earnings or revenue growth, and that's the context in which content innovation is linked to value creation. Activision gets a bump from Guitar Hero because that franchise supports Wall Street's revenue growth estimates, and because hit titles produce economies of scale that drive better margins and thus earnings growth.

But content innovation rarely produces long-term, defensible competitive advantages in the way that distribution innovation does. When EA created their global direct retail distribution platform in the early 90's -- highly innovative at a time when most of their competitors were still working through aggregators -- they created sales leverage that lasted for a decade, and created a market share and earnings multiple advantage that none of their competitors could match. It wasn't that EA had Madden & FIFA, it was that EA had those titles and could sell them in the four corners of the planet.

Meanwhile, the companies that have recently built innovative digital distribution platforms, often based on virtual goods sales or subscription revenues, are thriving, maintaining buoyant revenue multiples despite the downturn. Shanda, the Chinese MMO company, is trading at a 4X revenue multiple.

Content innovation is sexy. It's spectacular. It's what every editor wants to write about and what every gamer wants to play. But as an investor, you are better served looking for companies that are innovating on distribution.


9 comments:

Anonymous said...

Mitch -Thanks for this. The analysis is sound but I think you fail to incorporate the interdependence of content and distribution, ie a distribution platform without the right content is dead. For instance, Steam would not be what it is if it did not have counterstrike, half life, and other top tier shooters tied to it. So, although it would be lovely to separate the 2 and only invest in the one with the largest multiple, distribution is only a necessary and not a sufficent condition for success.

Anonymous said...

Great blog as for me. I'd like to read something more concerning that matter. Thanks for posting that info.
Sexy Lady
A level escort

internet tv software said...

I really wanted to post a small note so as to appreciate you for some of the magnificent solutions you are placing here. My time intensive internet lookup has at the end been rewarded with good quality facts and strategies to exchange with my companions. I 'd express that many of us website visitors are very much blessed to live in a useful network with so many marvellous professionals with good things. I feel rather fortunate to have seen the web pages and look forward to so many more enjoyable minutes reading here. Thanks a lot once more for all the details.

Hamilton Beach Coffee Maker said...

Thanks for your great article, i've really found it to be insightful and very informative.

ambien online said...

I 'd express that many of us website visitors are very much blessed to live in a useful network with so many marvellous professionals with good things

online generic viagra said...

thanks for the information.. the post you have updated teaches a good way of creation.. thanks for the post and information.. keep posting..

Buy Runescape Gold said...

Properly the particular starting place come in the Whitened Knight's Fort that is situated in Falador RS Gold. Start off this particular Search through actually talking to Sir Amik Varze. He's located in the citadel around the third ground. If you talk to him or her, he will advise you that the African american Knights are intending to acquire gone the White Knights in combat. To relinquish the Dark Knights through make this happen, your White Knights are likely to ask you to traveler on them Runescape Gold. Any time he does ask anyone, Acknowledge his or her challenge.

call center voip solutions said...

Thank you for the post, pretty helpful info.

call center voip solutions said...

Thank you for the post, pretty helpful info.