Phil Spencer is right: AAA games are in big trouble

AAA Games are not all good.

In the past, those outside of the industry assumed this to be true based on dipping sales, poor working conditions, and a cratering of creativity — as publishers like EA, Activision, and Ubisoft have stopped taking risks, and have spent more time and money on their diminishing pools of hit franchises.

But today, thanks to this week’s Xbox leak, we can see how the turmoil appears from the inside. Tucked away in industry business conversations, the head of a major console platform has explained the challenges ahead — and what led to this debacle.

Ethan Gach, senior Kotaku reporter, sifted through the leaked information to find the most intriguing bits. spotted an emailPhil Spencer, the Xbox head. In just 650 words, Spencer summarizes how the shift to digital storefronts caught major game publishers flat-footed — and says that those publishers have continued to fail to adapt.

Spencer, a man who works in an industry that is notorious for secrecy about the production of sausages, has shown a comparable level of transparency. You know, C-suite levels. This note, however, is still refreshingly vulnerable and insightful. As other game journalists have noted, it’s rare to get such a helpful look behind the curtain.

Here’s an excerpt of the email in question from within the Xbox leaks:

In terms of subscriptions and the impact on larger publishers I realized that I haven’t really done a good job sharing our view on the disruption AAA publishers potentially see and how their role in the industry will likely change with the growth in subscription platforms like Xbox Game Pass. .

It is important to ask why publishers of games exist. And like many other forms of media the idea of a game publisher was created from an access “moat”; like movie studios locking up theater distribution, album companies locking up radio play, game publisher’s scale in physical retail game sales allowed them to secure retail shelf space, in-store promotion and margin structure beyond what any individual studio could dictate when games were primary sold in retail stores. You needed an AAA publisher if you wanted to sell your game at Egghead Software.

The AAA publishers were able to increase their power by increasing the restrictions on creators’ access. The creation of digital storefronts like Steam, Xbox Store and PlayStation Store eventually democratization access for creators breaking physical retail’s lock on game distribution. AAA publishers took a long time to respond to this disruption. They did not figure out how to use the physical retail moat in digital media in such a manner that they could continue dominating the gaming market. It is not possible to successfully cross promote. They are unable to develop publisher brands to drive consumer loyalty (as Disney does in the video game industry). Without a lock on physical distribution the role of the AAA publisher has changed and become less important in today’s gaming industry.

In the last 5-7 years the AAA publishers tried using production scale to their advantage. Few companies have the budget to invest $200M as Activision and Take 2 do to release a game like Call of Duty, Red Dead Redemption or other AAA titles. Most of these AAA publishers use this scale for production to maintain their most successful franchises as the best-selling games every year. This issue is that the production cost/scale approach has hurt their ability to produce new IP. Big publishers have become risk-averse due to the high hurdle rates on creating new IP. You’ve seen a rise of AAA publishers using rented IP to try to offset the risk (Star Wars with EA, Spiderman with Sony, Avatar with Ubisoft etc). Netflix has created more original IP in Hollywood than all the other movie studios.

The AAA publishers have not been able to achieve any platform effects, despite starting with a strong position based on physical retail. They effectively continue to build their scale through aggregated per game P&Ls hoping to maximize each new release of their existing IP.

In the new world where a AAA publisher don’t have real distribution leverage with consumers, they don’t have production efficiencies and their new IP hit rate is not disproportionately higher than the industry average we see that the top franchises today were mostly not created by AAA game publishers. Games like Fortnite, Roblox, Minecraft, Candy Crush, Clash Royale, DOTA2 etc. Independent studios had access to the distribution of all their games. Imo this is good for the industry, but puts AAA publishers at risk. AAA publishers have a few hit franchises in their portfolio but are struggling to add more.

For the mega-publishers, the prognosis is grim — which explains why Activision would want to make room for itself under Xbox’s umbrella. But there’s a silver lining around the thunderclouds. In Spencer’s own words, most of the great and beloved games of this era have been “created by independent studios with full access to distribution.”

It’s worth noting that Spencer’s email is from March 2020. Many things have changed since that time. Xbox management wishes that it would have partnered up with an independent studio. But what’s chilling about the message is how timely it feels in 2023. Spencer saw the storm coming; now it’s here.