Tobold's Blog
Friday, October 21, 2011
 
The financial realities of decline

As Wilhelm decided to front-page my comment on the financial future of CCP on his blog, I would like to elaborate on that comment: As documented in my previous post, I do believe that the MMORPG market *in general* is in decline. I also believe, and that is well documented for many other industries, that a general decline of any industry means that some companies which are not on solid financial footing end up bankrupt. And I do believe that CCP right now is financially feeble. Thus I am willing to bet even odds that CCP isn't going to survive 2012.

The data I have supporting this belief are from earlier this year, and have been well documented by the Nosy Gamer. CCP made a profit in 2010 of $5.4 million, but that is after receiving a government subsidy in form of a $3 million tax credit. Them remaining profitable in 2011 was depending on them continuing to grow. Quote the Nosy Gamer: "Looking a few pages farther into the document (p. 34) shows that while CCP's total liabilities due for the year was $22.2 million, it was expecting to receive $18.4 million in loans and receivables throughout 2011 (p. 37). Still, that gap of $3.7 million was greater than CCP's non-tax profits in 2010. If CCP could maintain its growth of 2010 (where gross profit rose by 11%) then CCP will have no problems."

The obvious problem is that EVE's subscriber numbers did not grow in 2011. Instead they fell by 20%. Thus presumably the liabilities of CCP for 2011 are greater than their revenue, they went from being profitable to losing money this year. Of course we don't have profit numbers for CCP for 2011 yet. But if a company fires 20% of their staff, I would consider that as a sure sign of financial difficulties.

This is where the data ends, and the speculation about the future begins. While I am well aware that Star Wars: The Old Republic resembles World of Warcraft a lot more than it resembles EVE, I do believe that SWTOR will hurt EVE. It isn't as if SciFi fans have had all that many games to choose from. And even post-apology, it isn't evident that EVE is steering in the right direction now, with lots of criticism of their new planetary interaction game mechanics. Add all this to a general decline of the MMORPG market and take the age of EVE into account, and to me right now CCP looks very much like a risky bet on Dust 514. And I don't believe that Dust 514 will actually be a big hit, because the market of console shooters is highly contested, and I find no evidence suggesting that CCP is actually good at designing that sort of game. Not in a market in which even id Software with their latest game Rage finds it hard to succeed.

Note that my prediction is not limited to CCP. I do believe that the decline of the MMORPG market will kill other companies as well. And I do believe that Blizzard's profits from World of Warcraft will shrink significantly. Only that they have been making half a billion dollars of profits for several years, and they will make another ton of money on Diablo 3, so the decline of the MMORPG market isn't an existential threat to Activision Blizzard. But for smaller companies in the MMORPG market, 2012 is going to be brutal.

Comments:
I think it's just an side effect of the world-economics issue.
People are trying to move from a debt-culture to an sensible way of living. Banks are not so grateful nowadays (and should be destroyed)
 
I do agree that the world financial crisis plays a big role here. Investment in a MMORPG company was a risky business in the best of times. These days the notion looks increasingly foolhardy.
 
We'll see. I really hope CCP weathers the storm, not just because I like the game but because the sector needs successful indy participants.
 
"Thus presumably the liabilities of CCP for 2011 are greater than their revenue,..."

Revenue isn't the issue, its free cash flow you should be looking at. If you have enough cash to support your debt service, you're fine. Revenue tells you nothing about cash flow (other than its the starting number in the calculation).
 
Just checking, are you strictly talking about CCP the company not surviving, or Eve the game not surviving? Based only on what you have posted, I think it makes sense that CCP might not survive, but I don't see that as being the same as Eve not surviving. I can't imagine that even with 20% fewer subscribers, it doesn't still have the numbers to interest some other company if CCP flounders.
 
Agreed that on the day money runs out, bankruptcy is not the only option. EVE could instead be sold to Perfect World Entertainment, a Chinese Free2Play MMORPG company. ;)
 
I think looking at the new numbers, your 50% prediction may be just a tad off. The Icelandic media reported that CCP laid off 80 people from the Atlanta office and 34 people in Reykjavík. While surfing the internet, I read that the average salary for a CCP employee was $54,000 (That number may be in the financial report I linked to in my post). Just using that as a very inaccurate ballpark figure and accounting for a 50% markup for the U.S. employees to account for things like payroll taxes and benefits, my initial estimate of the employee savings for FY 2012 will be approximately $8.2 million, give or take a million. So stopping development of World of Darkness plus the other cuts in Eve employees should have CCP turning a profit again.

Hilmar gambled two years ago that he could stop most development on his cash cow Eve and develop two new games at the same time. He even took out a $11.8 million loan to do it. Whoever told him that his programmers could develop a brand new game engine (Carbon) that could support multiple avatars on a screen without melting everyone's graphics cards in two years was sadly mistaken. I actually believe that if the developers had succeeded and been able to implement all 4 races Captains' Quarters in June and rolled out Establishments in August, no one would be talking about the future of CCP in anything but glowing terms. Instead, we are now talking about "the 20%" and can CCP survive.

With a renewed focus on Flying in Space in the Winter expansion and the introduction of a localized client for Japan coming soon, I believe that CCP has just about hit bottom and next year will see a rebound, at least in the company's operating profit.

Now all I have to do is a lot of research, a little bit of writing, and maybe I can get another link from Tobold :)
 
The genre is still healthy and large so any present decline, if a long-term trend, is still not that worrying. Things are evolving into facebook games, etc.

As for CCP, Dust 514 will be a minor blip in the world of shooters. That audience generally has the attention span of gnats anyway and is accustomed to changing games every month. The MMO crowd is different from the "average" gamer, or at least I like to think so. Unfortunately, in an effort to chase more dollars, companies keep dumbing down a genre that belongs to the thinking crowd.
 
People don't understand what "PS3 Exclusive" means. Sony is paying CCP for the game. They use it to sell/promote the console. Those games are not expected to sell as much as the average game. And considering DUSK has yet to come out, it would be tough to see that income on the 2010 report. Or 2011 for that matter.

Not a bad Friday blog post though, well done.
 
TBH most FPS gamers are fairly loyal and aren't much different than MMO gamers. They have a few choices yes but for the most part they are fairly loyal when it pertains to online play due to the leveling systems most FPS games use now.

I think the MMO industry is going to be in a lull for a few years. The reason WoW was so big is it innovated. All the great MMO's people still talk about innovated in some way, UO, EQ, WoW and yes EVE. Until someone tries to take the genre further we wont see a big surge in subs.
 
For Activision Blizzard, how will Diablo 3 (let's say a $60 one-time purchase) make nearly as much money as $15 monthly WoW subscriptions? Even the RMT auction house won't pull in more than a small fraction of that monthly fee.
 
CCPs decline isn't the market's fault, its the fault of their own poor development decisions and priorities. If you don't give your players what they want, they will leave and take their money with them. Simple concept. But many developers get so in love with some pet ideas they want to put in the game (like CCP and it's Incarna and FPS game) that they actually piss off the people whose desires REALLY matter -- the paying customer.
 
CCP are all over the gaming media today stating they have 400,000 subscribers for EVE. I would imagine that, given sufficient retrenchment, that and the "exclusive" deal with Sony should at least keep them in business.

Whether they will progress or grow is another matter.
 
From the statement, it sounds like most of the people who were let go were working on WoD. It seems like CCP way overextended - they tried to finance the development of two AAA titles (WoD and Dust) with some combination of financing and EVE income.

I wouldn't be surprised if CCP were to go bankrupt either, actually, as there really is no reason to believe they'll be able succeed with Dust and the recent leaks of financial statements show that they will have some serious cash flow problems as loan payments come due next year. But this a story about over-leverage, not a statement on the health of EVE. Yes, EVE subscribers are down 20%... but they're still higher than at the same time last year. (It's regressing to mean from a truly extraordinary summer peak) And EVE's sandbox, player-driven design means that your cost-effectiveness is extremely high when it comes to adding new features. This is not a theme park where your devs are grinding at a feverish pace to stay just ahead of the player base (who are themselves grinding at a feverish pace.)

So while I too would be willing to lay even money on CCP going bankrupt, I'm even more confident EVE will be around for a long, long time. Player-driven content is just too cost-effective and too compelling, so someone is certainly going to pick up. Even if that someone does nothing but put EVE on autopilot, it will be a long, gradual glide path down.
 
I felt that statement was too good to let it languish in SynCaine's comment thread.

Plus it gave us all something to talk about right up to the moment that Blizzard brought out the shiny pandas.

Snark aside, I think that CCP, a company that brings in plenty of Dollars and Euros, is sitting in a stronger position than it appears in an economy whose currency has dropped to less than half of its pre-crisis value against the Euro.
 
CCP are all over the gaming media today stating they have 400,000 subscribers for EVE.

400,000 subscribers that aren't logging on any more? I have trouble fitting CCP's statements and the data about them together.

But then I'm not Syncaine, who manages to interpret CCP's 20% staff reduction as a sign of solid health, while he sees Blizzard's announcement of the next expansion as a sign that WoW is dying. I can't follow that logic. Does anybody really believe Blizzard isn't going to sell millions of these Panda expansions and make more money on the first week of sales than CCP in a year?
 
Do you see giving D3 away to keep WoW sub numbers decent as a sign of health as well?
 
They won't be selling any to me - and I've been loyal to WoW for a little over 5 years.
 
Do you see giving D3 away to keep WoW sub numbers decent as a sign of health as well?

Giving away D3 for an annual subscription of World of Warcraft is basically a promotion offer to play WoW at a reduced monthly rate of $6.82. There are promotion offers that allow you to play EVE Online for $4.95. Although the details are different, the principle is exactly the same.

My local supermarket has promotion offers every day. That doesn't mean it is failing.
 
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From what I read WoD is probably getting scratched or laid back, and that is a solid mistake on the part of CCP. It's way harder to create an engaging 3D shooter these days then to actually create an innovative MMO. And with all the hype in the media concerning vampires WoD would be a better shot. Only problem is CARBON doesn't actually work. I have three PCs and the weakest cnfiguration can pull SC2 in full detail, but has lots of problems when I venture the Captain Quarters, and simply freezes in character edition mode. The way I see it this can't support multiple characters in the same room.

Decisionmaking in CCP is bad, but I still root for these guys. In the web,and on this blog as well there is only WoW, EVE, WoT, FB games and future games that are being discussed. CCP has some genre innovation on it's part. Some things were a failed social experiment on which mostly other games benefit, but nontheless...

I just wish CCP invests in CARBON cloth designers and put a whole lot of cheap clother in NeX - if I (and other players) could buy two or three pieces of cool stuff in the NeX, them way more money would be spent on those timecodes/PLEXes, enerating additional cash. Just some wishful thinking.
 
Yeah I agree Bezier, if CCP was going to cut one of their two games in development, Dust seems like it should be the one to go. CCP has zero established competence in multiplayer shooters, and there's no reason to believe that their high-concept persistent/living world multiplayer shooter concept is going to go over well with the COD crowd.

My guess is that Dust is further along and has Sony PS3-exclusivity moolah, whereas WoD is still in early development, so they decided to focus on pushing Dust out of the door instead of continuing WoD.
 
From my understanding, they're making significantly more money on Eve than they're spending on it, it's just that they spent a lot of the money that they were making on Eve on making other games, which:
A. Costs money.
B. Pissed off Eve players to see their game being used as a cash cow and to have so little of the revenue being plowed in to continuing to develop the game.
 
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