We spent almost a whole hour chatting with Wedbush Securities Analyst and crystal ball holder extraordinaire Michael Pacher, who gave us his opinion about quite a few different topics, ranging from Morpheus to Sony, Microsoft and Nintendo, touching Electronic Arts, Titanfall, Ubisoft and more.
Pachter mentioned that he feels that Sony’s Project Morpheus isn’t probably going to be successful, as the market is simply too small to fit both Morpheus and the Oculus Rift. You can read more about that part of the conversation here, but it’s worth mentioning that it was recorded before the sudden reveal of the purchase of Oculus VR by Facebook.
Pachter also shares his opinion on the fact that Electronic Arts believed that the PS4 and Xbox One would be priced competitively and that Xbox would keep the lead this generation. He also adds that EA was paid to embrace Xbox One. Sony (who historically doesn’t pay for content) is now working a similar deal with Activision. Pachter adds that Microsoft will probably continue to offer Activision something for the usual head start for Call of Duty map packs, but maybe this time Sony will match it.
Ultimately the publishers behave in order to make the most money, and while they’re far from perfect, they try making their best guess when they pick sides.
According to Pachter, EA picked the wrong horse with Sony initially in the last generation, then they picked wrong again by backing Nintendo, and then on the third try they chose correctly with Microsoft. This time around they’re not backing Nintendo at all, they picked Microsoft early but they’re probably already regretting that decision.
Michael continued by saying that the attach rate for PS4 on Titanfall would have probably been around 30% of 15 million, so they missed on the chance to sell another 4.5 million units sold. If their profit is 15 bucks a unit they missed out on roughly 70 million dollars worth of sales. If Microsoft paid them that same amount or more (for the exclusivity) then it wasn’t a bad decision on EA’s part. Microsoft probably paid close to a hundred million dollars for exclusivity and they’re selling a lot of boxes, so there’s no worry about EA losing money here. They made a rational decision to go exclusive, but we won’t see very many exclusives this cycle from third parties.
On the other hand the game is not on PS4, but that’s a reason why a million or so people will buy an Xbox One. Counting the discounts from retailers, the Titanfall bundle makes the Xbox One cheaper than the PS4, so EA is getting back quite a bit in sales.
Pachter also mentioned that if the bundle isn’t discounted across the board on all retailers, then the price drop isn’t sponsored by Microsoft, so the retailers are taking a loss on the console. They’re normally given a discount of around $30 per console so they’re probably selling it at $20 below cost because they think those sales are traffic drivers that will compel customers to buy other items.
Pachter thinks that Ubisoft is a hybrid between Take 2, that has a large number of great IP, and Activision that has just a handful but manages to release them frequently. If Take 2 managed to do what Ubisoft does with their IPs (launching its brands every 2-3 years with a handful that are annual) they’d make a ton money.
Assassin’s Creed has been fresh enough, so they’re keeping their game interesting even if it’s an annual franchise, they seem determined to sell a Tom Clancy game every year (three games on a three year cycle), and it sounds like Watch_Dogs is going to be another “every other year” franchise and the same goes for Far Cry. The Division and The Crew are probably every other year games as well. They have good IP and exploit them pretty well with good quality games. On the other hand maybe they spend too much money with thousands of people at work on them, but gamers seem to like it. Investors don’t so far, but stocks are going to do very well for people.
Pachter also talked about the difference between talking to gamers and talking to investors, and explained that his predictions have the purpose to tell investors what companies might do. Companies act out of “enlightend self-interest,” looking to exploiting consumers as much as they can without alienating them. Basically they’re trying to charge them one penny less than what would cause the consumer to switch to somebody else, and Pachter just comments on whether they’re effective at doing that or not.
He made a comparison with the movie model where the price is lowered in time, depending on whether you go see a movie at the theater or you wait for them to come out on commercial TV. Movie companies try to segment their offer to make as much money as possible over time, and video game publishers aren’t any different.
Going back to Sony, Pachter mentioned that the company simply isn’t stupid. They learned that it’s a bad idea to launch a console a year late, so this time they didn’t, and they also learned that it’s a bad idea to launch a console at $600, so they avoided that mistake as well with PS4. They haven’t yet learned that having many peripherals are “kinda stupid,” but Microsoft hasn’t either. They also learned that they can’t give away the PSN for free, so they made PlayStation plus and made it obligatory for multiplayer on PS4. They also learned that the more they give you free that doesn’t cost them very much, the more people will perceive value in the system.
Pachter feels that they do a lot of things right and a lot of things wrong, like Playstation Now, that according to Pachter is going to be “a disaster,” because they’re not going to get any content newer than two years old from third parties unless Sony is willing to pay a lot for it.
Michael also explained that in his opinion the difference between Nintendo and Sony is that Sony has a capable leader and Nintendo doesn’t. Iwata is not a good business manager. He still makes comments like it’s never too late for the Wii U to do well for compelling content and he’s wrong. It’s too late. EA is not making games for the Wii U, and they’re never going to. They should learn that the console is not selling and aggressively court the third party publishers, and Nintendo is not doing that, while Sony never had that problem.
Probably Nintendo’s board isn’t independent or smart enough to figure out that Iwata should be replaced. On the other hand according to Pachter they shouldn’t stop making hardware, but they should concede that they screwed up with the Wii U, go back to the drawing board and make a better console and while they’re waiting, make money on software by putting it on other platforms like smartphones.
That could allow them to convince many potential customers that their software is so great that when the next console does come out, the experience will be even better. Making the games available on smartphones would make them visible to a billion people, and possibly 20-40 million of them will then buy Nintendo’s next console.
Looking at the future, according to Pachter we’re probably going to see a lot of cross-generation games for the next two-three years, even if next-gen only games are going to gradually increase in 2015 and 2016.
You can listen to the whole conversation below. I apologize for the bad sound quality of my own voice, but my microphone suddenly decided to die on me. It’s always amazing how technology decides to always break at the worst possible time.