Licensing and the Changing Videogame Business

Posted by Marty Brochstein on November 26, 2012

There was a time when traditional console-based video games could be counted on as one of the four major revenue pillars of the licensing program for a major entertainment property, along with toys, publishing and apparel. The category is still a significant revenue generator – and in some cases still one of those four pillars — but in many cases, those calculations are changing significantly, as the tide of social and mobile gaming rises.

The top licensing executive for one major entertainment company with a bevy of well known properties says that one of the biggest challenges facing the company is to make up for the vastly reduced revenue flowing from the videogame/software category. Where will it come from? It depends on the property. In some cases, it might be from in-game purchases of virtual merchandise. In others, it may be produced by licensing the IP to the online equivalent of slot machines. In any event, these digital applications don’t produce the level of royalty revenue that a prior generation of licensors had grown accustomed to.

It’s forced many to adjust their thinking over the past 24 months. “In the past, console games would be created for new movie and consumer properties, big and small. However, the current market economics have changed such that console games at launch are warranted only for a select group of brands and movie properties,” says John Louie, VP Digital Initiatives Group and Global Strategy at Mattel. “That said, video games are still a big part of consumer products licensing, not only from a revenue and profit perspective but from a consumer engagement perspective as well—they are a critical piece to make sure consumers engage with their favorite licensed IP, wherever and whenever they want. “

Casey Collins, Executive VP of Consumer Products for World Wrestling Entertainment (WWE), makes a similar point, saying that for WWE, “console games are still a very important part of the portfolio, from both a revenue standpoint and from a fan engagement standpoint.” The recently released WWE ’13 console game by licensee THQ showed first week sales that were off marginally – strong, considering that was the week in which Hurricane Sandy obliterated the retail business in the Northeast.

Collins notes the nature of the WWE fan base to gravitate toward realistic console games, but says that there are opportunities for mobile and social games “to flank the console business,” perhaps creating an avenue toward younger kids.

Results of LIMA’s most recent Annual Business survey showed a slight decline in the role played by videogames and software as a product category. They accounted for 9.8% of overall licensing royalty revenue (or $508.7 million) in 2011, down from 10.2% in each of the prior two years, and the lowest figure in the past five years.

Videogames continue to play a larger than average role in a few key categories, according to results of the LIMA survey. In sports, they accounted for 15% of revenue in 2011, though that figure is down from 16% in the two prior years. In the Entertainment/Character business, videogames/software generated 13.5% of revenue in 2011, and in the collegiate market, they accounted for 12%.

Any decline in sales and royalty revenue derived from console and handheld games must be seen within the larger context of steady sales drops of console-based and handheld games in general.

“Videogames are still a big dollar business, but the platforms are aging, and the handheld gaming business is going away because everyone’s got smartphones now,” said former Toys R Us and Mattel President Neil Friedman at the recent LIMA Retail Symposium. “You can’t get the sophistication of gaming on an app that you can on a videogame, so the hardcore gamers are still going to stay with the Xbox or PS3…. But a $1.99 app will keep you just as busy as a $29.99 videogame for a kid on a handheld.”

“The advent of mobile and social gaming platforms, complementing console platforms, makes the portfolio management more complex, as gaming mechanics and retention mechanisms vary by platform,” says Mattel’s Louie. “However, we believe all three platforms have the potential to meet business and engagement objectives, as well as allow licensors additional avenues to deepen our relationships and dialogues with our consumers. “