Ubisoft to Create More “Live Service” Games

 

This article is based on Ubisoft’s financial results for Quarter 3 of the Financial Year 2017-2018. You can view the report here

Ubisoft’s latest financial results provide further proof that major publishers are shifting from selling “traditional” $60 games to selling what Ubisoft refers to as “live service” games i.e. ones with recurring revenue streams. DLC, microtransactions, and loot boxes make money and a lot of it.

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When I was a wee lad, publishers made money by selling video games. The success of a game was judged on how many copies it sold, with developers perhaps taking some solace from critical acclaim when sales numbers were a disappointment. In 2018, sales numbers have never been less relevant.

Ubisoft uses six different metrics to brag about the success of its current catalog of games: (1) sales; (2) average playtime; (3) unique players; (4) esports relevance; (5) player engagement; and (6) Twitch viewership. It should be noted that financial reports are essentially a sales pitch to investors. The numbers have been audited by an external auditor, however Ubisoft chooses what it tells investors and will paint a pretty picture where possible. When Twitch viewership is used to brag about the success of For Honor you’d be wise to question why the sales numbers aren’t used instead.

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There’s also a bit of creative accounting at work. Ubisoft states that the average playtime of Assassin’s Creed Origins is expected to be double that of the franchise average, however a quick glance at a footnote states that this average playtime excludes Black Flag, the game most people consider to be a franchise highlight.

 

Putting the sales pitch to one side, there’s a good reason why Ubisoft is bragging about things like player engagement and average playtime. Digital revenue is booming, partly due to gamers spending more money on games they’ve already purchased. Ubisoft wants its games to become “live services” to maximize Player Recurring Investment (“PRI” aka DLC and microtransactions). PRI is up to 26.7% of total revenue. While this is lower than the comparable percentages for EA and Activision Blizzard, which are both close to 40%, Ubisoft’s PRI was only 18% in the year ended March 31, 2017, and it’s projected to rise further. EA, in particular, is practically infamous for its microtransactions, whereas Ubisoft has largely slipped under the radar of most gamers. South Park: The Fractured But Whole had a season pass but no microtransactions. Assassin’s Creed Origins had a season pass and Helix credits that could be purchased for real money, however the microtransactions were relatively low-key and not the subject of much uproar. Despite that, PRI is over a quarter of Ubisoft’s revenue and it’s only going up from there. Ubisoft even boasted about the high-profit margin on digital goods such as horse skins.

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Digital revenue as a whole (PRI plus digital sales of games) now accounts for 56.3% of Ubisoft’s revenue. Ubisoft doesn’t provide a split of digital and physical sales of new games, but based on a few calculations it would appear that revenue from digital sales of games is 40% of revenue from all sales of games.

This doesn’t necessarily mean that 40% of sales are digital. Ubisoft collects more money from digital sales than it does physical releases. At retail, Ubisoft loses about 25% to distributors and 20% to the platform holder (e.g. Sony, Microsoft, Nintendo), leaving it with a gross profit of 55%. For digital sales, the platform holder takes an increased share of 30%, however there’s no separate distributor leaving Ubisoft with a gross margin of 70%. Adjusting for these revenue splits, I estimate that just over one-third of Ubisoft’s new game sales are digital.

As an aside, it’ll be interesting to see if Sony and Microsoft continue to charge gamers separately for multiplayer once digital sales make up the vast majority of total sales. With a revenue share of 30% (as opposed to 20% at retail), Sony/Microsoft collect the same amount as Valve does on its Steam platform which doesn’t charge separately for multiplayer.

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Live service games have a much longer tail than traditional games. For live service games, revenue generation in the second year is 52% from a base of 100 contrasted to just 13% for traditional games. However, live service games presumably have higher second-year costs than traditional games because they require continued maintenance and updates.

Nearly half of all revenue comes from the sale of PS4 games. Xbox and PS4 combined represent 69% (nice) of sales. PC sits at just 15%, however Ubisoft confirms what most people have known for a while: PC gamers are louder and more obnoxious than console gamers so it feels like there’s more of them than there actually are (I’m paraphrasing slightly). In addition, PC ties into Ubisoft’s new focus on China because “Asia is all about PC” (this time I’m not paraphrasing; that’s a direct quote). Ubisoft is also keen to exploit the popularity of esports and streaming which are both PC-focused.

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Ubisoft’s major release in the quarter ending March 31, 2018, is Far Cry 5, although it’s also releasing DLC for Assassin’s Creed Origins and South Park: The Fractured But Whole. Interestingly, the remaster of Assassin’s Creed: Rogue barely got a mention, so I assume expectations aren’t particularly high for that release.

These financial results don’t tell us much new about the industry, but they do confirm what many of us already suspect: microtransactions aren’t going anywhere. EA and Activision Blizzard may be the most prominent offenders, but the allure of “player recurring investment” is impossible for major publishers to ignore, especially those listed on a public stock exchange. Expect to see many more live service games from Ubisoft in the next few years.

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