Turtle Rock’s Steve Goldstein believes the console game industry lacks risk takers

GamesBeat: Tencent has become the world’s largest game company, with $10 billion in revenue. NetEase is also in the top 10 for public companies reporting game revenue. On the platform side, Google, Microsoft, Sony, and Apple are in that bunch. EA and Activision Blizzard as well. You can say that all of them are investing in games in some way. SoftBank just said, with the Improbable deal, that they’re investing in games. Magic Leap raised $1.5 billion. All the companies that invested in Magic Leap are investing in games.

It’s not really good on the granular level, though, where you’re talking about making investments in individual studios or projects. There are a few funds that got created in the last six months or so. The Russians did one, a $100 million fund to invest in either user acquisition for mobile games or development studios.

Goldstein: There are more avenues of funding now, but it depends on the type of games you’re making. If you’re going for that $5 million budget or under, you have a lot of alternatives out there. I think Fig is one of the coolest things I’ve seen in a long time. Justin and his crew are smart. It’s like Kickstarter — for those of you that aren’t familiar. They have reward-based crowdfunding — spend $30 and get a t-shirt and get a copy of the game — but they’ve also used the JOBS act in order to create securities that are essentially a piece of the game. As an investor, you can buy into a Fig-supported game and reap profits, hopefully, later down the line when the game goes live. They’ve done well with that. I forget what they did on Pillars of Eternity 2, but I want to say it was [$4 million to] $5 million when they finished that round.

GamesBeat: Every one of their fundings has been successful, too. There hasn’t been a project that’s failed to meet its target yet.

Question: They’ve also been very selective.

Goldstein: Right. They curate.

GamesBeat: Kickstarter seems to have gotten a worse track record lately as far as hitting targets, but Fig and other equity crowdfunding companies seem to be picking up some of that slack.

Goldstein: The curation aspect is really smart. The problem with Kickstarter is people have had enough with funding games that never come out, or the developer implodes, or somebody flies off to the Bahamas with a suitcase of money. At least with Fig, they know because they’ve done their examination of what studios are coming, the type of IP that’s going to be made, how the game fits in their slate — they operate more like a publisher, at least from the standpoint of developing a series of games that people will be interested in. Because they’ve done that, that results in those games getting made and coming out.

Question: You were talking about stagnation in the industry, given the lack of new franchises in this generation. How much of that do you think is a market force, as far as gaming companies targeting their core audience, which has grown with certain franchises over time? If you have this core following for something like Zelda, it makes sense to continue to make Zelda games. How much of that stagnation is really just the market saying, “This is what we want. We want more of the franchises we’re familiar with?”

Goldstein: Everything you describe is part of the problem. People think they want new stuff, and then, when you put out new stuff, they decide they want to stick with the next whatever it may be, Call of Duty or something like that. Publishers looking at that are going to narrow their scope because they only have so many dollars to spend on development. They see that fewer games are coming out, but people are spending more per game. They’ll spend $60 bucks on the box and another $50 on DLC. It’s all combined.

It’s unfortunate because those systems provide a great opportunity to make new stuff, but new stuff is just too risky. Especially when you know that you can get a consumer for $100 [to $120] once you bake in ongoing content.

Question: This is one maybe exceptional example, but a counterpoint would be something like Breath of the Wild. Zelda has a formula that’s worked for decades. To some extent, that bleeds into Breath of the Wild, but that game was also a huge departure for Nintendo in the way they designed it, and it was a huge success. It seems like there is still room, even if you end up following this trend as a developer — catering to fans with the franchises they like — there’s still room for innovation.

Goldstein: I don’t know. The question of budget is always going to come into play. Nintendo games, the budgets on them just aren’t equivalent to what you have going on with Destiny, as an example. To Nintendo’s credit, they did create a franchise for this generation. Splatoon is a great game. It’s a lot of fun. There’s a sequel coming out and good for them.

I also think Nintendo has historically been a bit of an outlier when you talk about consoles. Is the Switch even a console? Is it portable? What is it? It’s a smart move on their part because I think they understand that people want their entertainment to be mobile, something they can carry with them at all times. I can’t tell you how many people I’ve talked to who say, “Man, the Switch is amazing. I was playing it on my TV, and then, I took it to bed and kept playing Zelda.” That’s a huge move on their part.

It also ties into — when you look at the direction of VR, AR, MR, wherever it’s headed, it’s all going to be essentially a portable device that you have on you at all times. That totally got off track, sorry.

GamesBeat: One thing I wonder is, why aren’t some of the portfolio strategy companies beating the companies that have focused down so much? You think of Activision and how they used to be. Now, they’re a three-game company: Destiny, Skylanders, and Call of Duty. That switch they made was probably one of the most brilliant moves any company has made — to go down to just three games and focus on them and turn them into multi-billion-dollar franchises. They’re profitable. They’re in the top-10 public game companies because of that strategy.

Electronic Arts is making more money. Its stock price is a lot higher. It also went from 60 games a year down to eight. But what seems healthy for the industry, to me, is more like the tentpole strategy I described, where you have a portfolio of games and you can experiment based on revenue coming in from your big hits. That’s a good thing, I think, when you have that level of experimentation within each company.

Glu Mobile, though, is not successful as one of those kinds of companies. It a collection of many different genres of games within one mobile-game company. They logically should be more successful than Supercell or Machine Zone or King. But those companies are more like Activision. They have one or two or three games.

Goldstein: To be fair, Activision is more than a three-game company. It’s probably a seven-game company because you have to factor in Diablo, World of Warcraft, and Overwatch. Candy Crush as well. In some ways, I guess Overwatch really is an example of the tentpole strategy. Revenue from Warcraft and Diablo funded 10 years worth of development on what ultimately became Overwatch. Some companies can still afford to do that. It’s just that everybody else in the world, other than Blizzard, doesn’t really have that luxury.

Question: What we’re seeing to some extent — game concepts come from two places. They come from game designers or they come from marketing. The marketing department sometimes comes up with game ideas — a product person in a game company’s marketing department who’s been trained at Nestle or Procter and Gamble will sit there and run the numbers and say, “We need another Call of Duty. We need another Destiny.” I don’t think that person is going to innovate. That person is going to do what mathematically makes the most sense based on MBA training.

Where you’re going to get Minecraft is from one guy who has the passion to build something and becomes a game designer. Innovation is going to come from smaller groups. Hopefully, they’ll drive innovation. You’ll always have these huge companies, to an extent, like you have in the film industry. They’ll do another Fast and Furious movie because market research tells them how much money it’s going to make. They’re not going to do indie-style movies themselves. Indie studios will do those, and maybe they’ll get bigger distribution. But the real innovation will come from smaller companies.

Goldstein: Absolutely right. The giant publishers have essentially become Hollywood studios. I can’t tell you how many meetings I’ve had where someone will say, “We want to find a game like Rocket League.” And I sit there thinking, “No, you don’t. If you did, you would have signed Rocket League.” Everyone’s expecting that suddenly they can duplicate the innovative thing that they didn’t recognize in the first place.

Question: And it’s because that’s not what they do. If you’re a product marketer, don’t try to be a game designer. The game designers have the vision to say, “I have something new that people haven’t played before, and I’m going to pursue it. I may create what people are going to want to play next year.” People don’t necessarily want to play what’s hot now. They’re playing it, but they don’t know what’s coming out a year or two from now. It’s our job to figure out what they’ll want to play in two years. It’s not the marketer’s job to do that.

Question: The great irony of this whole thing is that, as the business has grown — we all talk about how the game business is bigger than the film business. Well, you get all the film business issues that way. You look at the movie business this summer. There’s a couple of enormous movies doing all the business. Everything else is either terrible or a big flop. This King Arthur movie that came out this week is going to be something like a $130 million loser.

As the game business, we take a lot of pride in how we’ve grown from selling games in baggies at flea markets to becoming what we are today. You get the good and the bad with that. What we’re focusing on here now is that there’s a bad side to that growth, too. You can lose innovation when you have such big money decisions that have to be made.

Goldstein: Going back to the console discussion and the major publishers, you’re losing innovation there. The company that I think has been doing it right for a long time now, actually, is Tencent. Riot is the big example, but Tencent has made investments in a lot of developers that people aren’t aware of. These developers are running their games on their own. They’re publishing games on their own. They don’t need to take heed of a third party pressuring them to go in a direction they don’t want to go. There’s going to be a lot of innovation coming out of that model, where you have developers building good, sizable businesses. They may not be billion-dollar franchises like League or an Activision game or an EA game, but they have a nice, respectable business that allows them to make the games they want to make.

Question: It may be a window, though. As that matures, then the window begins to close. What was once an opportunity like that is no longer there. Then, you have to look somewhere else.

Goldstein: Well, that’s always the case. We’re always scrambling.

Question: On the console side, we’re talking about boxed games and how there isn’t innovation. There is innovation on the download stores for the consoles. That’s where an indie can come in and do something on a smaller budget, try a new type of gameplay, and put it out there. It may be over time that, as retail decreases and digital increases — that’s already happening. It’s more than 50 percent of revenue for people like EA. But as that continues to become the primary method of distribution, it’s possible that that’s where you’ll see innovation. That’s the window for the indies into the console space, the PlayStation Store, and Xbox Live. That’s where they can distribute things that can’t get on Walmart shelves.

Goldstein: You can certainly have companies doing a decent business from that. But I think those companies are few and far between, the ones that are successful at that.

Question: It really all comes down to what we talked about yesterday. It’s my personal belief, at least, that the industry has to be more developer friendly. Your joke about profit — developers don’t make money. It’s a rare developer that does, one in a thousand. You’re working a lot of hours and just hoping to make next week’s payroll.

Goldstein: We’re in the lottery ticket business.

GamesBeat: I like to think of forces in the industry and counter-forces or counter-strategies to them. Apple is very strong, but it’s also very proprietary. You’d expect a counter to arrive in the form of Android. Steam is the counter to Windows.

Question: It’s not so easy to put up an independent game from a studio no one’s heard of up on Steam and make your money back, though. People think it is, just like at one point they thought you could put anything on iOS and make your money back.

Goldstein: I’ve had plenty of meetings asking if I could make something like Ark. The new one now is Battlegrounds, I think.

GamesBeat: But the force that’s stopping some of this — FIFA is already huge. It sold 21 million units this past go round. It made $800 million in revenue from FIFA Ultimate Team, the DLC. Developers who once were available to do something else are now just making DLC, making Ultimate Team content nonstop. They’re doing live operations year round. That’s definitely the case across the mobile industry. Any successful games are live operations games. Those teams are preoccupied with the current hit. It does fund other games that are possible, but those teams are staying in place. The Call of Duty teams stay in place. They’re not doing original work.

Goldstein: I’m not going to say what publisher it is, but when it comes to these franchises, the developers that are working on them don’t want to make new stuff. New stuff isn’t allowing them to go buy a Porsche every other year. They’re all doing very well working on established franchises. There’s no incentive for them to say, “Hey, management, I’d love to pitch you my new idea.” That doesn’t make sense. Going back to the question that was raised earlier, why isn’t there more innovation? There’s no incentive for internal teams on successful franchises to make something new. Why take the risk?