On Tuesday, we attended Ubisoft’s investors meeting and viewed the Nintendo digital event. We also hosted investor meetings with members of the GameStop (NYSE:GME), King, and Zynga (NASDAQ:ZNGA) management teams. Below, we have summarized the key topics discussed at each event.
Ubisoft’s investors meeting
The Ubisoft presentation consisted of six topics: strategy, motion pictures, consumer products, mobile, Just Dance Now, and a financial overview. In the strategy discussion, management reiterated the company’s commitment to open world games and digital growth. Ubisoft has become a leader in open world games, with Assassin’s Creed Unity, The Crew, Far Cry 4, and Watch Dogs all expected in FY:15. Although many competitors will release their first open world titles in upcoming years, Ubisoft believes that the genre takes some time to master. Digital is enhancing the gameplay experience for Ubisoft’s customers and their colleagues. As an example, almost 1.5 million people have downloaded a companion app for Watch Dogs that allows them to participate in the action even if they do not own the game, providing additional awareness of and engagement with the new franchise.
Ubisoft is branching into movies and TV through Ubisoft Motion Pictures (UMP.) UMP’s strategy is to retain copyrights and ancillary rights (such as merchandising) to diversify the studios mix for each IP, develop and optimize synergy between game and movie marketing, and build creative and technical synergies. Some distinguishing characteristics of UMP are that it retains total control of development (including choosing actors and directors), keeps creative control (including the final cut on scripts), and minimizes financial risk. Ubisoft’s payback is linked to box office performance, not profitability, and its financial exposure is limited to the size of its completely discretionary investment.
It expects Assassin’s Creed and Splinter Cell movies to be released in 2015 or 2016, with Warner Bros. producing a Ghost Recon movie directed by Michael Bay, and Sony Pictures producing Watch Dogs and Rabbids long features. Management then discussed Ubisoft’s licensing strength from high-profile existing brands, marketing power, media production, retail expertise, and global reach. As an example, the Rabbids franchise now has a top animated series, apparel, puzzles, stationery, and toys, among other items.
Management then provided an update on the mobile market and Ubisoft’s strategy. The number of smartphones and tablets is expected to increase to 3.5 billion in 2017 from 1.7 billion in 2013, with mobile game revenue expected to double to $24 billion in 2016 from $12 billion in 2013. Reflecting market trends, Ubisoft will focus on developing freemium apps that require no upfront payment, as opposed to premium apps. It now has roughly 500 people working on mobile projects, with four dedicated studios. Management then provided an overview of Just Dance Now, which allows the gamer to use a smartphone as the controller. For the final topic, management discussed its plan to improve margins through digital (digital distribution, item-based and DLC revenues, and free-to-play.) Digital is expected to account for over 50 percent of revenue by FY:18 or FY:19. Digital provides Ubisoft with a gross margin of 70 percent, above physical’s gross margin of roughly 55 percent. It expects one-third of games to be digitally downloaded by FY:18.
Nintendo Digital Event
The primary focus of the Nintendo Digital Event was Wii U. On Tuesday, Nintendo revealed amiibo, a near-field communication (NFC) based line of figurines in development for the toys-to-life category. The amiibo concept appears to be very similar to Activision Blizzard’s (NASDAQ:ATVI) Skylanders and Disney’s (NYSE:DIS) Disney Infinity toys. Each amiibo figurine contains a chip that transmits data to and from the Wii U console as the character evolves. When the gamer places a figurine over the Wii U GamePad’s NFC sensor, a playable character within the game becomes available. Nintendo announced that Super Smash Bros. will be the first game compatible with amiibo, with other games including Mario Kart 8 being prepared for the new figurines as well.
Fellow notable reveals included Captain Toad: Treasure Tracker, Kirby and the Rainbow Curse, Mario Maker (which allows gamers to create their own levels playable in Super Mario Bros. 8-bit and Wii U’s New Super Mario Bros.), Splatoon (a third-person squid shooter), and Yoshi’s Woolly World. Other Wii U games featured in the Nintendo Digital Event included Bayonetta 2, Hyrule Warriors, Xenoblade Chronicles X, and a new Zelda title. Although the Wii U content on display was quite impressive, we remain unconvinced that Wii U’s fortunes will improve significantly, particularly given a relatively light near-term release slate and the success of Microsoft’s (NASDAQ:MSFT) Xbox One and Sony’s (NYSE:SNE) PlayStation 4. For the 3DS, Nintendo showed footage of Super Smash Bros., as well as Pokémon Omega Ruby and Pokémon Alpha Sapphire.
Michael Pachter is an analyst at Wedbush Securities.