Activision: Business Is Good, And Getting Better

During this in-depth interview with Gamasutra -- conducted during last week's E3 trade show in Los Angeles -- Thomas Tippl, Activision Blizzard's COO, could barely say "$3 billion in cash with no debt" without cracking a smile.

While many publishers are facing major difficulties in the complicated game marketplace of 2010, and are trying to re-entrench in a landscape that's ever-changing, Activision is currently riding high, as the industry's leading light, from at least the business perspective.

While there have been controversies over the company's relationship with its talent which spring from major layoffs and, of course, the situation that ended in the departure of Infinity Ward founders Jason West and Vince Zampella, the company has had nothing but success with its Blizzard studio and Call of Duty franchise, with World of Warcraft and Modern Warfare 2 topping the PC MMO and console game charts.

Here, Tippl explains what he sees as the keys to the company's success, and lays out its cautious future plans -- including a reluctance to enter the social gaming fray as quickly as its most major competitor, Electronic Arts, did with its Playfish acquisition.

What at E3, as a third-party publisher, has you most interested or excited? The 3DS? Motion controls?

Thomas Tippl: The best thing out of everything I've seen at E3 was Call of Duty: Black Ops. By far, the best thing I've seen. [laughs]

From a technology perspective, I think it's great that first parties are coming with new innovation on the technology side to create some new excitement to interest the consumers. The industry needs that and it's going to be a good thing.

I'd say Nintendo's 3DS, just to start there, is phenomenal. It's a great product. Again, it just shows how smart the folks at Nintendo are to recognize that to enjoy that experience, you've got to figure out how to do that without forcing people to put on glasses.

The integration with the 3D camera, you know, is just brilliant. You've got the analog stick. I mean, it's a great product. We're developing a game for it already. The screen is fantastic. I think that's going to really breathe life into the DS and the handheld market in general, particularly those who deal with some of the copyright protection issues that they're facing today on the current DS platform.

Move and Kinect, I think, will be interesting new opportunities to innovate certain franchises, but probably not for every kind of game. So, we'll have to see how much of an install base they're going to develop. A lot of that will depend on the price point they choose.

We have a few franchises where we think this could be an interesting value to improve the experience for the player. Tony Hawk is an example. We have our Rapala fishing franchise. But it's not going to be something that will be every game because I don't think it's one size fits all. It's not going to enhance the experience for every game.

Tony Hawk: Ride

Are you concerned at all about the price for those? They're expensive. And they're targeting a mass market.

TT: Yeah, a bsolutely. I think as a publisher, you have to be concerned about the price; it drives a lot of the outcome on how big of an install base there's going to be. The bigger the install base, the more likely that you can make sense out of your investment. So, the lower the price, the better. In this economic environment, it's probably more important than ever.

The executives at Activision aren't necessarily shy about coming out saying if they think something is too expensive.

TT: Yeah. You know, we're generally not shy. [laughs] But at the end of the day, it doesn't matter what we say. At the end of the day, what matters is how consumers vote with their pocket book. And that's going to be the most important thing.

There was a big shindig at the Staples Center. What was the motivation behind that, and why did you think that Activision should do something of that magnitude this year at E3?

TT: Well, I tried to convince [Maryanne Lataif, Activision VP of corporate communications] that we should just do an E3 sequel. [laughs] She told me that all of you guys cannot take another sequel. So, that's why we decided we had to come up with something that has never been done before.

Maryanne and her team have put together a phenomenal show to showcase our games, showcase the gameplay in our games, but also showcase the artists and the variety of artists that are all in our games. So, everybody that was involved in that show is part of our games. You see the kind of music artists we're attracting. All kinds of talent. You know, directors and what have you.

We just felt we did a great job with last year's show at the Wiltern Theater with Jay-Z and Eminem to introduce DJ Hero, and we thought we could take this to another level this year, introducing all of our top product in a very engaging environment that shows yet again how we are a couple of levels above our competition.

Maryanne Lataif: It's also important to note that we don't have any other presence on the show floor and didn't do a press conference. That was our showcase.

Many Procter & Gamble executives have landed at Activision. How do you take that experience outside of video games, with packaged goods, and how have you leveraged that and applied it? How is selling something like Call of Duty like selling Charmin or Tide?

TT: [laughs] Well, we also sell, you know, beauty fragrance among other things. And Pringles potato chips, which is a form of entertainment. [laughs]

But in all seriousness, there is a lot of experience that I was able to leverage from my 15 years at Procter & Gamble, which is one of the most successful -- probably the most successful -- consumer products company. And I worked for Procter in not just the U.S., but I worked for Procter in Europe, I worked for Procter in China, I worked for Procter in Japan.

And what I've learned through all of those experiences is that no matter what you do, you always have to start with the consumer.

You don't start with your product and you don't start with the technology. You start with the consumer and really understanding what the consumer wants and what satisfies the need either through getting their shirt cleaned or getting a great entertainment experience. So, that's where you start, and that's universal.

The second thing that I learned at Procter, and they do better than almost any company, is how important execution is. The way I phrase this is it's easy to be conceptually brilliant, but all the difference happens in execution. The quality of the product, the way you market it, the way you present the product at retail -- all those things apply regardless of the industry you're in.

There are some things that are very different between a company like P&G and this business. This is a business where the creative talent is much more important. It's a much bigger people business. If you look at our assets, we have about 8,000 employees. We have very little machines [compared to a] manufacturing plant.

It's important to recognize that the creative talent, these individuals, it's not one size fits all. They have different needs, different motivations, and being able to be flexible and adapt to that as we do with our independent studio model, it's very different, for example.

So, there are a lot of things that are similar, there are lots of things that are different. And lastly, I would say I spent less time at P&G doing M&A deals. I was the co-founder of Procter & Gamble's venture fund, so I've worked a lot with startups and small companies, and a lot of those experiences have helped me tremendously as we put the deal together with Blizzard or the latest partnership with Bungie.

So, I feel like still today, after five years in the industry, I've been able to get a lot from my 15 years working for a global consumer product company.

Call of Duty: Black Ops

So, what's Activision's M&A strategy right now? I imagine you guys are always looking for something.

TT: Yeah. Our strategy on the acquisition side has been the same. It starts with, first of all, our job is to make sure we grow the business that we have. That's job number one. Second, we are in the fortunate situation, based on our strong financial performance, we have a great balance sheet with more than $3 billion in cash and no debt. Therefore, when we see great opportunities, we can add some value. We can make it happen.

We only do it if it can happen at the right price. Therefore, we don't get more than one or two done a year. I don't think that that's going to change. So, it's very unpredictable what happens in M&A-land, because a transaction takes a buyer and a seller. Particularly, if you're as disciplined as we are, we don't just throw hundreds of millions of dollars around just so that Maryanne can issue a press release.

You have a partnership with Bungie, but were there considerations of "Let's make an offer for those guys?" They're a top-tier company, they'd have a high price. Was there acquisition talk?

TT: Not really because that's not Bungie [president] Harold Ryan's team's objective. They have a very clear vision of what they wanted to accomplish and how they wanted to accomplish it.

There are many reasons we got this done. One of those was that we are flexible in how we think about things. And we bring a lot to the party here. We are the most capable company. When it comes to our line, we have the best institutional knowledge there.

We have proven with Call of Duty that we can really deliver mass entertainment products with numbers that have never been before, bigger than what Avatar and Titanic did at their launch. As a result, the Bungie guys have decided that we are the best long-term partner then.

And you mentioned about looking for ways to grow the business. Recently, [Activision Blizzard CEO] Bobby Kotick spoke about one of the ways that you guys can expand your margins: through getting more active in the used games market. One of the things that he said is to have great partnerships with retailers, and utilize new technology solutions. Can you explain what he meant by that?

TT: I can't tell you new details about this at that time. We've always been watching the market. A lot of our competitors have already executed solutions on the used games market. We've been following those. We've been analyzing those, and when we're ready to share details, we'll let everyone know.

ML: I think one of the things that we've seen is we are working closely with retailers to form partnerships with. For us, we feel that the retailers are making profits, but if they're looking to reinvest those profits in the store experience, if they work with us on an initiative like that, that's a better use of the dollars for us.

If you could just completely get rid of the used market magically, would that be the ultimate goal for you? Then you guys would get paid straight up for your work.

TT: I don't know. I wouldn't say that that's the ultimate goal. If you step back and think about the fact that there are other parties that can [leverage] our intellectual property without us getting properly compensated for that, that should make you pause and think, "Does that make sense?"

Obviously, you guys are very into online. You've got DLC, and World of Warcraft of course, and digital downloads. But what about social gaming? Your competitor bought Playfish for a whole lot of money recently. Is that market something that you're examining right now?

TT: If we were, I wouldn't be broadcasting this, just to get that out of the way. We always look at opportunities, but we are very thoughtful about our investments.

Right now, I would say we've got about seven opportunities that we are pursuing that are massive. Those are Call of Duty, Guitar Hero, World of Warcraft, StarCraft, Battle.net, Diablo, the unannounced MMO for Blizzard, as well as the Bungie relationship.

Those are huge opportunities. Any single one of them, we believe, is a bigger opportunity than whatever social gaming company you may want to look at.

When you have all those huge profitable existing brands like that, what's your take on new IP? And how often do you want to be introducing those?

TT: It's very challenging to successfully bring new intellectual properties to market, and that's why we are very selective about doing it. Usually, we only do it if we believe we have a great concept that's appealing to consumers and if we can find a broad audience for it, so that it's not a niche, but it's a broad market.

And then we have great developers who are able to deliver a great game against those consumer products. And when we have all those pieces in place, then we greenlight it, make an investment, and make sure it's as great as it can be, then support it from a marketing perspective and make sure it's distributed broadly.

But, you know, 99 percent of new IP introductions fail. And this is not just unique to video games, by the way. This is the same in consumer products. If you look at brand introduction with consumer products, 99 percent of them, a year after they're introduced, you won't find them on the shelf. It's just generally a very difficult thing to do.

And in our view, if you're not very selective about the way you do this, it's very unlikely that you'll be successful. So, our approach is to be focused, think about what can be big, and make sure we have all the pieces of the puzzle that are required to be successful.

Guitar Hero: Warriors of Rock

What about franchise fatigue? That's something a lot of people talk about.

TT: Yeah, this is something that I have not bought into. I think it's an excuse for a lack of innovation. If you have a great franchise and you get complacent and you stop innovating, then yes, you will lose your fan base. But if you think about it, if you have a large fan base on a property, that provides you with the opportunity to communicate directly with fans, to really understand what they love about the game and what they would like to see in the game.

And if you think about a franchise of the scale of Call of Duty, the ability that allows you to bring development resources and investment against making that great game better.

And then lastly, you can market it much more strongly than a new IP because you've got a huge scale that you can work off. So, all these things allow you to make a much better product than if you start it from scratch.

You don't know if you're going to be able [to move] five million units or not. In most cases you don't. In which case, that means I have only X for development and Y for marketing, and then I have to compete with Call of Duty that has 10 times [that] for product development and 10 times that for marketing. It's a very, very difficult thing to do, and that's why we do it but extremely selectively.

There's so much that our Call of Duty fans tell us they want that we are not providing yet, that we see many, many years of innovation ahead of us for Call of Duty and we will keep that fan base very, very happy and even more excited than they already are today.

And you know the last thing I always like to say, coming back to, since you brought up the Procter & Gamble experience, when people come and tell me, "Well, how can you possibly make another Call of Duty?" I always tell them, "Look. I used to work for a company that every year is to figure out how to make a white shirt whiter". And they've been doing that for 35 years on a product like Tide.

If you're telling me that with all the opportunities we have from a technology, from a content perspective, the story, the gameplay modes, the characters we can develop, that we can't innovate on a franchise for ten years, then we are just not doing our job.

ML: I think Blizzard is a good example of that.

TT: Exactly. Look at Warcraft, right. They go from strength to strength, but it's because they innovate all the time. They improve the customer experience all the time. They improve the gameplay modes all the time. You can't be lazy. You can't get complacent.

You've got to continue to reinvest. You've got to listen to your consumers. You've got to do a lot of research. You've got to try different things. Not everything will always work, but I think you're in a much better position to innovate on the basis of a strong fan base with a lot more investment behind it than starting from scratch all the time.

You mentioned Black Ops earlier. How has Treyarch been holding up? I hear they're under a lot of stress with everything that's happened and morale has been low; that's it's been challenging over there.

TT: Morale couldn't be higher. They are so excited. They are going to blow everybody's mind with Call of Duty: Black Ops.

I was really bothered by the labeling that was going on between who's the A team and who's the B team, and I don't think there will be any discussion about the label that we will have after Call of Duty: Black Ops. That product is phenomenal.

This is the first time that we've enabled them to have the whole team against one product development effort, and they're doing a phenomenal job. This November 9th is going to be a great day for the Call of Duty fan community because they're going to get a phenomenal product.

And with everything that happened with Infinity Ward, management came under criticism for not respecting the talent that you guys have.

TT: Yeah. I don't agree with that statement at all. Unfortunately, because of litigation, I can't go into a lot of details. Have you read our cross-complaint?

I've read some of it.

TT: I think that and the actions that they've taken since then speak for themselves. It's very unfortunate and it's very unique.

It seems rather personal.

TT: You know, we've been in this business for 20 years, and we've had 17 different developers join us over that period of time, and we never had an issue like that. That alone probably provides a pretty good perspective.

What do you think that Activision is doing right that other publishers are just not seeing or not recognizing? What are you doing that other less-successful publishers aren't doing?

TT: Focus is probably the biggest difference. We are very focused, and we don't try to be everything to everybody. That means we have the best talent against the biggest opportunities, which allows us to make great products, and then we bring those products to the broadest possible audiences.

The second thing I'd say is we've over the years continued to bring great talent to the company, whether it's on the development side or whether it's on the marketing side or whether it's on the retail execution side. We are very focused in getting the best talent from a development perspective but also from a corporate perspective.

That's why we look outside the industry from time to time and bring in talent from companies that are best in class in marketing, best in class in retail, or best in class in hardware manufacturing. We set our standards to try to be the best. Blizzard brings customer service talent from Virgin or American Express that have best-in-class customer service, full stop. Not [just] in video games. Anywhere, any industry.

You know, Bobby has always been visionary in that sense. He never felt constrained by only looking at video games. He always set his sights to be the best not within a small field but the best, full stop, in anything we do. We don't always accomplish it, and we still have a lot to go in many areas, but that is our aspiration, and that's how we got to where we are today.

Five years ago, I joined the company. We had a business plan for $1 billion in revenue and $70 million dollars in operating income. And four years later, we were at nearly $5 billion in revenue and $1.2 billion operating income. So, the strategy of focus in terms of what we do and operational discipline and bringing in constantly great talent and making sure it's clear to everybody that nothing is ever good enough and there's no room for complacency, that's a big part in success.

It was interesting when Kotick said that Activision's new goal is to become is the most profitable entertainment company, including the areas of film and TV.

TT: That doesn't mean, by the way, that we're going to start making movies or TV shows. It's just the fact that today, video games only have a 5 percent market share in a $1.6 trillion media entertainment market, which just underlines the opportunity. Consumers are migrating to interactive entertainment.

New technologies are coming along that allow for social type of gameplay, which is very, very appealing. New technology of facial animation allows you now to tell stories that create an emotional bond between the character and the player. There's so much happening on the technology side that allows us to provide an entertainment experience, whether that's storytelling, whether that's music, or whether that's in social networks that is just much better than you can find in traditional forms of media.

Again, Bobby is great at setting unreasonable objectives. So, one of the things you always have to be comfortable with if you work for Activision Blizzard is the fact that you will always be going for unreasonable objectives, and the next thing you know, you're saying "Holy shit. We did it!"