Videogame 'Add Ons': Billion-Dollar Business and Two-Edged Sword

By Sarah E. Needleman 

Forget "game over."

Videogames are generating billions of dollars a year in revenue by creating additional characters and stories that players can buy long after a title's launch -- the equivalent of selling new chapters to an already completed book.

"Add ons" are a bonanza for major game publishers: Last year, world-wide spending on add-ons for PC and console games was $4.78 billion, nearly double 2012's haul, according to SuperData Research, which projects $5.21 billion in 2017 spending.

"It's the most important trend we've seen over the past five years," said Tim O'Shea, an analyst at Jefferies. "These are incremental dollars that weren't being captured before."

Analysts say add-ons' popularity is a major reason stock prices have more than tripled in the past five years at game giants Activision Blizzard Inc., Electronic Arts Inc., Take-Two Interactive Software Inc. and Ubisoft Entertainment SA.

There is a downside, though: With players adding on to their favorite titles and playing them for longer stretches, executives say, it becomes more difficult to produce new blockbusters that stand out.

Here's how add-ons work: A person buys a game such as EA's "Star Wars Battlefront," typically spending $60, then spends more for extras, ranging from a 99-cent upgrade such as a special weapon to a $40 "expansion pack" with new stories. Videogame publishers dole out the add-ons at intervals, typically over a year, but may also sell them as part of a package called a "season pass."

Electronic Arts, publisher of popular sports franchises such as FIFA soccer and Madden football, last year generated $1.2 billion in revenue from add-ons, including about $800 million from Ultimate Team, a mode launched in 2009 that players use to create and compete with fantasy-sports teams.

Previously, "people would typically buy one of our sports games and play it for two or three months and then probably put it away," Blake J. Jorgensen, EA's finance chief, said at an investor conference in February. "Today, people engage in Ultimate Team for a full year."

In some cases, the payoff from games with longer lifespans can provide cover for new titles that flopped, said Strauss Zelnick, chief executive at Take-Two. Take-Two's "Battleborn" game didn't meet the company's expectations when it launched in May last year. Even so, revenue that quarter rose 13% despite no other major releases. The company credited sales of digital add-ons for its Grand Theft Auto games, which were released in 2013 and 2014.

Mr. Zelnick declined to say when a new Grand Theft Auto game might launch. "There is a limited amount of mind share," he said.

Add-ons are part of a shift in the industry toward "games as a service" -- a play on the idea of "software as a service," where companies such as Salesforce.com Inc. sell subscriptions to software rather than boxed or downloaded programs that customers pay for once.

Games as a service began more than a decade ago, when broadband made it possible for ambitious games to offer persistently updated worlds, such as Activision Blizzard's "World of Warcraft," a subscription-based game that remains popular today.

More recently, the model has evolved to include services, typically free, such as matching competitors by skill level and contest hosting. The more time players spend in a game, the more likely they will be to spend on add-ons, analysts say.

Persuading players to put more time and money into the same game can have unexpected consequences.

Activision Blizzard recently said "Call of Duty: Infinite Warfare" underperformed during the 2016 holiday quarter relative to past installments of the hit series. Some fans didn't like the war simulator's outer-space setting. But the company also said many fans were still enjoying the previous year's "Black Ops III," which got free and paid updates throughout the year.

It is a particular danger for franchises released annually. "If users are actively engaged with older games, then there's not as much of an incentive for them to buy the next new game," said Colin Sebastian, an analyst at R.W. Baird.

A spokeswoman for Activision Blizzard declined to comment.

Still, consumers' aggressive adoption of games as a service is lifting digital sales, which contribute about half of total revenue at some big publishers. That's significant because digital goods generate higher profit margins.

"It used to be that you would ship a game and everyone would go on vacation for a month," said Chris Early, vice president of digital publishing at Ubisoft, the company behind "Assassin's Creed." Now, the company makes digital add-ons for just about all its games.

Write to Sarah E. Needleman at [e-mail]

(END) Dow Jones Newswires

April 19, 2017 07:14 ET (11:14 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.