Why March is the New Video Game Christmas

gamestop-black-fridayIt used to be that all the big products were launched in time for the Christmas shopping season (or your religion’s December equivalent). This included video games. Last year wasn’t much different with big releases in the run up to Christmas including Far Cry 3, COD: Blops 2, Hitman, Assassin’s Creed 3, among several other triple-A releases.

The reason for releasing games in the fall in the run up to Christmas is obvious. Christmas is the biggest shopping season of the year. Everyone is asking for and looking for Christmas gifts so what better time to get your big products out there than when people are spending scads of money anyway.

So why do I bring up March? If you’ve checked the release calendar, you’d have noticed that this month has more noteworthy games coming out than seemingly any single month in the past year. We’ve already had reboots for Tomb Raider and Sim City start the month and BioShock: Infinite will close it up. In the intervening time period, there you can buy StarCraft II: Heart of the Swarm, prequels for Gears of War and God of War, and The Walking Dead cash in from Activision.

So why has March turned into such a hotbed for big game releases?

First, it’s about competition, or the lack there of, compared to Christmas. When you flip on the TV or look at a flyer, every company is trying to shove their desired big seller down your throat with ads. With companies in a metaphorical shouting match to get their product noticed so consumers buy it in mass quantities, you get the equivalent of white noise. Everything is so loud and everyone is trying so hard to get noticed that it’s very easy for a product to get lost in the shuffle.

mass-effect-2-poster-01Over the last few years, we’ve seen some big releases come out in the first quarter of a calendar year. Mass Effect 2 and 3 and Dead Space 2 and 3 were big early year triple-A releases. Really, EA has been the company leading the charge into Q1 with those series as well as moving the Tiger Woods series to March.

This year might not be the best example of games leaving the Christmas season to get some attention at a quieter time of year because this has been the busiest Q1 in recent memory. As I noted up top, the four Tuesday release days in March share six triple-A level games. It makes for less competition than going up against all the hot ticket items of the holidays but it’s not clear sailing.

That brings me to the second reason why publishers would release games in the first quarter of the calendar year. What do Electronic Arts, Square Enix, Take-Two Interactive and Sony all have in common besides that they’re video game publishers with games coming out in March?

Each of these companies are publicly traded corporations (meaning their stocks are publicly traded on a stock exchange) and they all have fiscal years ending on March 31st. (Microsoft, whose subsidiary Microsoft Studios publishes Gears of War, has a June 30th year-end but the reasons for a calendar year Q1 release are still applicable. Activision’s fiscal year-end is December 31st so my discussion of the financial reasons behind releases at fiscal year-end are still applicable.)

tomb-raider-2013-wallpaper-01By releasing games in what would be the fourth quarter of their fiscal year, it allows companies to release games and generate revenue in a time period that is generally quiet. It’s not just quiet in terms of new products that are competing for retail dollars but in terms of advertising. The laws of supply and demand drive up advertising costs near Christmas. That same battle for eyeballs isn’t there in late winter. That provides for some cost savings in that a CoD-sized marketing campaign is likely to cost less in February and March than in November and December.

Now that we’ve established the retail market dictated reasons for a March release, let’s look at the financial reasons. It’s important to remember is that publicly traded companies are supposed to generate value for their shareholders (whether it’s through stock price increases or dividends isn’t relevent to this discussion). The easiest way to do that is by making a profit.

However, making a profit isn’t just about selling games but being able to cover your costs. Expenses for games like The Last of Us and GTA V are being eaten in this year’s financials by Sony and Take-Two because those games aren’t producing any revenue to offset the costs incurred. That means that other products they have to put out will have to cover the costs of development that can’t be capitalized.

“Now, Steve, you Buffett of the gaming blogosphere,” you might be saying, “don’t publishers have to recorded expenses constantly for games in development but are months or years before getting released?” Yes, dear reader, games spend a while in development but the longer they spend in development, the more sets of quarterly and annual financial statements those expenses are spread over. Whether that’s a good thing or not is debatable but most companies try to smooth costs so as to not have any massive changes between sets of statements. From their perspective, there’s nothing wrong with smoothing costs.

However, there is more to profitability than earning enough revenue to cover the ongoing costs of game development. There are other accounting principles that are only really applied once per year. These have to do with the impairment of asset value. Basically, the value of an asset is the lower of its book value (cost less amortization [which is expensing the cost of a long-life asset over its estimated useful life]) and its net realizable value (which is the estimated cash that an asset is expected to generate for a company).

Generally, these asset value impairment tests have to be done annually and are usually done at year-end. Therefore, any expense from writing-down the value of an asset due to impairment would be reflected on the annual financial statements and their fourth-quarter financial statements. Just look at Activision’s financial statements if you want an example of fourth-quarter write-downs.

dead-space-3-trailer-01Let’s use a practical example. This week saw a rumour saying that EA was cancelling Dead Space 4 and killing the franchise. They denied it for now but let’s suppose that they confirmed Dead Space was, well, dead. That would mean that any work that Visceral did that could be used going forward in making Dead Space games would have to be written down because it has little to no value to EA going forward. That includes programming and design work that could be carried forward into new games like the necromorph AI, logo designs, character models and engine development work (most engines don’t do dismemberment as a standard feature, after all) which would have been capitalized at the amount of money spent to make them (which would be mostly programmer & artist salaries) would be written down because the net realizable value would be next to nothing.

Please note that I’m not accusing of EA of keeping quiet about any DS4 rumours for financial reasons. However, if I wanted to take my time in making a decision that would impact the bottom line, I would certainly do that before my rather important annual financial statement was released.

So what do March releases have to do with big impairment charges? Well, if those March games have big sales numbers, it’s easy to job to convince your auditor that the relevent assets aren’t impaired. That’s especially true this year because most current game engines and models will be outdated when development for this console generation ends. Also, that revenue spike will go a long way to making fourth-quarter statements look good. In 2009, Activision had impairment charges of over $400 million. Fortunately for them, Q4 wasn’t a complete disaster because they had revenue coming in from a little game called Call of Duty.

Not to sound too much like a broken record but moving big releases away from Christmas and into the first quarter of the calendar year is done for the same reasons as releasing DLCs, incorporating single-use online passes and “giving away” crappy pre-order bonuses. It’s all about the money. In this instance, though, it’s not a case of evil, faceless corporations. The March release is a smart business practice.

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