CONFIDENTIAL
SPE Games Co-Production Growth Opportunity
Preliminary Draft
July 2009
DRAFT
page 2
Executive Summary
• Games market has reached critical mass, offers attractive economics
– Games now consume a meaningful portion of consumer entertainment time – moviegoers are 1.5x more likely to play video games at least 1+ times per week than the average population (National Cinemedia)
– Growth is expected to continue to outpace all other entertainment media sectors
– Major studios (Disney, Warner Bros., Paramount, Universal) taking a more aggressive approach to their movie-based games
• SPCP and SPE Corp Dev propose that SPE take more control of its games slate by co-producing for high-potential titles and select platforms
– Games slate consists of three distinct platform product categories: 1) console/PC, 2) hand-held (PSP, DS), and 3) downloadable (PlayStation Network, Xbox Live)
– A mix of continued licensing and selective co-production provides the lowest-risk, incremental path for SPE to capture greater value from its film-based games while enhancing its promotional programs
– To achieve this, SPCP will require 1-3 additional resources (or consultant support) and active collaboration with SPE production and WW Theatrical Marketing
• Proposed SPE games slate schedule targets incremental profit in the base case across a range of potential title-platform co-production variations*
– Phase 1: Karate Kid & Battle LA (H-H & downloadable) Investment required*: $1.4-6M; Net Profit: $1.6M-2.4M
– Phase 2a: 6-8 title slate (H-H & downloadable) Investment required*: $2-6M/year; Net Profit: $2-8M
OR
– Phase 2b: 6-8 title slate (all platforms) Investment required*: $6-12MM/year; Net Profit: $8-10M
*Note: all title-platform combinations may likely be up to 50% co-funded, reducing costs and profits to SPE proportionately
page 3
Games are among the fastest growing sectors of entertainment media
0.4%
0.9%
1.9%
5.7%
6.5%
7.3%
17.3%
0% 5% 10% 15% 20%
Home Video
Recorded Music
Box Office
TV Programming
Overall Entertainment Media
Cable & Satellite TV
Games
Source: Veronis Suhler Stevenson 2008 Communications Industry Report
Compound Annual Growth In U.S. Consumer Entertainment Media Spending (2007-2012E)
Note: By 2012, Games are
expected to be a $25B business – as large as the current
home video business
Market Size(2007, $B)
$217.9
$9.6
$27.7
$132.6
$11.4
$25.1
$11.5
Time Spent(2007, Hours/User)
1,947
12
639
973
85
61
177
page 4
Movie-based games are now an established sales category – performance is comparable to broader averages
Disney
Warner Bros.
SPE
Dreamworks
Fox
Universal
Paramount
*Note: Between 2002-2007, film-based games represented ~15% of total industry games titled based on licensed IP (majority are sports)
Source: Screen Digest; Secondary research
11
18
Total Titles = 63*Total Titles = 63*
Movie-Based Games – # of Titles by Major Studio (2002-2007)
9
7
7
6
5
•Columbia: 7•SPA: 2
Title Lifetime Unit Sales (MM)Spider-man 1 4.5Spider-man 2 3.8Spider-man 3 5.0Batman Begins 0.6Harry Potter 2 2.4Harry Potter 3 1.1Harry Potter 4 1.5Finding Nemo 3.4Incredibles 2.7Narnia 1 1.2Cars 2.8Pirates 1 0.8Pirates 2 0.6Hulk 0.7Shrek 2 2.6Ratatouille 0.8Transformers 2.7Hannah Montana 2.5
Historical Lifetime Unit Sales (Multi-Platform): AAA Film-Based Games
2.2AAA Film-Based Game Average
1.5AAA Title Industry Average
page 5
SPE’s games titles have demonstrated uptake
SPE: Recent Film-Based Games Titles
SPE: Recent Games Title Performance
Source: SPCP (M. Caplan); NPD
Average:
Average (excluding Spider-man):
3.3
1.8
Title Developer Publisher Genre Life to Date (MM) YearSpider-man: The Movie Game Neversoft Activision Action 6.0 2002Spider-man 2 Treyarch Activision Action 5.0 2004Open Season Ubisoft Ubisoft Adventure 2.9 2006Monster House A2M THQ Adventure 1.2 2006DaVinci Code The Collective 2K Games Adventure 1.1 2006Spider-man 3 Treyarch Activision Action 5.0 2007Surf's Up Ubisoft Ubisoft Adventure 1.8 2007
page 6
Studios are taking a more aggressive approach
StudiosStudios
SummaryDescriptionSummary
Description
CommentaryCommentary
STAND-ALONE GROUP& FULL IN-HOUSE
PRODUCTION/DISTRIBUTION
STAND-ALONE GROUP& FULL IN-HOUSE
PRODUCTION/DISTRIBUTION
• Organization: 1-2 person HC managed as cost center
– Fox: reports through TV Licensing & Merch.
– SPE: reports through Theatrical Promotions
• Activities: licensing-only
• Properties: new release (promo value) film and TV
• Organization: stand-alone group with dedicated P&L
– Disney: stand-alone division
– Warners: large, stand-alone org. in WBHE
• Activities: develop and publish games in-house
• Properties: new release & catalog film and TV
• Greatest exposure to games business and full control over exploitation of creative IP
• Stand-alone P&L drives focus on profit maximization
• Requires large and consistent pipeline to sustain O/H burden
• Universal: co-production for ~30% of games titles across all platforms
• Paramount: co-production for 90% of games titles on hand-held, downloadable, and casual
• Lower-risk approach to getting additional upside exposure
• Increased quality and speed-to-market than traditional licensing
DEDICATED P&L & MIXED CO-PRODUCTION/
LICENSING
DEDICATED P&L & MIXED CO-PRODUCTION/
LICENSING
• Organization: dedicated interactive team with P&L responsibility:
– Universal: reports through Universal Home Entertainment
– Paramount: reports through Par Digital Entertainment
Activities: mix of self/co-financing, self/co-publishing and licensing (vary by platform and property tier)
Properties: new release/catalog film
• Low to no cost and limited operational requirements
• Limited control of final product
• Lost upside for successful games
• Value of licensed IP may tick down in near-term
LICENSING-ONLYLICENSING-ONLY
Source: Company reports; Company web-sites; Secondary research
page 7
Arcade-quality games ($4.99-19.99) digitally delivered via console manufacturer’s network service
Provides consumers with an easy-to-access, lower-cost alternative to retail games, while allowing content owners and developers to establish a more direct linkage to the consumer
Fastest-growing category – market estimated at $400M in 2008, growing to $1.6B by 2011
Benefits to Movie Studios & IP Owners:
Requires less lead time to develop, enabling sync between film and game production/release schedules
Low development cost (<$1M/title) accelerates recoup
Eliminates need for 3rd party publisher (e.g., EA, THQ, etc), allowing studios to exert more control over creative and marketing
Long-tail opps via re-promotes in downstream windows (e.g., DVD release), bundling onto physical discs (e.g., Blu-ray movie/game bundle), etc.
• 20M PSN members
• Mid-range games sell 25-55K units
Key Service Overviews
• 17M XBLA members
• Mid-range games sell 40-75K units
• No member stats available
• Mid-range games sell 15-30K units
• 30M+ install base
• Mid-range games sell 1-5K units
Source: Wedbush Morgan; Game Developers Conference; Company websites
Downloadable games – an emerging, fast-growing platform category – are attracting movie studio interest
page 8
• Proposed slate focuses on three distinct games platforms (in order of co-production frequency)
– Downloadable: focus on co-production in highest-growth, lowest-cost (<$1MM negative cost/title) segment of the games market and synchronize fully with theatrical promotional campaign
– Hand-held: mix of licensing and co-production – target co-production for high-visibility titles that benefit from additional promotional push at retail (e.g., Karate Kid)
– Console/PC: continue to primarily license titles given timing and cost constraints, while selectively co-producing against high-potential titles with franchise potential and proper lead-times (e.g., Battle LA)
• A mixed co-production & licensing model provides the lowest-risk, incremental path for SPE to capture greater value from its film-based games while enhancing its promotional program
– Business model is incremental step closest to current licensing approach and offers profit upside
– Provides flexibility to focus co-production efforts on high-priority/-potential titles, while allowing for licensing activity for riskier titles and games platforms
– Enables SPE to exercise greater control of its games titles – from development to retail – to ensure that game fully complements and supports film’s overall promotional campaign programs
• To achieve this, a few dedicated games resources and some collaboration with SPE production and WW Theatrical Marketing would be required
– Will likely require 1-3 additional resources (or consultants) with abilities to manage integration points with SPE film/TV creative, games development process, and publisher relationships
– Coordination with SPE film production and creative resources to ensure that games are delivered with relevant storylines, concurrent marketing and in sync with theatrical release
SPCP proposes taking greater control of its upcoming games slate by co-producing for select high-potential titles and platforms
page 9
• Pilot Karate Kid and Battle LA (or other titles, e.g., Green Hornet, Priest) games for downloadable & hand-held platforms
• Cost (Negative + Marketing):
– Downloadable only: $2M
– Downloadable + Hand-held: $5-6M
• Up to 50% of costs may be co-funded by developer partner
Proposed SPE games slate schedule targets incremental profit in the base case across a range of potential title-platform variations
2a: Downloadable
& HandheldOnlySlate
2a: Downloadable
& HandheldOnlySlate
2b: All Platforms
Slate
2b: All Platforms
Slate
1: Karate Kid & Battle LA
1: Karate Kid & Battle LA
Phase Description/Assumptions Net Profit Opportunity(ultimate basis)
• Base case: $1.6 - 2.4M
• Low case: -$1 - 0M*
• 6-8 high-potential title slate (Karate Kid, Green Hornet, Battle LA, MIB, etc.) for hand-held & downloadable over five years
• Cost (Negative + Marketing; assume ~2 titles/year):
– Downloadable only: $2M/year
– Downloadable + Hand-held: $6M/year
• Up to 50% of costs may be co-funded by developer partner
• Base case: $2 - 8M
• Low case: -$2 - 0M*
• 6-8 title slate (as above) for all games platforms, including console/PC
– For console/PC, only co-produce 1 title to gauge potential and limit risk (assume console/PC is 50% co-financed)
• Cost (Negative + Marketing; assume ~2 titles/year):
– Downloadable and Hand-held same as phase 2a
– Console/PC: $15-18M for single title
• Base case: $8 - 10M
• Low case: -$5 - 0M*
*Note: downside risk may be mitigated by negotiation of preferred return with co-production developer partners – first $ recoup off adjusted gross in exchange for reduced share of back-end after recoup
Source: SPCP (M. Caplan); SPE Corp Dev analysis; Partner discussions
OR
page 10
Challenges
• Downloadable games platform rapidly emerging but still in early stages of development
– Need PlayStation and Microsoft continue to invest (as announced) in providing aggressive marketing support
– Publisher models still emerging – high variability in development costs, price points, game quality, etc.
– Consumer demographics mirror broader gamer demographic but may skew older than for hand-held platforms
• Large volume of titles published at retail break through the clutter (issue for console/PC and hand-held). HOWEVER, by exercising greater control to ensure superior quality/coordinated marketing, SPE may partially mitigate
• Threat of digital distribution to physical distribution (as in music and video) may ultimately harm physical retail games economics
– Economics for retail hand-held platform may deteriorate in the long-term
– Establishing a position in digital (via downloadable) may help SPE garner more favorable economics as hand-held transitions to digital
• Need to ensure collaboration between film production, marketing and games activities
• Tightening budgets
MARKET CHALLENGES
SPE-SPECIFIC CHALLENGES
page 11
Next Steps
• Get approval for proposed business plan
• Agree on funding approach
• Continue to explore operational requirements and potential partners for properties in development (Battle LA, Karate Kid, Green Hornet, Priest)
• Organize internal ‘road show’ with appropriate SPE business leaders
– Introduce SPE games approach
– Explore potential for collaboration
page 12
APPENDIX
page 13
30%
38%
67%
49%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2006 2007 2008E 2009E
SPE’s games partners are shifting away from traditional licensing models
Source: Morgan Stanley; Screen Digest; SPE Corp Dev analysis
% of Major Publisher Game Titles Based on Original IP (Cross-Platform, 2006-2009E)
Factors Driving Original IPFactors Driving Original IP
Publishers
Successful franchises based on original IP are most lucrative over the long-term
Historically used licensed IP to ‘jump-start’ and supplement their market position
As they grow into major stand-alone businesses, they may become less reliant on licensed IP
Experience of the premium cable networks may provide a preview for game publishing
– Early phase: vast majority of programming from recent major studio movies
– Market matures: players begin to differentiate through original programming
– Today: emphasis on original programming, reducing value of film licensing
Developers
Increasingly able to ‘stand on their own’ and invest in high-risk/high-reward original projects
Console manufacturers
Emphasizing original IP games to highlight unique features of their platforms
Publishers
Successful franchises based on original IP are most lucrative over the long-term
Historically used licensed IP to ‘jump-start’ and supplement their market position
As they grow into major stand-alone businesses, they may become less reliant on licensed IP
Experience of the premium cable networks may provide a preview for game publishing
– Early phase: vast majority of programming from recent major studio movies
– Market matures: players begin to differentiate through original programming
– Today: emphasis on original programming, reducing value of film licensing
Developers
Increasingly able to ‘stand on their own’ and invest in high-risk/high-reward original projects
Console manufacturers
Emphasizing original IP games to highlight unique features of their platforms
page 14
• Contracts with developer
• Coordinates development process
• Facilitates access between film and game production
• Coordinates marketing film-game marketing
Co-production model involves more active studio participation and coordination with games production partners
DeveloperDeveloper
Publisher(Console/PC
Platform Only)
Publisher(Console/PC
Platform Only)
StudioStudio
Participant Responsibilities Financial Implications
• Funds 40-60% of development
• Funds 10-30% of marketing
• Receives 40-60% of profits
• Develops prototype and game
• Coordinates with film production to matchtime-lines, asset usage, storylines, etc.
• Delivers game in advance of film release date
• Console/PC platforms: development spend above advance
• For non-console/PC platforms
• 40-60% of development
• 70-90% of marketing
• COGS/platform royalties
• 40-60% of profits
• Provides QA and Localization
• Develops marketing plan and coordinates marketing program
• Manufactures and distributes game
• Manages retail plan
• 40-60% of development at GM
• 70-90% of marketing costs
• COGS/platform royalties
• Developer royalties proportionate to ownership stake
page 15
SPE’s games partners are willing to pay a premium for more active financial and operational participation
Key Elements Description Value
Capital Investment
• Direct investment to share risk and reduce development cost burden – ranging 40-60%
• Investment level varies based on platform
– Console: $8-12M
– Downloadable: $175K-600K
– Casual: $30-60K
Preferred return (first profits to studio until recoup of direct investment and marketing costs)
Financing • Many games publishers use co-publishing as a method to obtain off-balance sheet projects and financing
Theatrical Marketing Collaboration
• Games publishers willing to pay premium for extra promotional exposure
30 (studio)/70 (partner) split in direct marketing budget
Note: studio’s hard marketing costs may be lower due to preferred rates, etc.
Lead Time/ Simultaneous Release
• Console/PC: 20-24 months in advance of release date
• Handheld/Downloadable: 14-18 months in advance of release date 40-60% negative pick-up at GM
Partially fund direct O/H costs
No distribution feeProduction collaboration
• Games publishers believe that early coordination between film and game director will improve story development game quality
Asset Sharing • Across all business models, games publishers increasingly require some minimum level of asset sharing – artwork, animation data, etc.
Producer’s fee ($1-3M at gold-master)
page 16
Anticipated Incremental Resources
1 Executive Producer
1 Associate Producer• Manage day to day activity for all development activities related to the creation of the game. Work directly with game production
team and as a go between with film and game production
• Oversee all phases of development from the concept phase through release. Identify and communicate goals and risks, on an ongoing basis, to both internal and external stakeholders
• Represent the needs of the studio on any and all project-related issues
• On a day-to-day basis, the Executive Producer manages and monitors tasks to ensurethe project is tracking in accord with the specified product plan
• Responsible for integrating the marketing function into the development process. Work with development staff to ensure that marketing insight and competitive factors are leveraged to maximize the commercial success of the title
• Coordinate with SPE’s theatrical marketing, consumer product and promotions, trade marketing and PR staff to develop and facilitate marketing tactics throughout the product lifecycle
• Ensure that SPE titles meet consumer demands and further the establishment and success of the franchise
1 Marketing Manager
Continue oversight from existing SPCP interactive resource and Corp Dev to continue business development discussions, development of business case and financial management
1 Assistant • Support executive and manage data and research
page 17
Movie/TV +Movie/TV +Video gameVideo gameMovie/TV +Movie/TV +Video gameVideo game
OnlineOnline
PRPR
RadioRadio
In-theatreIn-theatre
PrintPrintTVTV
In-storeIn-store
ConventionsConventions
QSRQSR
Collaboration with WW Marketing requires coordinated planning/and execution of movie-game programs across promotional outlets
Source: SPCP (M. Caplan)