Vague Patch Notes: How to read games industry investor reports as a player

    
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Vague Patch Notes: How to read games industry investor reports as a player

The old adage goes that diplomacy is the art of saying “nice doggy” until you can find a rock. By extension, marketing is the art of setting yourself on fire, then calling it an extraordinary and unprecedented state of being with life-altering potential. And business is the art of taking that slow-burning marketing guy and explaining that your initial investment in one match led to over 3000% fire growth this quarter.

At the intersection of marketing, diplomacy, and business lies the investor report. And a whole lot of fans of this industry are both very focused on what these reports say and also terrible at reading them.

Obviously, I am not a financial advisor. But I have been doing this job for more than a decade now, and thus I’ve got a certain amount of practice in understanding what these reports are actually about, what they do, and how to tell the difference between lies, damn lies, and what the suit on the other end calls an unforeseen third-quarter growth spurt. So let’s offer a bit of a key to decode these reports.

Space me out.

Companies can’t lie, but they can deceive

The first thing to understand about investor reports is that they are legally required to contain nothing but facts. That is not the same as saying that they are legally required to be true.

Imagine, for a moment, that you’re a little kid and your brother has slipped into the pantry to steal some cookies. You want your brother to succeed in this, so when your mother comes by in five minutes to ask if you know where he is, you can honestly say, “I don’t know where he is right now.” You aren’t lying. He might have gone to the bathroom first. But you do have a pretty good idea of where he is just the same.

Read every single line in an investor report in exactly that mindset. The company reporting cannot lie about what happens, but it can do everything possible to obscure numbers, omit numbers it is not legally required to disclose, and otherwise make things look more successful than they actually are.

A good example of this is Activision-Blizzard’s not-at-all-beloved Monthly Active Users metric. The company reports a number that it claims is based on how many people used the service over a period of time, but the fact of the matter is that this is a different metric from a subscriber. For one thing, it’s an entirely self-determined metric, wherein Activision-Blizzard can set its own definition of what an MAU actually is. Let’s just look at the word salad used to define it now, with bold text added for emphasis.

“Monthly Active User (‘MAU’) Definition: We monitor MAUs as a key measure of the overall size of our user base. MAUs are the number of individuals who accessed a particular game in a given month. We calculate average MAUs in a period by adding the total number of MAUs in each of the months in a given period and dividing that total by the number of months in the period. An individual who accesses two of our games would be counted as two users. In addition, due to technical limitations, for Activision and King, an individual who accesses the same game on two platforms or devices in the relevant period would be counted as two users. For Blizzard, an individual who accesses the same game on two platforms or devices in the relevant period would generally be counted as a single user. In certain instances, we rely on third parties to publish our games. In these instances, MAU data is based on information provided to us by those third parties, or, if final data is not available, reasonable estimates of MAUs for these third-party published games.”[Emphasis ours]

In other words, some of Activision’s divisions conveniently count users multiple times, while Blizzard “generally” doesn’t. But what does “generally” actually mean in this context? What are the exceptions? We have no idea. How exactly does Blizzard check its third-party reporting from its overseas partners? Again, we don’t know. What constitutes a “reasonable estimate” in this context? You get the pattern.

I’m not saying Blizzard is absolutely counting one person four times for logging into Battle.net, HearthstoneHeroes of the Storm, and Warcraft III: Reforged for a matter of seconds in each place. I’m stating as fact that it is legally possible thanks to waffle words, and based on the bolded text it actually seems likely. So long as nothing being stated is an actual falsehood, the reports can say whatever they want. So that’s the first thing to keep in mind, that all of this is worth being skeptical about… especially when you consider whom these reports are for.

Trouble double.

It’s all still a pony show

In part of a video essay on The Matrix, Bob Chipman noted that the most powerful message a story can impart are seven little words: You are already doing the right thing. But it’s not just stories because apparently investors like to hear the exact same thing when they listen to these reports.

At the end of the day, that is what these reports are designed to do. You know how you put a huge chunk of money into this company? Good news! You are already doing the right thing. The company did great. We’re going to throw a lot of numbers at you and frame them in the most positive way possible, and as you’re someone who cares about video games only insofar as they make you more money due to your investment, that’s what you want to hear!

I’m sure that there are, vaguely, some investors who do actually care about games beyond the element of “does it make money or not.” But investor calls aren’t about that. Investor calls are marketing toward the converted, convincing the investors (and their brokers) that these things are making money and will continue making more money. They care about player satisfaction only insofar as it leads to more money, expansion quality only insofar as it leads to more money, and the list goes on.

Why are questions from the investment firms on these calls frequently kind of dumb? Because even if the investors do care about video games, they cannot possibly follow every aspect of their development and probably wouldn’t care even if they did. They care about what’s making money and how it’s going to make more money in the future. Full stop.

This gets especially harmful if, say, you’re a fan of the company’s games. If you read a report that talks about how well things are going with enthusiastic vigor, you’re more likely to conclude that it’s true based on confirmation bias alone. That must mean that all of the game design is going well and is well-liked by the players! Never mind that there are protests and pushback from actual players or the fact that these reports are just shy of actual lies top to bottom; that’s all circumstantial!

Congratulations, you have now been swindled by marketing that isn’t even targeted at you. In many circles, this is known as being a “mark.”

It's all riding rats.

Don’t look at the numbers; look at the comparison

So aside from being much, much more cynical, what can you actually do to understand these reports more accurately? Well, for one thing, you can stop looking at numbers as meaning anything on their own because they kind of don’t. Revenue at $300 million or $500 million or just $50 and a pack of Juicy Fruit is, by itself, totally irrelevant.

What matters more is gains or loss compared to the previous quarter and most especially the same quarter the previous year. That’s what investors care more about, and frankly, that’s what you should be paying more attention to than anything else, not individual numbers or claimed gains or “beating expectations” (when they set those expectations themselves) or anything else.

If the past year for a game has seen the release of a major patch an an expansion but revenues are up only a paltry 5% year-over-year, for example, that is a bad sign. If revenues are down 5% from last quarter despite a major release, that’s a bad sign. There was a lot of additional effort put in, but no growth was seen. By contrast, if the past quarter saw no major release or just a small patch but revenue remains consistent? That’s a really good sign because there was no additional investment but also no dropoff.

Placing reports within their context tells a much more interesting story. In many cases, investment reports are put out with an eye toward divorcing them from context, but that’s why the work of doing comparisons is so important. And again, the reports will often try to obscure this information as much as possible if it looks bad, trying to compare something from two quarters back if it looks convincingly like growth when framed properly.

So don’t fall for it. If you want to follow financial information and use it as a rough barometer of a game’s health, follow it smartly. Be cynical, be analytical, and know what matters and what’s just pure marketing. It beats being a mark for advertising that’s not even aimed at you.

Sometimes you know exactly what’s going on with the MMO genre, and sometimes all you have are Vague Patch Notes informing you that something, somewhere, has probably been changed. Senior Reporter Eliot Lefebvre enjoys analyzing these sorts of notes and also vague elements of the genre as a whole. The potency of this analysis may be adjusted under certain circumstances.

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MolleaFauss

I just commented on the 5 years in, but this is the kind of articoles that makes MOP shine.
Keep the torch burning.

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Armsbend

Something also to consider when analysts ask banal questions. They aren’t asking for us and even themselves. Big fund like Fidelity or Vanguard have billions upon billions and some of their large investors wouldn’t know a video game from the grandson they never loved. So when they have a 5% stake in a gaming company they might ask seemingly dumb questions for those guys – the guys that might ask, “You put my $100M in a toy company? Why?”

Article seems spot on though Eliot.

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McGuffn

Allow me to summarize:
Did they say something nice? Everything’s going great! Get a divorce lawyer because you won’t need affection with all the fun you’ll be having in game!
Did they not say something nice? Everything’s on fire!

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wratts

Good advice as a whole. I will say, if you really want to get into investor perspective you have to pay attention to the forward projection & growth estimates information the company provides. Most of a quarterly report is history (in fact, I worked for one company whose CEO renamed the Accounting department to the History department to reemphasize that point, much to the irritation of the accountants and amusement of everyone else). As Eliot says, its validation of the investor decision to stay invested 3-6 months ago.

What really drives stock prices, and therefore investor interest, is an assessment of what you’re going to do relative to the industry over the next 3-6 months. Validating my last decision instills confidence, but you still need to persuade me that I’m better off staying invested in Activision-Blizzard vs. EA, or that it’s not worth at least reallocating my investment split among the industry players.

Obviously future projections are even more subject to marketing fluff, but I would say that’s where player and investor interests somewhat align. We’re all more interested in what’s coming up than what’s already passed.

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Jon Wax

I made enough money off take two to cover the cost of most of the games I bought over the last 20 years. That was some good meta