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Rod Cousens on Codies' Global Transformation

Coming off its best year ever in which sales were up 38%, Codemasters is very confident in its future. We spoke with CEO Rod Cousens about targeting the U.S. market, the online space, Clive Barker, strategic acquisitions, the console war and more.

GameDaily BIZ: Codemasters just had its most successful year in its 22-year history. What's been at the heart of this success?

Rod Cousens: I joined the company two and a half years ago, and while I regard it as a hotbed of development and creative talent in the middle of England, where a company was a very U.K.-centric company, Codemasters began to adapt and modify its product strategy to one which has more of a global appeal. So basically what's starting to happen now is the investment in product with a more global appeal. We published three titles recently that were next-generation and were targeted at that, and we've been fortunate enough to have a pretty good impact so the revenues from the U.S. have grown from sub 10 percent to about 40 percent. Clearly, we're keen to build on that and align ourselves from a financial perspective with the typical profile of a global publishing company where the bulk of the revenues are derived from the U.S. market.

So that's one of the big things. Also, taking a product where we've got a great skill set, such as racing, and modifying the design so there's a greater appeal to the U.S. consumer. That's manifested itself in something like DiRT where we sold more of that title in the U.S. than the combined cumulative total of the prior seven versions. It's aspects like that, plus expanding our global distribution in other territories – obviously we've built a relationship with Warner Bros. to do our physical ship and dispatch in the U.S.

And as you know, product development can take at least two years, so what we started two and a half years ago is now flowing through and is a pipeline, which bodes well for the future.

BIZ:
Is Codemasters looking to bring U.S. revenues up to 50 percent, even with other territories, or do you want it to become an even larger portion of the business?

RC:
Ideally, we'd want it to be 50/50. We do have, from an American point of view, some obscurities in our product lineup... we're the market leaders in cricket but we really only sell that in England and Australia. Our biggest competitor [in that space] is obviously Electronic Arts, but it's one of the few spaces in which we can say we beat them. We haven't given up on cricket because we're in a position of market leadership. Because of obscurities like that I would anticipate the revenue profile to be equally divided between North America and Europe.

BIZ: And in terms of the Asian market, obviously Western publishers have historically had more difficulty penetrating the market and creating games that are tailored to the Asian gamers' tastes, but what is Codemasters' approach?

RC:
For the last two years it's been one of a licensing approach. So we've taken some content such as DiRT and we've licensed to certain Japanese, Chinese and Korean companies, and we've built relationships with companies such as Shanda in China. We've also worked with a number of the Japanese publishers over the years and some of the games like rally games and racing games do quite well... so we'll be shipping DiRT some time in the beginning of 2008 and we've got great hope for it in the Japanese market.

BIZ:
Concerning Codemasters' online business, the company recently made some of its games free to play, and that would seem to align with some of the business models in Asia where the games are micro-transaction supported. What are your thoughts on that?

RC:
First of all, depending on the product, we've taken a different approach in various areas. We've also shipped Lord of the Rings Online in Europe and we've done particularly well in the volume of both subscriptions and boxed good sales in the European market and it's exceeded that in the U.S. helped by our relationship with Midway... and that's a straightforward subscription model and we'll continue to do that. As for our approach to the online market, we've built a significant infrastructure in Europe, which basically enables us to punch above our weight.

Certainly a number of the more significant U.S. publishers haven't got the server farms and the infrastructure to support local languages 24/7 (which is an issue in the European market). The way we did that was to take a risk averse approach initially by going in and picking up products like for the Korean market that aren't necessarily best suited for Western tastes and then putting them through a system which we've gradually built... and as we played through the whole Korean output we've turned them into free-to-play games with micro-transactions and there's been a significant uplift in obviously the revenue base we're picking up out of micro-transactions and also the take-up of would-be subscribers.

So it was initially a risk averse strategy but obviously for major releases we'll be looking at the subscription-based model in key European territories because it supports it at the moment. But as you know based on the experiences coming out of the Asian market, [online] is an evolving model that's changed dramatically over the years, so we're still watching it closely.

BIZ: When evaluating Codemasters' own IP, if you look at something like Clive Barker's Jericho, the reviews just weren't very good. Clive Barker is obviously a hugely important figure in the horror genre, and attaching his name to a poorly received product couldn't have been a good thing for Codemasters. What's your take?

RC:
I think that's a fair observation. We see it as a category that we want to continue to support, and we believe we will build a longer term relationship with Clive Barker resulting in other franchises that we create working off his ideas. Because that was our first foray into that market, I would give us a tick for good effort, but we have more work to do.

I'm also mindful that certain products like the first two Grand Theft Autos didn't do so well and then exploded on the third. That's obviously a different analogy, but what I'm saying to you is that we're committed to that genre of product and as we get more sophisticated development and experience we'll continue to improve.

BIZ:
When I spoke with Codemasters VP of Marketing Charles Bellfield back at E3, he indicated that Clive Barker was very, very much involved – almost too much – in the whole game development process.

While Clive is an author and a filmmaker he might not know what really makes a good game. Do you think that maybe hurt the title somewhat?

RC:
I think we have a great relationship with Clive Barker, and the fact that he's as passionate about his ideas and designs – and that they should be translated into a new form of art as far as he's concerned, which is interact ive entertainment – is something that we would definitely indulge.

But clearly, we have a role to play based on hopefully our knowledge and experience within the games business that he can also learn from... as he continues to evolve and get better. I would say, though, that if it's a good initial effort, both sides will learn from the other and we'll just continue to get better.

To put that in another context, very often people license an IP and then have no further involvement and criticize it thereafter. In fact, he has gotten involved and he's very enthusiastic... it's akin to a movie star being used by a motion picture company to promote the studio, and we certainly haven't had to contain him.

So I don't want to constrain that; I'd like to harness it and figure out how we all work together and ultimately get an awesome product out of it.

BIZ:
The big investments that Codemasters has gotten from Balderton Capital and Goldman Sachs have obviously helped the company, but what is the strategy to best use that money going forward? Are you looking to acquire more internal development or to open up new studios specifically in the U.S. to bolster the U.S.-centric approach?

RC:
It's certainly in product development. The weight of the investment will be given to the production of content to achieve revenue growth over the years to come. And yes, we recognize the fact that the market that we have it all to do in is the U.S.

Everything that I've looked at says that in order to give yourself the best chance of success in the U.S. marketplace is to work with U.S. developers creating U.S. content for the consumer. No one knows that better than the people in the marketplace. I don't believe you can simply dictate from external sources and say you've arrived.

I'm never afraid to admit I'm always learning – I never want to stop learning – so our approach would be to look at strategic investments where they arrive. But the main thing is to look for high quality, very creative development studios, and I want to be a magnet for emerging talent; I want to be a talent friendly company and hopefully we're extremely responsive.

If you drew analogies to other forms of entertainment over the recent years you'd look at Miramax, New Line, Pixar, etc. and one day I'd like to have a conversation with you to say that we've emulated some of the great things that they've done in the form of video games.

BIZ:
So would you say that Codemasters is actively on the lookout for strategic acquisitions right now or how would you classify it?

RC:
I would say that we're on the lookout for talent, be that in the form of strategic acquisitions or the creation of development studios or just simply being an outlet for talented developers in the U.S. who want to come to a company that is showing a commitment to create original IP and to be innovative in its output, or innovation as you guys say over there. [laughs] Because the catalog is such that it's geared towards a European audience we haven't got a whole lot of series and sequels that we're bound by.

Some would argue that if video games are not to face the threat that the music industry and others have faced by stagnating over the years, you have to continue to innovate. I think we can be one of the most innovative companies, but certainly the fastest growing company in the video game space today in what's heralded to be the fastest growing industry over the next five to 10 years because everyone assumes this cycle is a lot longer than other cycles. So if we can achieve any of that I think that's great and the development talent will be enthused by that and hopefully will want to work with us.

BIZ:
Speaking of the cycles, how has the makeup of the current console war had an impact on Codemasters? What's your take on how this is evolving?

Certainly a year ago nobody would have expected the Wii to have dominated the way it has and for the PS3 to struggle initially.

RC:
The global event that's been marked as a surprise for most people is the huge success that Nintendo's achieved in every territory... The challenge that third-party software publishers face in supporting that market is that it's clearly a market dominated by the first party and always has been.

If you look back at the Nintendo track record over the last 20-25 years, it's a typical situation where Nintendo will take 60-70 percent of the market and third parties will compete for the remaining 40 percent. One of the challenges is: will that result in a sudden flood of software by third parties onto a platform that's currently seen as the Holy Grail, and as a consequence there's a lot of wastage?

So I think you have to have a pretty defined product strategy, which is platform specific... but certainly on a global basis Nintendo is the only platform in each of the markets to take up a position of leadership. In other markets you've got fragmentation because obviously the PS3 is trailing in the North American market. It's yet to have the killer application that it needs... it'll be interesting to see if they can catch up or ramp up aggressively. I'm sure they don't need me to point that out or tell them how to do it.

And in Europe it's a completely different situation, because this will be the third Christmas for Microsoft that it's been in the market over here and it's yet to establish itself as a clear leader in certain European territories. It's very strong in the Anglo-speaking territories such as the United Kingdom, Scandinavian markets, Dutch markets, etc.

But they've got a lot of work to do in France, Germany, Spain and some other territories. Also, Sony's distribution, because of the success of PlayStation and PS2, puts it in a very strong position and the PS3 is showing signs of an uplift in the market.

I also noticed in Japan in the last month the PS3 sold pretty well against the Wii. So I think at this stage of the cycle and if this is a 10-year cycle... I think it's all [still] to play for.

And I think the North American market for Sony is clearly their biggest challenge. I think they have a long way to go in both the Japanese and European markets and I certainly wouldn't write them off. And in terms of Microsoft, they'll be aware of their territorial challenges with software content, because in certain markets, such as Germany, which is the biggest PC market in Europe, they can't ship Halo 3 and that has an impact on them – and so do all these variables that come to bear that have to be worked out.

I think it's going to be interesting, but to be honest with you, as a content creator I'm platform agnostic. For me, if it's a third, a third, a third, it's a great position to be in because it means we can negotiate with the hardware vendors rather than having one who has a dominant market share where your ability to negotiate is pretty limited

BIZ: I found it pretty humorous when Peter Moore, shortly after leaving Xbox to head up EA Sports, was suddenly a proponent of a third, a third, a third too... RC: I agree. It's amazing what career moves can do. But we all have our jobs to do and he's done a good job. And with his background in sports and obviously in technology, it seems like a great appointment for EA. But if you try to be the impartial industry observer, you would want equal bidding between the hardware vendors. It'll be good for the consumers, [and] it'll be good for the publishers and developers because it gives a market of the scale that you can support.

It's always very difficult to justify development with a 20 percent market share position, but if it's a third, a third, a third and you're the IP holder (which is a value that can influence hardware success or failure) you're in a pretty good position.

So I find it interesting this time around because if you look at the last two platform cycles, which were dominated by Sony, this is a different situation. I think what we have to do as publishers is differentiate our content by platform, even if it can be the same IP. Nintendo is slightly different because you have got the 'Blue Ocean' and [software like] Brain Training, which is very successful over here.

You get some obscure titles that do incredibly well and you also have some other vagaries between the market with Singstar for PS2 in Europe, which has been huge, particularly in Germany, and has not been that successful in the U.S. and Guitar Hero, which has been wondrous for Activision in the U.S., but it's going to be interesting to see if it does better this time around in Europe.

Hopefully, the marketing and different content they're attaching to it this time will give them a lift. They certainly didn't have the same take up in the European market as they did in the states. So it's these subtleties that start to emerge, and when you as a developer or publisher target the global market, you've got all these things to take into consideration.

BIZ:
You touched on this a bit already, but in terms of the Nintendo phenomenon of first-party titles dominating, it seems third-party publishers are trying but not making much headway. Do you think over the long-term that the smaller revenues for third parties will actually hurt the Wii as more and more publishers possibly change their approach and pull back from what they're willing to put on the Wii?

RC:
That's my view, because if you look at the harsh realities of the return on investment model and when you've got a high failure rate amongst a significant uplift in the output, then clearly you start to back off. If you look at the DS in Europe, there's 240 DS titles launched in October, November and December, and maybe 30 will sell.

When you're building that wastage or obsolescence into your equation it's a difficult thing. I think the short-term answer is you have to be quite clear that it's not a simple exercise that "I own this IP so I'm rolling it out across three or four platforms."

You have to ask 'Will it work on that particular platform, or do I get creative?' – Cooking Mamas and stuff like this. What staggers all – and I would have argued against this years ago – is how many pony games or horse games have sold on Wii and DS; certainly in Europe it's been a significant volume I think. SCi/Eidos did 700,000 Pony Friends over here. None of us probably would have put that in development.
 
I think you have to go and take a long, hard look at it and figure out the content that works and recognize that the business model operated by the first party, which hasn't changed in all that time... If you go back to the Nintendo model when it first started you had a five-product license and so one of the ways in which software publishers dealt with that was to go and buy a competitor so you could increase your output to 10. It was a way of managing product outflow both from a first- and third-party perspective, but it was always done on the basis that even if you bought up another five-product license you still knew the available share to you was something on the order of 40 percent and that the product flow, which was cartridge-based at the time, seemed to be managed in a way so that's how it folded out. Well, I'm not so sure that the current wave is any different, because I hear there's manufacturing shortages, and too much software... and these are all consistent characteristics. Software publishers have to look at that very carefully and determine their strategy, and I do agree with what you just said. That's what I suspect will happen.

Maybe I'm just a grumpy old man [chuckles], but I think this cycle has got a long way to go and it's certainly not over. Anyone writing off Sony and Microsoft do so at their peril. I could give you an argument that says there's going to be a Wii 2 pretty quickly because [Nintendo would need one] in order to sustain momentum over a 10-year period. And what type of software would it have then? Because right now it isn't driven by technological supremacy or power. I wonder if the idea of opening up a whole new audience to 60-year-olds looking to make sure their brain cells don't die off is a sustainable form of entertainment. Maybe they got it right because we are all an aging population in Western markets, but I somehow think as a form of entertainment that won't be the case.

BIZ:

It's been a pleasure talking with you. Thanks.