Focus: Vivendi Universal Games president Phil O'Neil

Sometimes, being big is no guarantee of success - a tough lesson that Vivendi Universal Games, the game publishing division of one of the largest media empires in the world, has learned over the past few years. Weak financial results and ongoing uncertainty over the future of the business as a whole made it a difficult time for VU Games - despite the fact that the firm enjoyed relationships with some of the best-regarded developers in the world, including Valve and Blizzard.

The last year has seen major changes for the company, driven by new CEO Bruce Hack - changes which have put the firm back on track to becoming one of the best publishers in the industry, according to Vivendi Universal Games president Phil O'Neil, who sat down with Rob Fahey to talk about what the future holds for the company behind World of Warcraft, Scarface, 50 Cent and FEAR, to name but four titles from its impressive current portfolio.

Phil O'Neil: Certainly. We're very very bullish about where Vivendi-Universal Games is. As you're well aware, the past couple of years have been very trying from a financial standpoint, our operating performance has not been what we hoped it would be. We've lost significant amounts of money in '03 and '04. We brought in a brand new management team in '04, run by a new CEO, Bruce Hack, and I think we spent the bulk of '04 in what we're calling a recovery period.

I think the results of that recovery are now really moving into what in '05 can be characterised as a growth year - and I would tell you that the real engine behind that growth is Blizzard Entertainment and World of Warcraft.

We view Vivendi-Universal Games as being now corrected, and moving forward in a very very positive way - and from a financial standpoint, we are now projecting, publicly, to not only be better than break even but to actually make money, which after two years of not making money is going to be a terrific thing.

We're thrilled with our line-up of products - we have some of the most venerable brands out there, including World of Warcraft from Blizzard Entertainment - but also we think we have some new, exciting stuff with 50 Cent, Scarface and some of the other games we're doing, including a PC game called FEAR.

First and foremost, Blizzard Entertainment's World of Warcraft has revolutionised the online gaming space. It has dwarfed all of our expectations for what online can do. As of the end of April, we had one and a half million registered subscribers worldwide [Editor's Note: This figure now stands at over two million] - that's dwarfed any expectation, externally or internally, so we're absolutely thrilled and gratified.

That's been a huge change. That's been a different business model to our traditional business; as you know, that's a subscription business, and so the dynamic from a maths standpoint is very simple - one and a half million people, paying fifteen dollars a month for twelve months a year, begins to be what we call real money!

So that's been helpful. Candidly, I think a strategy we put into place a couple of years ago, which because of the development times in this business, the things we did a couple of years ago even though we were losing money in that given year, really are now paying dividends - and I would say that's what we call fewer, better, bigger.

As you saw on the E3 show floor, we had six titles out there. Two years ago we had twenty-two. So as we've cleaned up our portfolio, that's enabled us to really focus on our products and doing the right offerings.

I'd say the third thing is really cost containment. As you know, we've done a series of restructurings over the past couple of years; we're now at what I consider to be the appropriate size for the company. We spun off our kids education business, we shut down our productivity businesses.

So I would say that those are the big three, and the only other thing that I would say is a major change from a year ago is that we had no internal development capability on console. We recognised that as a weakness for us, so as you know, in the past year we have bought Radical Entertainment out of Vancouver, and that's the developer behind Simpsons Hit and Run. It's also the developer that's now doing Crash for us, doing Scarface for us and doing The Incredible Hulk. Now Blizzard Entertainment has announced that they've purchased Swingin' Ape, which is a developer that's doing Starcraft Ghost for us - which as you saw, was picked as the action game of the year at E3.

We set out an objective, in our early '04 when we did a diagnostic assessment of where the company's strengths and weaknesses were, of understanding that to be successful - the really successful game publishers have internal development capability. We had none.

As a side-note, I'd also add that up until 2001, the group was not even in the videogame business - so recognising that we had a very strong PC heritage, we'd been a PC company for years, now suddenly we entered into the videogame business and quite honestly had a couple of stumbles and scrapes on our process of getting into the videogame business. But I think we've learned a lot, and one of the things we've learned is that you need to have internal console development capability.

We've addressed that need, and we'll continue to look at, where it makes sense, acquiring other developers to give us additional console capacity.

Well, two things. One is that I would politely disagree with your assessment - I'm not sure Blizzard is the jewel in the crown. I would suggest that it's the crown. Blizzard is the crown; we have some nice rings and bracelets and other pieces of jewellery inherent in the company, but Blizzard, without a doubt, from a commercial standpoint and a creative standpoint, is the crown of Vivendi-Universal Games and from a go-forward standpoint, will clearly be the engine that drives Vivendi-Universal Games' success.

When Vivendi-Universal announced our latest corporate results, the Wall Street Journal headline mentioned the videogame sector as improving; we had improved results this year, in Q1 we were up 47 per cent versus Q1 of '04. Our revenues were $150 million, which is about 113 million Euro.

In terms of your question about other developers, obviously we just recently purchased a couple. We're very strong believers in Radical, otherwise we would not have done the acquisition. We feel equally strongly about Swingin' Ape. So we will continue to look selectively at developers that we think can do the types of things we need done here.

I think what's happening, again going back to my earlier statement, is that we'll do fewer, better and bigger titles. We're doing less things, we're much more rigorous on what we greenlight. We're also doing what I think is an important strategy, mitigating risk to some degree - when you look at our portfolio, and you see Scarface, there you're taking advantage of an IP that has a huge reach and a huge following from the movie, going back to 1983. Very iconic film, great.

You then move to 50 Cent, which is the biggest recording artist in the world. As you're aware, 50 Cent was recently in a USA Today feature as one of the games that people will probably play in the future... We think this sort of fusion of bringing music and games together, we're uniquely positioned. We own the largest music company in the world, Universal Music Group, through our parent company, Vivendi-Universal.

So I think, to answer your question about external development... We'll use external developers in a mix of business. We'll also assign projects to internal developers, so we'll have a healthy mix. We won't be 100 per cent one way, nor will we be 100 per cent the other way. We were historically 100 per cent all external, and as you know, there's a financial benefit to bringing things internal as opposed to external.

I think we understand our business model much better than we did a couple of years ago, and I think our financial results reflect that.

Again, I do think there's an area that we not only specialise in, but I would argue that we are better than anyone else in the world at, and that will bear me out - which is MMOs. Massively multiplayer online, as you know, has been seen as the next big wave in the videogame space, and most of the growth expectations are that online will be the next fuel, the next growth engine for that.

With Blizzard Entertainment's World of Warcraft we have, in essence, taken that to a whole new level, and dwarfed any industry analyst's expectations about what that could be. We've got 1.5 million subscribers as of the end of April, as I mentioned earlier, paying $15 a month over the course of a year, that begins to add up to what we refer to as real money. We think that's a core, core speciality.

This may be helpful; when Vivendi thinks about our mission and what we want to be, we want to be the best games company in the world. We have a secret to tell you - the best games company in the world is the company that makes the best games, and I think we're already there with Blizzard. I don't know that anyone would argue that Blizzard makes the best games in the world. What we need to do is have the rest of our portfolio be as equally reflective of that quality as we can.

So I think we're beginning to do that - I think Radical is a very good developer, Swingin' Ape is a very good developer. We also work, as you know, externally with other developers that are excellent. Rational Games out of Boston is an example, Eurocom... So we have the flexibility to pick and choose, and work with the truly great developers to create truly great games.

I can absolutely tell you this about Valve - we have a great deal of respect. I personally have a great deal of respect for Valve. I think their products speak for themselves. Half-Life 2 was an incredible achievement, in terms of a great game. You're right, we have actually settled our dispute very very amicably. We will be the publisher and distributor of Valve products through August 31st of '05, at which point in time we will no longer have an ongoing relationship.

Valve, to my knowledge, has not announced that they plan to do - all I can say is that I wish them well. We've enjoyed the relationship, we're thrilled with the success of Half-Life 2, and we wish them all the best.

You know, I don't know what the figures are on Steam. You'd have to ask someone at Valve what those figures are or aren't. We think that there was a lot of buoyancy on Half-Life 2 at retail - obviously we sold a couple of million units of the product worldwide. So Steam is really something that you need to talk to the Valve people about.

We think that the skew will be a couple of different demos. I think obviously you have a base of people that grew up with that film and absolutely love the film - as I said earlier, it's an iconic, cinematic tour de force that is probably... Well, I'm a little bit older, I'm 46, but as I watch MTV Cribs the resonance of that character within the hip-hop community or the rap community is unbelievable. They all kind of look up to Tony Montana. So I think that's a demographic.

In terms of young kids, that's obviously not going to be a demographic that we're shooting for - no pun intended - it's clearly an adult game. There will be a fair degree of violence in it; as somebody mentioned to me earlier, it's sort of this new genre called gritty games. Gritty crime games.

So we think that it will appeal to a number of people who are both old fans of Tony Montana, and perhaps new fans of Tony Montana. The convergence of music within that game as well... There'll be a lot of new exciting things about music that we haven't talked about yet, that will be in the game, so I think you'll also have a very big fanbase within the musical community for the game.

We're pitching it, as you would think, from a responsible standpoint - to everyone over the age of 17 in North America and across the world.

It's been a strategic decision as follows; one is that there are clearly financial benefits to owning your own IP and to exploiting it successfully, and obviously with Blizzard Entertainment - with Warcraft, Starcraft, Diablo... We own Crash, as you know, which is celebrating its ten year anniversary, it's sold over 35 million units worldwide. Spyro has sold over 22 million units worldwide. So we're still very much in those franchises. We'll continue to reinvigorate those franchises. I think that's important.

In terms of licensed IP, quite honestly when the company first started in the videogame business we probably overextended ourselves - we were doing too much on licensed IP. We have throttled back to the degree that we now look at IP as important if it's compelling - and I think clearly Scarface is compelling, 50 Cent is incredibly compelling - so the right IP done correctly can be very interesting, but we like a balance. You don't want to have everything owned IP.

I would add that creating new IP is very challenging. I would suggest that not too many publishers have unlocked that key. If you look at the top sellers across any real platform, it's a lot of sequels, it's a lot of expansion packs, it's the next Madden iteration, it's the next NBA iteration. So it's tough to break new IP in today's environment.

Absolutely. Arguably, 50 Cent - while a person - is not necessarily licensed IP in the traditional sense. It's actually an ability to create a franchise, and that's probably the big determination which is the ability to take an IP and make it into a franchise as opposed to a one-off. So we're hopeful that candidly, both Scarface and 50, while not "original" IP, become sustainable franchise brands for us.

We see a Scarface 2, a Scarface 3, a Scarface 4, and consecutive iterations of that product as being a really important component of what we're trying to do here.

50 Cent is going to be probably the most dynamic product in the games business, I predict, in the next 12 to 24 months. The reason for that is that the game itself, firstly, is an incredibly rich story - it's written by Terry Winter, who's also writing the screenplay to 50's movie. He's filming a movie in Toronto as we speak. He's also an Emmy Award winning screenwriter from The Sopranos and executive producer; so you see a level of story and depth of gameplay resident to this business that I think is changing dramatically. It's not just about shooting things up and violence; there's really a very deep plotline, it's almost becoming theatrical in nature.

The game itself will include his first album, his second album, the soundtrack, exclusive mixes and new beats that he's doing just for this game, and then three exclusive songs that will be available only in the game. So it's really almost like a comprehensive box set of all things 50 - all of his music, his videos... There's 12 of his videos. I mean the amount of stuff that will be in this, and the fact that then there's a - if you'll excuse my French - a kick-ass game, is to us an incredible opportunity. So we see very big things for 50 Cent.

We're not in a position to do a launch title on Xbox 360. What we have done - it's part of the reason we moved Scarface from '05 to '06 - is that we have added a 360 SKU, so Scarface will be our first title on 360. We're also doing a PSP SKU with 50 Cent. It won't ship this year, it'll ship probably Q1 of '06.

In terms of our commitment as a company to the next gen, I would say that we're still very cognisant that there's a great amount of business to be done on current gen. We agree with Sony's assessment - in Europe I think they're saying that their hardware business is through about 60 per cent of the product life cycle, software is about 50 per cent. So clearly in Europe there's a big appetite remaining for PS2. We see similar numbers coming out of the US, especially as you look at the Greatest Hits program.

In the eagerness to talk about console, we may be a bit contrarian - we still think there's still a very vibrant market in the PC business, and we're big believers in PC. FEAR is a PC title, we've released Empire Earth 2 this year, which is a PC title. SWAT 4 is a PC title. All of Blizzard's products, by definition, currently have been PC products. World of Warcraft as an example is a PC product fundamentally and has sold millions of units worldwide. So we will continue to focus on current-gen, the PC platform - which may be different from what a lot of publishers are talking about, because they have reason to rush to the next-gen and we think that's great, but we think there's a lot of business to be done on current-gen and PC.

Thank you.