How digitalization impacts a truly digital industry: The case

of Ubisoft

It was mid-May 2014, only a few days before the 2013 financial results of Ubisoft were
announced, when Jean-Baptiste Desmaizières, the Trade Marketing Manager and Raphael
Rodriguez, the Digital Sales Manager discussed some of the latest developments in the
gaming industry and their impact on Ubisoft. While the sharp drop in sales of almost 20%
was a bitter pill to swallow, the fact that the profit margin could be maintained
approximately at last year’s level was a silver lining. It was also clear that one of the main
drivers for this development was the ever greater digitalization of the industry which was
both impacting overall sales figures and offering new opportunities. Digitalization in the
gaming industry mainly referred to the shift from games stored on DVD or Blu-ray to
downloading or streaming. On the one hand, digitalization was proving to be an inescapable
trend and a way for Ubisoft to diversify its line-up. However, at the same time, it was quite
unsure whether all the parties involved: customers, retailers and console manufacturers,
were ready for such a change. How would things develop? One immediate decision that
Jean-Baptiste and Raphael were considering was to offer one of Ubisoft’s blockbuster games
like Assassin's Creed exclusively for downloading. With the next version of Assassin's Creed
already undergoing development, the question of the right distribution strategy became a
pressing one.

THE BACKGROUND OF UBISOFT

Ubisoft fitted into France’s corporate tradition of successful family businesses. The company
was founded in 1986 when Michel Guillemot and his four brothers officially launched a
import/export video game business. Starting from distribution only, the fledgling firm quickly
moved towards publishing and thus developed its own game creation structure. Its first
massive success was Rayman in 1995. As years went by, Ubisoft worked on consolidating its
competitive position by building franchises: Beyond Good and Evils in 2003, The Raving
Rabbids in 2006 (as an extension of Rayman), Assassin’s Creed in 2007, Just Dance in 2009.
A franchise is a core game turned into a range to include sequel games, extensions on other
platforms, cartoons, movies etc. The intellectual property originally belongs to the
developer/publisher who will license the game to launch the marketing of diversified items
on the game theme. In this sense, game franchises can be considered brands.
At the end of 2013, The Rabbids had sold 14 million copies worldwide, Assassin’s Creed 76
million, all products included and Just Dance 49 million. These three licenses have become
cultural phenomena, known by millions and strongly associated with the name Ubisoft.

This case study was written in November 2014 by Professor Martin Kupp, Chloé Rabbione and
Clémence Leconte. Sole responsibility for the content rests with the authors. It is intended to be used
as the basis for class discussion rather than to illustrate either effective or ineffective handling of a
management situation.
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The 1990s and 2000s were also the years of internationalization. First, the firm opened
distribution subsidiaries in neighboring countries like the United Kingdom, Germany,
Switzerland and broadened its studio network by setting up its first studio abroad in
Bucharest, Roumania. In the following years, the company expanded to further regions: after
Spain and Italy, a new distribution center was opened in Australia in 1996; others then
followed in China, Denmark, South Korea, Austria and many more countries. Thanks to this
expansion strategy, in 2007 Ubisoft became the third largest independent publisher in the
world (excluding Japan), third in Europe and third in North America; a rank the company still
held in early 2014.

At the beginning of 2014, the regional split of turnover was pretty stable: half the revenue
was generated in North America; Europe came second and was mainly driven by the three
core markets: France, UK and Germany; the Asia-Pacific share, in spite of a strong growth in
sales in the region, remained low (4% of turnover for the 2013-2014 tax year)1. In total, the
company distributed its games in 55 countries and was operating in 28 of them.

LATEST DEVELOPMENTS AREAS AND CHALLENGES

In 2014, one of Ubisoft’s challenges has been to get closer to the consumer. In 2002, it had
launched its first international online gaming portal: Ubi.com and in 2009, a major step
forward came with the launch of Uplay. This was a platform used for digital distribution,
online gaming and multi-player interaction. Its main purpose (at first) was to gain
independence from powerful online retailers, such as Steam and to increase margins.
However, with the rise of customer data analysis, the Uplay platform also became a valuable
way of gaining customer insight. In 2012, Uplay boasted 50 million players over 10 different
platforms. Uplay could be seen as a club, a universe which enabled interaction with the
“Ubisoft community”. As such, it was an early response to the rising demand of social
gaming.

Another development area was the progressive diversification of activities. Uplay’s launch
was a kind of downstream move into the retail channel. Another noticeable move was the
entry into the movie industry. Ubisoft Motion Picture, founded in 2011, started producing
movies and TV series (such as the Raving Rabbids). The next big planned release was the
adaptation of Assassin’s Creed in 2015. Ubisoft also turned its games’ most popular
characters into comic or attraction park heroes. The Raving Rabbids was the subject of a few
comic books for children/young adults and of the “Time Machine” attraction at the
Futuroscope park in Poitiers, France.

Regarding the studios, Ubisoft had gambled on acquisitions and international expansion. The
company developed its own production structures in Bucharest, Shanghai, Montreal,
Casablanca, Barcelona and Chengdu, among others. Thanks to this large network, Ubisoft
became the second biggest video games producer in the world. In 2013, the company
counted 29 studios in 19 different countries.

1
Source : Ubisoftgroup.com ; Annual Report
THE DEVELOPMENT OF THE VIDEO GAME INDUSTRY

The video game industry emerged in the 1970s when the first video game console was
launched. In 1972 Atari, the first company specialized in video games, was founded, while in
1979 the first independent publisher was created: Activision.

Since its early days, the video game industry has regularly released a new generation of
console approximately every 7 or 8 years. That is why this business is highly cyclical: every
console launch being followed by a rise in sales, with sales fading at the end of each
generation. Console builders faced harsh competition; their products being quite similar.
This competition was referred to as the “console war”. The expression took on its full
meaning in the 1990s with the competition between Nintendo and Sega and was illustrated
by Sega’s famous advertising slogan “Genesis does what Nintendon’t”.

Big changes happened in the 2000s. In 2006, Nintendo launched the Wii, a console targeted
at the whole family, with highly intuitive games everybody could play using the Wii mote, a
motion-based controller. This console was affordable due to to its simple technology.
Meanwhile, new technologies had a strong influence on the video game industry. With
Internet connection, online gaming became increasingly common. It started with PC games
and became widespread with the 7th generation of console. Thus, on Microsoft’s Xbox 360
released in 2005 and Sony’s PS3 released in 2006, most games also offered an online
multiplayer mode.

The Wii U was released in 2013 and the PS4 and Xbox One (known as the 8th generation)
both in November 2014. These products had very similar technology and targeted the same
customer segments.

The video game customer profile has changed over time. While in the beginning, video
games targeted children and young people, especially males, the 2014 audience was much
broader and more diversified. In the last few years, a new kind of gamer has emerged,
resulting in a trend called the casualization of video games.

Casual gamers usually play on Smartphones or their Internet browser. Most do not own
video game devices such as consoles. The Nintendo Wii initiated this trend. When Nintendo
launched the Wii, the company had already decided to target a new audience, the console
was designed for families; the idea being that with the Wii console, the whole family could
play together and everybody could enjoy video games. For Nintendo, it was a way of
differentiating itself from its competitors Sony and Microsoft whose consoles focused on the
traditional core gamer audience. The Wii was a tremendous success, selling over 100 million
consoles. As Jean-Baptiste Desmaizières puts it: “We at Ubisoft estimate that 1.2 billion
people play video games over the world and 500 million of those play on mobile devices.”

The casualization brought new ways of playing video games. People play when using public
transport or while watching TV. Thus, in the UK, 61% of the players of the mobile game
Candy Crush Saga stated that they played daily in public transportation, while in the US, 78%
played while watching TV. Geographically speaking, the video game console market has not
changed much. Europe, North America and Japan still constitute around 90% of the console

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market, including software sales. However mobile gaming has developed very quickly in Asia,
accounting for about 46% of mobile game revenues in 2013 and further strong growth is
forecast.

MARKET TRENDS AND PERSPECTIVES

In 2013, worldwide video game sales reached €49.9 billion. Digitally distributed games and
content accounted for almost two thirds of the total revenue2 (including in “digital” the PC
sales which were games mainly digitally distributed and in-game purchases). The revenue
growth compared to 2012 was 7.3% and the expected growth for 2014 was 10%. This
increase was due to the launch of the Xbox One and PS4 in November 2013.

Digitalization in the video game industry has resulted in the transition from physical gaming
supports (discs sold through classic retail channels) to digital and intangible games which
were downloaded directly by the player (on computer, consoles, mobile, smart TV…). A
digital game may be retailed alone or with physical elements such as goodies, figurines etc.
in a special box set, but no physical disc would be provided, the customer would receive only
a code to download the game.

Digitalization was transforming the industry in several ways. One of these was the possibility
of downloading additional content. Developers could now offer content such as new
missions, new items, bonuses that players were able to buy and download to complete their
game, even if they had purchased the physical version of the game.

Due to this, new business models emerged. A lot of games used the free-to-play model.
These games could be downloaded for free, revenue was then generated when the player
bought additional content in the game to customize their game or to progress faster. Free-
to-play games were very common on social media and on smartphones and tablets, but this
kind of game also existed for PC or consoles. For instance, League of Legends, one of the
most popular online games on PC, was a free–to-play, as was one of the Xbox One launch
titles: Killer Instinct.

The model of classic games has also changed. Previously, when the games were launched,
the version was final. Now, developers could add updates to improve the game or fix bugs
that players would be able to download. But more importantly, developers could create new
content to sell to players. This content could be new missions, new characters, esthetic
features to customize the character, or items to help the player (like objects which would
enhance its character or virtual currency to use in the game). They were known as “DLCs”
(downloadable contents). They were an important new source of revenue for publishers.
This shifted the focus from customer acquisition to customer retention. Or as Raphael
Rodriguez puts it: “When a gamer buys a Call of Duty game he knows he will have 1 year of
content. We should have the point of view: game as a service”.

2
Video Games Companies – World, Hardware, Software Mobile and Social gaming. Market analysis – 2014-
2017 trends – Corporate Strategies. February 2014. Xerfi. See appendices 2 and 3.

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Another trend was the focus on so-called blockbuster video games, also called AAA games.
These games, like Assassin’s Creed or Watch_Dogs for Ubisoft, were very expensive to
develop, produce and market. For instance, the game GTA V, released in 2013, cost around
€200 million, around half of which was for production. It was the most expensive game of all
time. These costs were comparable to those of a Hollywood blockbuster and games were
usually sold for PC or consoles, at a price of €60 to €70.

Value chain of the video games industry

The traditional value chain in the video game industry was organized around three main
actors. First of all, there were the studios who created the games. They were responsible for
the development of the games but most of the time they were not directly in charge of their
marketing. Then there was the publisher - like Ubisoft - who would promote and market the
game. In most cases, publishers were the legal owners of game franchises and they owned
their own development studios. This was the case for Ubisoft but also for its direct
competitors such as Electronic Art or Activision-Blizzard.

The third key actor in this industry were the console manufacturers, known as first parties,
such as Nintendo, Microsoft and Sony, who created the hardware on which games could be
played. Console manufacturers needed games so that their devices would sell and publishers
paid royalties to manufacturers so that their games could be played on consoles.
Manufacturers also owned studios and published their own games putting them in
competition with publishers like Ubisoft.3

As seen previously, to develop and publish a game, Ubisoft worked with a wide range of
partners: the console manufacturer who granted licenses for their hardware and received
royalties from Ubisoft, the studios (often owned by Ubisoft), and the retailers who
distributed the games. Coordinating this network and serving the customer best was
becoming increasingly difficult. It required continuous collaboration and according to Ubisoft
EMEA Retail-Sales Director Sabine Berthier, the key was “to put the customer at the center.”

On traditional consoles, many games were available in a digital version and some were
exclusively digital. Customers could buy these games in the manufacturers’ online stores
(available directly on the console) like the PlayStation Network or the Xbox Live or buy a
code from classic retailers and then download the game from the manufacturers’ store. Thus
Nintendo, Sony and Microsoft also started to have a retailing function. However, “for this
generation, manufacturers have chosen the physical support for the 7 coming years” said
Jean-Baptiste Desmaizières, Trade Marketing Manager at Ubisoft. Indeed, all the consoles of
the 8th generation were able to read DVD or Blu-ray. However according to J.B.
Desmaizières, “digital games are performing well on the PS4” and there will be a tipping-
point in 5 years from physical to digital games.

Recently, new players have had appeared on the console market. In 2013, mobile gaming
accounted for 24.4% of the video-game market in value. Between a quarter and a third of
the applications available on iOS and Android were gaming applications. Most games on

3
Please see for an exemplary illustration of the different actors and their importance for the French market in
exhibit 6. Exhibit 4 also shows graphically the interactions between manufacturers and publishers.

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smartphones and tablets were very cheap games or free-to-play games, which targeted the
casual audience. In this segment, the two main players were Apple and Google who provided
the platform (respectively iOS and Android) and who controlled the store to which the
applications, including the games, were distributed.

On smartphones and tablets, games were 100% digital. Other new gaming industry players
like Ouya, launched in 2013, enabled gamers to play Android free-to-play games on their
TVs. The video game digital retailer Steam also went in that direction. On the Steam Boxes,
the first of which are supposed to be launched in 2015, players will be able to buy digital
games through Steam’s platform and play them on their TV.

Lastly, some Internet service providers have started to offer games through their boxes,
especially in Europe. These games are digital and while some are downloadable, others,
depending on the internet provider, are available in streaming, meaning that the gamer can
play even without downloading.

Many traditional publishers like Ubisoft, Activision, Electronic Arts, or Square Enix had been
making games for several decades. Most of these publishers own licenses that were
historically strong and ensure revenues for them. They also had the capacity to produce
blockbuster games thanks to these licenses, their financial capacities and their studios.
However, they were more or less diversified in terms of license, types of game (classic
games, with or without additional content, free-to-play…) or platforms. For instance,
Activision and Electronic Arts were known to be good at offering additional content for
games, as explained by Sabine Berthier “A game like Fifa (Electronic Arts) realized around
50% of its revenue through DLCs”. Multiplayer games were better adapted to this business
model than others, as gamers tended to buy new content to play with their friends or to stay
competitive regarding other gamers. In 2014, all traditional publishers had started to
diversify, especially by using their historical licenses on new platforms or with other business
models.

Parallel to these traditional publishers, many new developers on the market started creating
simple games for mobiles and social media, some of which have had tremendous success.
The publisher King, for example, developed the game Candy Crush Saga which was played on
smartphone or on Facebook by more than half a billion people worldwide in a single year.
Another example was Gungho with its licenses Puzzle and Dragon on smartphones; in 2013
alone these licenses generated $1.46 billion and Gungho revenue was higher than the
revenue of Japanese traditional developers such as Square Enix or Capcom.

However, for each success there have been thousands of anonymous games which barely
sold. One of the risks of casual gaming is that these games rely on a lot on buzz and their
popularity could be very short. Some new entrants did not only target the casual market.
The publisher Riot published the game League of Legends. This game was an online game
available on computers and it targeted the hardcore gamer audience. It was a real success,
with about 12 million active daily players in October 2013 and about 32 million active
monthly players. The success of League of Legends was partly due to the fact that it was a
free-to-play, but at the same time Riot was able to successfully monetize their audience
through the sale of virtual items.

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Recently, independent developers had started to offer digital games on console for a lower
price than physical games. The possibility of bypassing traditional retail and selling their
games digitally had made it possible for these developers to create games with a limited
budget and sell them without the help of a traditional publisher.

Digitalization of the industry

In 2013, 19% of total Ubisoft sales came from digital gaming: a total of 193 million euros (see
appendix I for a revenue breakdown of Ubisoft). This share increased (only 12% in 2012) and
supported the growth of the company. Ubisoft seized the opportunity after 2010. In 2009, it
acquired the French studio Nadéo, creator of Trackmania, a very successful multiplayer
online game. After years of relative stagnation, it was the first significant move in this field.
In 2014, this digital revenue was driven by digital distribution (titles sold online for PC,
mobile, tablets) and by the sale of additional content such as DLC.

As explained by Jean-Baptiste Desmaizières, Trade Marketing Manager at Ubisoft, “the

company is late compared to its competitors but experiments”. Its start was rather slow and
most of the effort was put into catching up with the competition. The strategy of the
company was to keep exploring the digital market and the needs of gamers by “setting up a
laboratory” testing their responses.

At the beginning of 2014, Ubisoft was present with digital offers for every support (mobile,
tablet, online, consoles) and tried to adapt its offer to the constraints of each. Its games
were divided into two groups: HD and arcade games. HD games referred to the core games,
such as AAA licenses (Assassin’s Creed, Watch_Dogs etc.). They were played on consoles or
PC and distributed via two channels: for the very large majority, the games were distributed
on DVD or Blu-ray via physical retail stores and for a lesser part, digitally. The arcade games
were smaller and much cheaper. They were sold exclusively digitally. The quality of these
traditionally rather average games, tended to improve and the content became increasingly
more interesting to play. A typical example for Ubisoft was the game Child of Light. Apart
from these two currently high revenue generating groups, Ubisoft was experimenting with
other fully-digital formats: mobile (Rayman mobile, Assassin’s Creed: Pirate…), free-to-play
(Duel of Champions …) and of course, the extensions: the DLCs.

On free-to-play, DLC and mobile games, Ubisoft was neither a pioneer nor a leader. Its
competitor Electronic Arts, for example, had obtained much better results for mobile gaming
with a larger share of its revenues generated by this type of game and a successful
monetization policy. The same was true for Activision, which also had good results for DLCs.

Digitalization involved changes for all parties in the video game industry. For publishers, for
instance, selling digital games directly to customers was a different business to selling to
retailers. Developers constantly had to adapt their skills as the game models evolved. For
retailers the changes were multiple. There were four types of video game retailers: (1)
specialized stores selling only video games and video game related products, the worldwide
leader being Gamestop with brands like GameStop, EB Games, an international electronics
retailer, Micromania, France’s leading video game retailer, Kongregate, a popular browser-
based game site, Game Informer® magazine, the world’s leading print and digital video game

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publication, and BuyMyTronics, an online consumer electronics trade-in platform, (2) multi-
specialist stores for which video games were just one product category among others
(books, household appliances, electronics…), (3) online retailers such as Amazon, and last
but not least (4) hypermarkets and supermarkets for whom video games had customer
appeal but did not constitute a vital category. Retailers, and in particular specialist retailers
were essential for the industry: they sold video games, the consoles and most of them
offered to trade-in programs, which was very important for customers. These retailers also
provided other services such as advice and loyalty programs. According to Sabine Berthier,
“in any case, retailers are still essential to our business model”.

Specialist retailers started to diversify and to equip themselves for the distribution of digital
content with the help of manufacturers and publishers. It was even possible to buy a DLC at
Gamestop. They sold a code that the customer would enter on the PlayStation Store or on
the Xbox Live for example, to download the content.

But there were still some limits to the development of digital games to consider. One of
them was the access to broadband internet. Due to its size, downloading an AAA game could
take several days if the customer had only a broadband connection. One of the main issues
for digital gaming was also the pricing. While many thought that digital games were the
future of the industry, digital games however hardly ever cost over 20€ today. Even though
the price of digital games has tended to increase, compared to their duration and the
experience they offered, Raphael Rodriguez thinks that “an AAA game only available in
digital and with a full price would have a real problem of positioning”. In the mind of the
consumer, a digital game has a lower value than the same game on a physical support.

Conclusion
With all this in mind, Jean-Baptiste Desmaizières and Raphael Rodriguez have been weighing
up the pros and cons for the launch of the next Assassin’s Creed. They were both conscious
of the risks involved. The former was clearly enthusiastic: he believed it could be a great
opportunity for Ubisoft to catch up with and possibly overtake competitors. Raphael
Rodriguez was more cautious: he wondered whether the market was really ready for it.

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Case questions

1. What are the forces that influence the attractiveness of the video games industry (4
points)? What were the three major shifts in this industry in the last 10 years (3 points)?
Based on your answers to the two previous questions, what are three critical success
factors to survive and strive in this industry? (3 points)

2. What is in your opinion the most important capability of Ubisoft? Please try to make a
list of theirs capabilities and test them with a concept we discussed in class. Please
elaborate on the capability that you have chosen as being the most important. (4 points)

3. What drivers supported the strong internationalization in the 1990’s and 2000’s? (3
points)

4. What kind of a corporate parent is Ubisoft? (3 points)

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Appendices

Appendix 1:
Evolution of Ubisoft sales revenues and part of digital sales (in million euros). Source: “Ubisoft FY14
Earnings Presentation”

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 24% 24% Package: consoles and physical
game on consoles
Downloadable games and
contents for consoles
PC Online
13%
Mobile: mobile game and in-
app purchase
39%

Appendix 2: Video game sales by format in 2013 (percentage of share in value). Source: Xerfi

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Package: consoles and physical game on consoles
16
Downloadable games and contents for consoles
14

12

10

0
2011 2012 2013* 2014* 2015* * Expected

Appendixt 3: Console physical games sales vs. console digital sales (in billion euros). Source: Xerfi

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Appendix 4: Manufacturer- Publisher Relationships. Source: Xerfi

Appendix 5: 2013/14 Ubisoft Non-IFRS Profit and Loss statement Source: “Ubisoft FY14 Earnings
Presentation”

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250

200

150
114

100
58
40 40 43
50 32
21 23
10 12 8 9
1 2 1
0

Average Revenue (M€)

Appendix 6: Distribution of on revenue and staffing in the French video game value chain in 2011.
Source: Ensane 2011

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