Early in January (which I missed, because I was doing other things) MMORPG.com revealed that NCsoft and Paragon Studio employees had contacted them to help correct a misconception: that City of Heroes / Villains (CoH/V) wasn’t profitable. This information was provided on the guarantee of anonymity. MMORPG.com managed to get NCsoft’s Director of Corporate Communications, Lincoln Davis, to comment on the anonymous tips. Massively.com have taken that article and run with in in a generally pro-CoH/V and anti-NCsoft way, but what I haven’t really seen is anyone try to verify the claims made. Obviously not all of them can be, but enough other information exists that some of them can be held up and evaluated.
(UPDATE 18 Sep 2013: I’ve created an addendum of sorts that looks at how NCsoft told Paragon Studios that CoH/V was going to be shut down months ahead of the actual closure. Read it for a little bit more context around some of the claims.)
The Verifiable Claims
Going through the list (and changing the order to build a clearer picture):
Claim: Paragon Studios grossed 12 million in revenue annually.
Going through NCsoft’s Earnings Reports, the statement that Paragon Studios “grossed 12 million in revenue annually” is a bit open to questioning, at least over which period you are looking at. If you do a quick sum of the revenue-by-year for CoH/V you end up with something like this using a Jan – Dec reporting period as NCsoft does (results converted to US$, with some assumptions used in the conversion):
Arguably there’s a bit of a gap in the idea that CoH/V – the only revenue source that Paragon Studios had that I’m aware of – grossed US$12m annually. At best it could be seen as a rough average over the last two years.
If you tweak it to a Jul – Jun accounting cycle, the figures look a bit different. CoH/V’s launch quarter is ignored and we end up with the following annual revenues:
So perhaps if you allow for some errors in conversion and maybe some rounding from the source, the concept of CoH/V earning US$12m a year in revenue is viable for 2010-ish onwards. Looking at those same figures you can really see that the revenue numbers take a dive around 2009/10. (Champions Online launched September 2009 – I’m not saying that the decline was entirely due to that, but it’s an interesting coincidence at least.)
Sidenote: those two images above are some very strong support for why CoH/V was shut down. That kind of revenue decline is a pretty brutal trend.
Claim: CoH had a high retention rate. Subscribers had a stick rate of 95-98%.
Obviously I can’t verify this by producing Paragon Studios’ internal data, but it is consistent with previous comments from former CoH lead Jack Emmert that this title had “a 90% retention rate from month to month“. But the key word for this claim is “subscriber”.
CoH/V was a F2P title. Subscribers – paying an automatic $15 or so a month – the most dedicated of players to any F2P title, because they could elect to pay less money and still keep playing. It would also be nice to know the time period for this indicated stick rate – per month? per week? (I believe such figures are usually reported on a monthly basis, but that doesn’t mean the claimed figure was). Regardless, it’s a strong result for CoH/V.
But even with such strong retention figures, you can’t forget the other side: new player attraction / acquisition. Let’s say that CoH/V started the year with a monthly stick rate among subscribers of 98% and 100k subscribers. If no new players came on board over that year but 2% churned monthly, at the end of that 12 months they would now have 78.4k players, or have lost roughly 22% of that ‘sticky’ subscriber base. You need new players to replace exiting subscribers to ultimately see a title grow.
Looking at those above revenue figures and accepting the potential for CoH/V subscribers to be incredibly loyal, it’s pretty clear that CoH/V’s problem was in attracting new players. This was despite a sizable marketing push around Going Rogue and then when CoH/V went F2P. It seems that CoH/V was a title where the subscriber base was rusted on but new players weren’t coming on board in large numbers.
Claim: NCSoft has no plans for a CoH 2. Paragon wanted to do it but NCSoft was growing ever more uncomfortable with a Superhero IP, worried that it wouldn’t work in today’s market.
NCsoft canning plans for CoH 2.0 is consistent with information I’ve seen from other sources. The perception that both Champions Online and DC Universe Online bombed wouldn’t have helped change their minds either.
Claim: They (Paragon) had a second project in the works. It was a compromise to not being able to make CoH 2. It was the show “Lost” meets Minecraft. You crash-landed on an island and you were able to build your own fortress and weapons. You teamed up with other players to tackle the mysteries of the island.
I’ve heard this claim before and it is mentioned in a previous link.
The Unbelievable Claims
Claim: The studio’s total annual operating cost was $4 million USD.
Paragon Studios had a total annual operating cost of US$4m? That’s… low. Incredibly low. Even the article points out that with Paragon Studio’s 80-odd people, they’d be paying an average of US$50k per year to each employee (a very low figure with the average salary in the gaming industry reported at around US$80k per year) for an overall payroll of US$4m, and that’s before rent, taxes and other business expenses.
I had a look at rent. Here’s where I believe Paragon Studios was located (2189 Leghorn St., Mountain View, California) and I believe it took up the whole building, so that’s 13650 square feet (SF) to pay for. Rental rates in the area look very low – ranging from around US$15 / SF per year to US$65 / SF per year at a glance – and if we take an intermediate figure like US$30 / SF per year for Paragon Studios, that still means around US$400k was going out in rent annually and the rest of the studio only cost US$3.6m to run.
Also, just taking into account studio operation costs may not reflect the full story of CoH/V’s costs. NCsoft provided services such as customer service, payment systems and server hosting to CoH/V, with it being highly likely that Paragon Studios was required to pay some kind of contribution towards those areas. Any cash going towards those overheads would also increase the studio’s operating costs, but they may not have been included in any kind of “studio operating cost” figure.
I could certainly accept that the operation cost of CoH/V was US$4m, particularly with rent costs being low, but saying that Paragon Studios’ total operating costs were US$4m seems to be leaving some numbers out somewhere.
Claim: CoH was profitable even before they converted to Free to Play but were even more so after the conversion.
Here’s the problem with taking the word ‘profitable’ at face value: you can’t always be sure what kind of profit is being talked about. Gross profit? Net profit? A profitability ratio? Profitability per player? And over what time period?
I have a lot of problem accepting that CoH/V was more profitable after going F2P considering its revenue continued to shrink following the conversion. Unless Paragon Studios and / or NCsoft was slashing costs internally, there is no way that you could have gross profit going up while revenue went down. Increased profit on other measures would be possible – perhaps on some kind of average profit per paying player basis, or something – but not at the net profit level that really counts.
As I’ve said previously, it’s possible that CoH/V was profitable but Paragon Studios wasn’t. Perhaps CoH/V’s profitability went up because a lot of costs were being deferred to the other project. This claim really requires a lot more challenge and clarification before is should be accepted.
The Unverifiable Claims
Claim: Brian Clayton tried to orchestrate a management buyout of Paragon starting over a year ago because it became progressively more difficult to deal with NCSoft. They had created a Kickstarter page and a campaign video, but it never went to press.
The claim that Paragon Studios was attempting a management buy-out isn’t currently verifiable using existing sources. However, if it is true, it’s a claim that could provide a reason for why Paragon Studios was shut down with such surprising speed.
The Kickstarter information is curious, given that Paragon Studios was 100%-owned by NCsoft and would need NCsoft’s permission to launch it. How would that conversation go? “Hi, we want your permission to help us leave you, and we’re going to be very public about it. That okay with you?” Plus how much could Paragon Studios realistically look to raise from that channel? Even in the absolutely best case scenario, it would less than US$4m.
There had to be other investors behind the scenes and probably the kind of people / organisations for whom an extra few million on a deal wouldn’t be a problem. It’s likely that any Kickstarter would have been more to show that CoH/V was popular enough to hit a financial target via crowdsourcing than vitally needing the money to fund the buy-out. Especially if prior to starting the process Paragon Studios were aware of how much they’d have to raise to buy out NCsoft’s share – the full amount would have had to be in the tens of millions.
I’ve had a look on Kickstarter to see if I could find a Paragon Studios-related account name, but was unable to locate any – the Kickstarter site is great for searching about projects but lousy for searching about user accounts.
When Cryptic sold the CoH/V IP to NCsoft and a number of Cryptic developers left to start NCsoft NorCal (which later became Paragon Studios), they did so under a structure that was fully owned by NCsoft. That Paragon Studios was allegedly looking to break away from this structure is unlikely to have been viewed positively by NCsoft management regardless of CoH/V’s financial performance.
Subsidiary break-aways are exercises that test the trust each party has in the relationship. Information that used to be openly shared is now cut back and each side looks to guard their territory, especially where current revenue generators would become competition for future revenue. Even in situations where the break-up is mutual, at least one side ends up looking bad to the public (and usually it’s the side with the most money / power in the previous deal) – if the relationship was working, then no-one would want to change it, right?
If NCsoft management were aware of the plan, it would be very easy for the internal view on any Paragon Studios management buy-out to be one focused on perceived disloyalty. Hadn’t NCsoft invested a lot in CoH/V, including a boxed expansion and F2P conversion, only to fail to see a return to growth? Hadn’t they kept expanding the Paragon Studios team despite CoH/V failing to meet its annual revenue targets?
But Paragon Studios management still wants to take all of that and walk away, taking the benefits of that relationship with them? It would be possibly insulting to NCsoft. And it would serve as a problematic example for other NCsoft-owned studios. Maybe ArenaNet or Carbine Studios would start to look at independence with a longing gleam in their collective eye. That’s not a situation NCsoft would want to encourage.
If NCsoft was thinking like this, it would have made Paragon Studios a very ripe target for cutbacks at a time of financial hardship – why spread the pain when a single studio that already wants out is underperforming? Some may view that as spiteful, but if you have to cut your costs, you start with the easiest targets. And you do it quickly, because that way no-one has time to take valuable materials with them.
Claim: NCSoft paid $8 million USD to buy CoH. They wanted $80 million USD to sell it. They only value it at $3 million for tax purposes.
NCsoft made the deal to buy CoH/V from Cryptic at the end of 2007. I don’t believe it has ever been publicly indicated the amount paid for Cryptic’s share of the IP. Although US$8m (if true) might seem a bit low for a title that earned about three times that amount in the same year, it’s important to remember that Cryptic were only in charge of management and development of the game, plus owned part of the IP, with NCsoft funding other aspects of the game and owning the other part of the IP. Internet rumours were that Cryptic and NCsoft owned the CoH/V IP 50/50 until the buy out. So in buying CoH/V NCsoft was spending money on something they already part owned.
However, without other sources, the US$8 million claim is unverifiable.
NCsoft wanting to sell CoH/V for US$80m is another curious claim, because it matches up with a claim that Trion was willing to spend US$80m to acquire CoH/V. But that’s a not entirely reliable rumour based on a single post in a video game forum from someone who may have been making a general claim (“Trion had US$80m available to spend on project acquisition”) that’s been taken as a specific one (“Trion had US$80 that they were willing to 100% use to buy CoH/V”). Other rumours about parties interested in buying CoH/V included Sony Online Entertainment (which was then refuted by SOE’s MMO head) and Valve (who allegedly was only offering US$3m plus profit share to NCsoft to buy the IP).
So maybe Trion’s story is true and NCsoft was just looking for a price they’d been offered by a recent potential buyer, but the biggest issue is that a lot of the comments on CoH/V’s price come from discussions on message boards. These comments then took on a life of their own as people looked for any information about what was going on with CoH/V and rumour started to be treated as fact.
Was the MMORPG.com source in the room when NCsoft indicated they wanted US$80m, or did they also hear about that figure from another source? And importantly: when did they hear that figure? A few years ago, US$80m for CoH/V as it earned US$20m+ a year would have been believable; in 2012 when the title was earning half that revenue that same price may not have applied.
Finally, regarding NCsoft only valuing CoH/V for tax purposes at US$3m, there are a number of questions: what part of CoH/V was valued at that figure? All of it, including its operations? Or just the IP? That aside, it remains an unverifiable claim – I can’t see any information that breaks things down to the per title level. If you can find those things in the Earnings Reports or Audit Reports, let me know and I’ll revisit this.
Claim: NCSoft tried to work with Paragon, they really did. But the profits were not what they needed to be, and CoH/Paragon were the weak link in NCsoft’s lineup moving forward.
Other people within Paragon Studios may feel differently about how well NCsoft worked with Paragon Studios, so it’s a bit too subjective to be verifiable.
NCsoft has a history of completely supporting a title right up to the point it doesn’t. I’ve seen this used (and have used it myself) as a criticism of NCsoft, but there is also virtue to it: NCsoft generally doesn’t cut a game off and let it slowly die. If a game is NCsoft’s they work to try to make it successful, exhausting a number of options before possibly pulling the plug. It’s actually saying something nice about NCsoft in that they were trying to turn things around, but sometimes it doesn’t work and you just have to make a hard decision for the benefit of the rest of the business.
Profitability and revenue have already been discussed.
And Now, A Word From Our Publisher
No-one really trusts PR statements put out by big businesses. In this case NCsoft’s Communications Head Lincoln Davis put out a statement that a lot of people seemed to read their own pre-conceptions into.
At its heart, NCsoft’s statement was that the financial figures the anonymous source presented were incorrect, Paragon Studios and CoH/V weren’t meeting long-term profitability goals, and that it was a difficult decision to shut the studio and this title. It seems that a number of people wanted NCsoft to counter by releasing the ‘real’ figures, and that since they didn’t they must be lying, but all of the things can NCsoft said can be true. As I’ve pointed out above, a number of the financial claims around CoH/V from the anonymous source require a lot more information before they could be considered as true and correct.
Both sides here may be telling the truth as they know it.
Lies, Damned Lies and Misinterpreted Statements
Under these kind of he said / she said situations, external observers on games forums will tend to try to find out who ‘lied’. In real life it’s rarely as simple as having one (or both) sides telling the absolute truth or a pack of lies. There are plenty of ways that someone can tell what they believe to be the truth but it turns out to be not fully correct – perhaps they are correct within their own sphere of work but wrong about the organisation overall, or perhaps they misheard or misinterpreted a statement. It’s also very possible that a company’s employees are told one thing while management is aware of a much fuller, more detailed picture.
This is why anonymous sources can be troublesome – they can tell a journalist / video game writer something they (in the best case) believe to be the honest truth, but how much weight their comments have depends on their position within the organisation. MMORPG.com felt that the source was reliable enough to publish the comments, but as I’ve argued above there are a number of claims made that deserve further questioning to better tease out their accuracy.
The Red Herring of a Smoking Gun
A lot of people seem to be looking for a smoking gun around the cancellation of CoH/V: that CoH/V in itself was profitable. As I’ve said before, I think that’s true – under certain conditions / assumptions, CoH/V probably was a profitable title. But at the same time, I don’t think Paragon Studios was a profitable studio with only CoH/V’s revenue coming in. There was at least one other title under development as well as two previously abandoned titles, meaning a lot of expenditure but no expectation of new revenue for at least a few years.
The challenge that some people seem to have is around why you’d shut down something if it was profitable, but it’s not that uncommon. If a title (or product or service, for that matter):
- wasn’t profitable enough to meet its targets;
- was profitable now but had a future expectation of going into a net loss situation;
- was a less profitable investment than its alternatives; and / or
- risked defecting to become the competition
then there is a solid business case for reallocating its operational dollars elsewhere.
Even if solid evidence emerged tomorrow that CoH/V was undeniably profitable, it doesn’t prove that NCsoft’s decision was objectively wrong or a poorly thought out. Subjectively a number of people disagree and think that CoH/V should have been left operating, but CoH/V’s revenue had been on the decline for quite a while with no signs of recovery. Something was going to give at some point; it just happened more suddenly than expected.