In the Red
The Trump selloff in the markets is in full force. Warner Bros. Games deep cuts are proof that owning great entertainment IP isn’t enough to win over consumers.
“It’s time to be nervous. Not bearish, but nervous.”
- Callie Cox at Ritholtz Wealth Management.
Dear Readers,
Welcome to the month of March and to day one of what seems to be spiraling into a full blown trade war. Trump, Musk, and their entourage continue to be hard at work to throw 80 years of transatlantic relationships overboard while also doing their best to send the US, and with it likely the global economy, into turmoil.
Specifically when it comes to Elon Musk, I’ve found this podcast clip from NYU Professor Scott Galloway on his ProfG Markets podcast to be the most entertaining and on point piece of entertainment this week.
I’ve got nothing to add.
"An act of war”
President Trump announced tariffs on Canada and Mexico went into effect today. The effect on markets was felt immediately as a selloff pretty much across US stocks began. This is the chart from the Dow Jones Industrial Average pre-market opening today (March 4).
That’s pretty red.
Here’s a screenshot of some of the stocks that I have been looking at lately for both investment and research reasons.
That is also a lot of red. Two of the three stocks in the green yesterday were European stocks (even Ubisoft ticked up!). It’s anecdotal, but maybe this is a sign of what’s to come. Warren Buffet, CEO of Berkshire Hathaway, in a rare public comment about the administration had this to say:
“Tariffs are an act of war, to some degree. Over time, they are a tax on goods. I mean, the Tooth Fairy doesn’t pay ’em! And then what? You always have to ask that question in economics. You always say, ‘And then what?’”.
Asking ‘then what’, and the absence of doing that, might just be the problem here.
A swing and a miss
Being in the red appears to be the theme of the week, maybe even this month. And this brings us to our story about Warner Bros. Discovery and particularly its Games division and the shutdown of three of its studios after a hugely disappointing 2024.
Warner Bros. Games swung and missed a bunch of times last year. Their games Suicide Squad: Kill the Justice League, a relaunched MultiVersus, and Harry Potter: Quidditch Champions all flopped. As one of my colleagues put it yesterday: “They went 0 for 3 all of last year.”
Monolith Productions, Player First Games, and WB Games San Diego had all of their projects cancelled and their operations shut down. The long-in-development Wonder Woman game was also cancelled because it no longer fits the strategic priorities of the company according to JB Perrette, CEO and president of global streaming and games for Warner Bros. Discovery.
As Polygon reported based on an internal email it obtained to employees, “Perrette cited a ‘disappointing 2024’ for the company’s games division, saying that it would focus on four franchises going forward: Harry Potter/Hogwarts Legacy, Mortal Kombat, DC, and Game of Thrones.”
None of this should come as a surprise. I’ve said it before and I’ll say it again: video games are hard. And, the writing for the WB Games division was on the wall as soon as Warner Bros. Discovery announced its Q4 and full year 2024 earnings. In the earnings report, the company reported that “Content revenue decreased 8% in 2024, primarily attributable to a 53% decrease in games revenue due to the strong performance of the 2023 slate [NOTE: this is a distraction from saying that the 2024 games just didn’t perform], including Hogwarts Legacy, compared to the 2024 slate.”
Meanwhile, “costs of revenues increased 3% in 2024, primarily attributable to a 4% increase in theatrical product content expense due to product mix and higher development costs, and a 1% increase in games content expense due to impairments of $384 million.”
Revenues down, costs up. Never a good combo.
Quo vadis, WB Games?
The notion that management consultants Bain & Company put forth in their M&A report that owning the content/IP is the end all be all is simply wrong.
I already made the argument as to why content alone isn’t enough in a previous post, and the results of WB Games are further evidence that execution around new technologies and delivering great experiences to consumers are paramount - if companies can’t execute, it renders the most valuable IPs in the world useless.
CEO Perrette says the company will focus on fewer but bigger franchises going forward and that it will place an emphasis on growing its mobile gaming revenue (did I mention that mobile gaming is just as hard?). The core franchises in scope are the aforementioned Harry Potter/Hogwarts Legacy, Mortal Kombat, DC, and Game of Thrones. In order to really succeed in mobile gaming, WB Games has to get very good at operating live-service games at scale as well as user acquisition. Great IP helps in attracting players intuitively - but it is not enough to retain them, let alone grow your audience beyond the core Game of Thrones fans. Mobile gaming requires scale and a tolerance for flexible marketing budgets. Time will tell if parent company Warner Bros. Discovery (WBD) has the stomach for this while it’s also pursuing growth in the streaming space with HBO (I still refuse to call it MAX).
There was also one more hint in the company’s earnings report that could be a telltale sign for where the road may lead:
“In September 2024, WBD announced a new global structure for the Company’s worldwide studio tours, retail destinations, touring exhibitions, and all location-based experiences. WBD Global Experiences brings together the previous Global Themed Entertainment licensing group and the Studio Tours & Retail owned and operated group into a single worldwide division to develop and execute on global strategies that offer partners a mix of both group models, putting WBD in a position to drive growth and become a worldwide leader in the creation, development, licensing, and operation of location-based entertainment inspired by Harry Potter, DC, Looney Tunes, Scooby-Doo, Game of Thrones, Friends, Discovery and more.”
Notice the strong overlap in franchises between the focus for WB Games and the Global Experiences.
If Warner Bros. Discovery can get its gaming division back on its feet, build out world-class location-based entertainment experiences, and - most importantly - string all of their different services, from streaming, merch, theme parks, to video games, together into a connected and cohesive journey for the consumer based on their strong IPs, the sky’s the limit for them.
If not: expect more red across their games division and an even stronger focus on streaming and theme parks.