GameStop (NYSE: GME) recently announced that Ubisoft's (NASDAQOTH:UBSFF) Watch Dogs is the most pre-ordered next-gen game in the company's history, putting it on track to achieve Ubisoft CEO Yves Guillemot's bold claim that the title would sell 6.2 million units.
If Watch Dogs can hit that target, it will match initial sales of the first Assassin's Creed title -- which launched one of Ubisoft's most successful original IPs.
Watch Dogs -- which blends together the sandbox elements of Grand Theft Auto, the hacking elements of Person of Interest, and the stealth and parkour qualities of Assassin's Creed -- will be released on May 27 for Sony's (NYSE: SNE) PS3, PS4, Microsoft's (NASDAQ:MSFT) Xbox 360, Xbox One, and PCs. The Nintendo (NASDAQOTH: NTDOY) Wii U version has notably been delayed until an unknown date.
The key question now for Ubisoft is whether Watch Dogs can become a fresh pillar of growth for the company after the last Assassin's Creed title, Assassin's Creed IV: Black Flag, sold 32% fewer copies than its predecessor, Assassin's Creed III.
Ubisoft has released new Assassin's Creed titles annually since Assassin's Creed II (2009), and will release two new Assassin's Creed titles this year -- Assassin's Creed V: Unity for next-gen consoles, and Assassin's Creed: Comet for previous-gen ones.
What Watch Dogs means for Ubisoft
Ubisoft currently has five top franchises -- Assassin's Creed, Just Dance, Tom Clancy titles, Rayman, and Far Cry. Assassin's Creed is its biggest source of consistent revenue growth, but Watch Dogs could soon join it as a top franchise.
Last year, Ubisoft's revenue fell 20% to €1.01 billion ($1.37 billion) while its gross profit fell 21% to €722 million ($983 million). However, after deducting various expenses related to research, development, and marketing, Ubisoft ended the year with an operating loss of €66 million ($90 million), down from net income of €100 million ($136 million) the prior year.
That steep decline indicates that games, like movies, are becoming more expensive and riskier investments every year. The original Assassin's Creed, for example, cost $20 million to produce. The second title cost $24 million. Assassin's Creed III and IV both reportedly cost around $100 million.
Yet as budgets increase, sales don't necessarily follow.
The second Assassin's Creed title sold over 10 million copies. The next two, Brotherhood and Revelations, didn't. Assassin's Creed III marked a nice comeback with 12.4 million units sold, but the franchise once again slumped to 8.4 million units with Assassin's Creed IV.
It's easy to see Ubisoft's problem -- costs have consistently climbed but sales have been wildly unpredictable. Assassin's Creed III creative director Alex Hutchinson famously called triple A games "the last of the dinosaurs" in an Edge interview in 2012, noting the difficulty of sustaining such a high-cost business model with unstable returns.
Earlier this year, Superannuation estimated that Ubisoft's production budget for Watch Dogs had hit $68 million. Although that would be significantly less than Activision Blizzard's (NASDAQ:ATVI) $140 million budget for Destiny and Take-Two's (NASDAQ:TTWO) $265 million budget for GTA V, it still represents a very confident investment for a new IP.
Yet another cross-platform 'next-gen' title
Although Watch Dogs is being promoted as a next-gen title, it is yet another game that straddles both seventh and eighth generation consoles. The reason, as I noted in a previous article, is obvious -- there are 7.7 million PS4s and 5 million Xbox Ones on the market, but there are 82.8 million PS3s and 81.3 million Xbox 360s.
It would be silly for any video game publisher to ignore that huge market for the sake of cutting-edge graphics. That's why Electronic Arts (NASDAQ:EA) released Titanfall for both the Xbox One and Xbox 360, and why Take-Two will release Borderlands: The Pre-Sequel on the PS3 and Xbox 360 instead of next-gen consoles.
However, that causes two problems for the gaming industry -- it throttles sales of the PS4 and Xbox One, and game developers must spend more time refining their games for both older and newer consoles.
Ubisoft's answer to this problem was to split Assassin's Creed into two series -- one exclusive to the seventh generation and another one exclusive to the eighth. That's a big risk, since the success of Unity, which will be released this holiday season, depends heavily on sales of the PS4 and Xbox One remaining strong throughout the year.
If Watch Dogs is a hit, Ubisoft will be faced with the same three choices that it encountered after Black Flag -- should it play it safe and release another cross-platform sequel, should it up the ante with a next-gen only one, or should it split the franchise into separate seventh and eighth generation titles?
Will Watch Dogs be a hit?
Watch Dogs certainly has the characteristics of a blockbuster IP -- it looks highly polished, employs time-tested gameplay elements from other hit titles, and its hacking mechanics help it stand out in a triple-A market saturated by first-person shooters and sandbox titles. It could certainly be the next Assassin's Creed, which is starting to lose its luster after seven years.
While GameStop and Ubisoft's forecasts bode well for initial sales of the title, gamers and investors should pay close attention to what happens next.
Will triple-A publishers like Ubisoft, Electronic Arts, and Activision continue playing it safe with cross-platform releases for both newer and older consoles, possibly throttling sales of the PS4 or Xbox One, or will they finally take full advantage of the extra horsepower with exclusive next-gen titles?
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Take-Two Interactive. The Motley Fool owns shares of Activision Blizzard, GameStop, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.