Ubisoft’s Future

On September 25th, Ubisoft released an earnings announcement which lowered guidance across the board, causing the stock to drop over 15% in the following days before M&A rumors helped to buoy it. The company now expects net bookings of ~€1.95bn for FY2025, down from the €2.32bn the previous year (NASDAQ). Ubisoft's challenges are not a new story, as the stock is down over 50% year-to-date and over 80% from its all-time high in 2021, but recent M&A rumors and angry letters from activist investors have drawn renewed attention to the troubles at Ubisoft. This week, we want to dive into the evolving story of the company, how it got here, where it has struggled, and our predictions of what could be next.

The Story So Far

Ubisoft was founded in 1986 by the five Guillemot brothers in France. Over the past four decades, the business has become well known for creating immensely popular video game franchises such as Just Dance, Watch Dogs, Far Cry, and Assassin’s Creed. Today, Ubisoft is one of the largest video game publishers in the world, with a market capitalization of ~$1.7bn. Despite its recent success, the company has been through significant turmoil since its all-time highs in 2021 when it had a market cap of over $12bn (when video games across the board were thriving and profitability was less of a focus for public market investors).

In 2022, a string of delayed launches and lower productivity compared to peers spurred rumors that KKR and Blackrock were considering acquiring the company, though the transaction never came to fruition. This was not the first time a third party had attempted to take control of Ubisoft. In 2018, Vivendi, a French media company, sold its stake in Ubisoft after a battle with the Guillemot family where Vivendi failed to take majority control (Bloomberg).

Later in 2022, Tencent acquired 49% of the Guillemot family’s holding company; however, this did not translate to meaningful control of the company. The Guillemot family only granted 5% of voting shares and Tencent was not given a board seat or veto power (Ubisoft).

This brings us to today, where history appears to be rhyming. Again, shares are down dramatically given lower guidance and the postponement of Assassin's Creed Shadows (the 14th installment of the franchise) and emerging rumors of a take-private by Tencent. Ubisoft put out a press release (albeit vague) on October 7th stating, “[Ubisoft] regularly reviews all its strategic options in the interest of its stakeholders and will inform the market if and when appropriate.”

Ubisoft’s pain points

The gaming industry (alongside many other sectors across media, entertainment, and tech) has been under pressure to show increased profitability and efficiency to their boards and investors (in the private and public markets). The industry has entered a period where the primary focus for developers is no longer on new game mechanics and growth, but on how to improve existing workflows, save on costs, and get existing games into the hands of more players.

However, this does not fully explain why Ubisoft has struggled to operate at the same level as its peers. For example, Ubisoft has worst-in-class 2024E EBITDA margins (~8%) relative to peers like EA (36%), CD Project (35%), and Take-Two (14%).

While not a comprehensive list, here are a few of the critical pain points that we see Ubisoft struggling with, many of which are being experienced by other companies across the broader gaming market:

• High labor costs: The cost of labor for Western publishers has increased by 15-20% since the pandemic in 2020 due to a combination of factors from inflation to a shortage in the number of quality game professionals (Matthew Ball). With this in mind, many publishers have spent the past 12-18 months rightsizing their cost structures, as seen by many layoffs across the industry.
  We initially expected to see Ubisoft laying off a lower percentage of their workforce relative to other publishers, given the strict labor laws in France (i.e. it is very hard to fire anyone). However, Ubisoft is estimated to have laid off ~8% of their staff compared to EA & Take-Two with ~5% and CD Projekt Red with ~9%.  While staff reductions appear to be roughly in line with other major publishers, their total employee numbers are still elevated relative to peers. Ubisoft ($1.7bn market cap) currently employs ~19k people, compared to EA ($38bn market cap) and Take-Two ($27bn market cap), who employ 13k and 12k, respectively. This is especially troubling given EA and Take-Two have a market cap ~22x and ~16x higher, respectively.

• Marketing budgets: Advertising is increasingly a large part of the game development budget, typically accounting for 10-15% of lifetime revenue; some companies like Take-Two are estimated to spend $1 in marketing per $1 spent on development (JPM Research). Increasing marketing costs have affected both the top of the food chain (AAA publishers) through the tail of indie and emerging developers. Brand new titles now only account for ~8% of total play time in 2023 as they are increasingly competing with long-lasting franchises (Newzoo).
• Non-recurring business models: Some of Ubisoft's most popular titles do not lend themselves to live-services models. For example, Far Cry has a limited multiplayer system, and Assassins Creed has largely been a single-player experience with limited content expansions sold through fixed price downloadable content (DLCs). This model is less favorable for the company's margin profile than a battle pass (recurring revenue model used by games like Call of Duty, PUBG, Fortnite, and more), which benefits from long-term payment and manageable costs to maintain the product relative to the initial upfront cost. To give some credit, Ubisoft has acknowledged this, stating that management is “Currently focused on executing its strategy, centered on two core verticals – Open World Adventures and Games-as-a-Service-native experiences” (Ubisoft).‍
  • Lack of pricing power: Additionally, premium title prices have not evolved alongside the cost base of games. Gamers are used to a $60-70 price point for single-purchase games and while publishers could increase this, it is risky given the breadth of alternatives that gamers have today, including free-to-play games or their existing library. At a time where consumers are more price sensitive, the idea of spending $10 on a battle pass is much more palatable than an $80 game with a finite amount of content.

• Distribution: Similar to Activision Blizzard’s Battle.net, Ubisoft’s game store and launcher is primarily focused on Ubisoft games only (with a limited library of third party games). It appears that they have acquiesced (and will pay a 30% platform fee) to the king of PC distribution: Steam. Ubisoft announced that they will be releasing Assassin's Creed Shadows on Steam on Day 1 instead of an early release on their proprietary store. While progress is being made regarding the democratization of app stores on mobile, it appears that Steam will remain the dominant PC distribution platform for the foreseeable future.
• Player frustration: Buggy launches and feature-incomplete games have almost become the expectation for gamers, but recently, the reception of Star Wars Outlaws (owned by Ubisoft) was exceedingly frustrating to players (only 4 of 23 Steam curators “Recommended” the game at the time of writing). We believe this catalyzed the internal decision to delay Assassin's Creed Shadow. Ubisoft came out with a statement saying that, “While the game is feature complete, the learnings from the Star Wars Outlaws release led us to provide additional time to further polish the title.”

Ubisoft’s Path Forward

While Ubisoft can continue down their current trajectory, we believe that an inflection point is long overdue for this company. To avoid further financial woes, we see two potential options for Ubisoft to turn the company around: M&A by another large publisher or a take-private, by Tencent and the Guillemot family.

1. M&A (unlikely and does not fix the core issues): Naturally, we have some degree of bias given the recent rumors around a take-private, but we also view Ubisoft’s history as a proof point that this path is less likely. Whether it is a challenge with the Guillemot family who has repeatedly demonstrated a desire to retain control, or decreased incentives from buyers who are reluctant to engage with the lengthy timelines imposed by French labor laws, large-scale M&A has consistently failed to materialize for Ubisoft. Moreover, outside of a larger budget for marketing, and potentially distributing their cost basis over a larger number of games, M&A does not meaningfully solve any of the core problems that Ubisoft is facing today.
2. Take-Private (most likely, yet problems remain): While this appears to be the most likely option, it is unclear if this will help the company long-term. Perhaps being out of the purview of the public market, investors can help the company focus more on long-term value creation, or perhaps a group like Tencent will be able to make a deal to gain more meaningful ownership to shake up the corporate focus.

Takeaway: Ubisoft, once a giant in the gaming world, is now grappling with steep declines in stock value and internal challenges. The company's struggles are representative of many developers in today’s ecosystem including rising labor costs, business model challenges, and increased competition. Despite rumors of a possible take-private deal with Tencent, Ubisoft's future remains unclear. While a buyout could provide some relief, it may not address the core issues hindering the company, leaving questions about how it will regain its competitive edge and meet the high expectations of both investors and players.