The floodgates have burst open at Ubisoft. Since the launch of Star Wars Outlaws, Ubisoft stock (UBI) on the Euronext Paris exchange (UBI) has plummeted by a third, the most dramatic two-week decline in the company's history.
This tumultuous period has sent the company’s stock to its lowest levels since 2014, when revenue was half that of fiscal year 2024, and earnings before taxes were negative, versus €262.4M today, and global industry revenues were materially lower than they are now.
Ubisoft didn’t enter this position overnight. In fact, its stock chart illustrates this has been a problem fomenting since at least 2018. It was then that Bloomberg Businessweek reported Ubisoft had nearly 16,000 developers, a larger team than all other competitors, and was producing about six AAA titles per year versus three from the likes of EA and Take-Two. However, net revenue per game was the lowest among its rivals, partly due to the quality of its output and partly due to preferences transitioning to live service games, which the company has long struggled with.
Saturation and Quality Control
It’s clear Ubisoft has mismanaged some of its IPs. Assassin’s Creed, the studio’s best known and highest selling franchise, has seen sales fluctuate with critical reception. To date, there have been 12 games in the main series, with PC Metascores ranging from 70 for Unity to 88 for Brotherhood. After building momentum with Black Flag, sales for the series cratered with Unity and Syndicate, only to rebound with the more positively received titles Origins, Odyssey and Valhalla.
Unfortunately, Mirage suffered from the same fate of declining sales as Unity, with an estimated 6M unit sales (though this number should increase by a couple of million units as back catalog sales pick up). Furthermore, Ubisoft reports revenue rather than units for recent titles, and its microtransactions and DLC have added new revenue streams.
Ubisoft proves that game sales are correlated with quality. Even though critics still rate new AC games at around the 80 range, players have become exhausted by the core gameplay mechanics, mission structures, and bloated main stories, which take dozens of hours to beat and even longer to finish 100%. The threshold for getting a "great" Metascore has only increased with time and competition. Despite some significant changes in recent titles, the sheer volume of releases over the years has diluted the appeal of the franchise.
Games such as The Witcher 3, Red Dead Redemption 2, and The Legend of Zelda: Breath of the Wild have offered players expansive, critically acclaimed open-world experiences that set new standards for quality. Simultaneously, there was a preference shift toward live service games; multiplayer experiences; and shorter, more frequent gaming sessions. Ubisoft’s emphasis on long, story-driven experiences coupled with sometimes less-than-stellar quality haven’t quite met gamers’ expectations in a landscape filled with great titles. Ubisoft’s latest AAA release, Star Wars Outlaws, was highly anticipated by gamers, but holds a disappointing 76 Metascore and even poorer 5.4 user score.
Far Cry 6 was the most poorly reviewed game in that series, and Tom Clancy titles since Rainbow Six Siege have not sold to Ubisoft’s expectations. The firm has cited competition in the third-person shooter genre for the middling sales of 2019’s The Division 2, whose launch came during the battle royale boom — an area in which Ubisoft utterly failed with Hyper Scape, a title closed within two years of launch. XDefiant, released just a few months ago, has already seen concurrent player counts falling below 20K players, and Ubisoft has been mulling its closure. The latest Ghost Recon also failed due to live ops struggles.
The lack of innovation and quality only explains part of the equation: Ubisoft’s flagging top-line sales. The revenue for fiscal year 2024, €2.3B is in line with the sales of €2.2B from three years prior. On its own, this is not alarming, especially considering the gaming industry is about the same size as it was in 2021.
Unbearable Bloat
What is concerning are ballooning expenses at the company, as operating expenses have risen from €1.5B to €1.8B over the same period. Furthermore, due to its growing debt load, interest expense is now a material €50M annually, up from €17M in 2021.
While many of Ubisoft’s Western peers continue to rightsize, the French publisher has been reticent to conduct mass layoffs. In fact, its employee count of 19,011 is just 9% lower than its peak headcount of 20,655 in 2022. The most shocking statistic here is that the company’s stock with 19,000 employees is lower than when it had 10,000 employees.
The chart below from SuperJoost clearly puts things into perspective. Ubisoft generates $96,403 in revenue per employee, just a third of what second-to-last-place Capcom makes from its 3,332 employees. Topping the list are Bandai Namco and EA, which showcase that you can be a video game giant with more than 10K staffers while also generating very high per capita revenues.
There is clearly a lot of bloat at the French publisher, which begs the question, why has the company not undertaken major restructuring efforts? Fiscal year 2023 saw a staggering €1.44B spent on R&D, a figure 74% higher than the previous record year in 2021. Franchises like Assassin’s Creed and Far Cry have long development cycles and require large, dedicated teams, and Ubisoft might believe it has a “smoking gun” to turn its prospects around. Furthermore, the company has realized the need to innovate with games like XDefiant, necessitating increased staffing levels. Unfortunately for Ubisoft, none of its new IP attempts have materialized into anything meaningful.
Unlike other more centralized game developers, Ubisoft has over 40 studios spread across multiple countries, each contributing to various projects. Different regions have varying labor laws and economic conditions, making widespread layoffs more complex and less desirable in certain markets.
Ubisoft does not break out its headcount by region, but roughly a quarter of studios are in North America, a quarter are in Asia, and half are in Europe. Particularly in Europe (and especially France), labor laws and unionization efforts provide stronger protections for employees, making mass layoffs more difficult to implement. The publisher has also seen growing labor movements within its workforce, as evidenced by February’s strike at Ubisoft Paris over wage concerns. However, even though there are difficulties in France, this is no excuse for the company’s lack of efficiency everywhere else.
In an open letter to the board dated September 9th, minority shareholder AJ Investments highlighted these operational efficiencies. It took exception to Ubisoft’s high employee count and called for cost reductions, staff optimization, and to focus on its main IPs. While activists’ calls for action typically lead to an increasing stock price, Ubisoft stock actually fell 7.1% the day after the news broke, as AJ holds less than 1% in the company and is powerless to change the company’s course.
Tencent’s increased 49.9% stake in the Guillemot family’s holding company may have had a role to play. Tencent’s ownership via the holding company gives the family outsized control, as voting rights are deferred from the Chinese technology company. This lack of accountability has almost certainly kept Ubisoft from making the difficult restructuring decisions necessary to operate profitability.
Finally, the pride of the Guillemot family may have a role to play. Instead of admitting defeat and axing vast swathes of the company, Ubisoft has adopted other cost-cutting strategies to improve operational efficiency. These measures include canceling underperforming or risky projects (like Splinter Cell VR and Ghost Recon Frontline) and reducing nonessential expenses. Ubisoft has also been reorganizing its internal processes to optimize its development pipeline, focusing on fewer but purportedly more impactful projects.
Speaking of the Guillemot family, it’s difficult to imagine a major turnaround taking place with the five brothers still at the helm. Record R&D spending has delivered nothing; Skull and Bones was famously stuck in development hell for a decade, only to release to mixed reviews. Yves Guillemot justified its $70 price tag by calling the title a "quadruple-A game." Perhaps this reflects the massive $200M-plus price tag it cost to develop the game, but it does not reflect its reviews or sales. For the record, the physical standard edition of Skull and Bones on PS5 is currently selling for $24 on Amazon.
Company leadership, headed up by Yves Guillemot since he founded the business in 1986, deserves credit for Ubisoft’s rise to prominence — but they are also responsible for countless cancellations, cost overruns, and forays that went nowhere.
Ubisoft’s push into blockchain gaming with 2021’s Quartz initiative was universally panned, with even Ubisoft’s own developers expressing frustration with the move. As of July 2024, the company is still trying to make this push happen, even though NFT sales are magnitudes lower than in 2021.
The Bottom Line
Ubisoft is facing significant challenges that have been brewing for years, with stagnant sales, rising expenses, and a failure to innovate or capitalize on new gaming trends. Despite efforts to diversify with new IPs and cost-cutting strategies, the company’s top IPs show signs of franchise fatigue and prompt questions about what’s next.
Compounding the issue is a ballooning workforce, longer development cycles, and an inability to shed underperforming projects or make meaningful staffing reductions due to labor laws and internal dynamics.
Tencent’s involvement and backing of the Guillemot family has only added to the complexity of Ubisoft’s situation. While the company is far from insolvency, its stock's dramatic decline and ongoing struggles suggest that without significant restructuring or fresh creative direction, Ubisoft’s ability to remain competitive in an evolving gaming landscape is in jeopardy.
Despite potential hits on the horizon like Assassin’s Creed Shadows, more structural change is needed, and it starts with new leadership able to make tough decisions and steer the company into a new era of gaming.
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