The last several years have seen Warner Bros.’s gaming division buffeted by change. After the highs of 2023 and the lows of early 2024, we thought it’d be a good time to take stock of one of the largest portfolios of gaming and entertainment franchises in the world.
First, let’s run through its corporate machinations to date. Initially formed under parent company Warner Bros. in 2004, WB Games has built itself into a formidable developer and publisher of AAA games, encompassing 12 studio subsidiaries across North America and Europe.
After parent company WarnerMedia split out of AT&T in 2021, it merged with Discovery Inc., forming Warner Bros. Discovery (WBD) in the process. The rationale for the spinoff was to bring together two aging media firms in the content arms race against Disney and Netflix, while allowing AT&T to refocus on its wireless business.
Interestingly, the deal took the form of a Reverse Morris Trust — a type of spinoff that allows the seller (AT&T) to retain significant interest in the new entity (WBD) and avoid paying tax on gains from the dispersal. (You can learn more about how this relates to the WBD deal here, if you’re curious.)
During this transition, WBD divested Golf Clash creator Playdemic to EA for $1.4B, leaving behind a roster of mostly PC and console developers, including NetherRealm (developers of the Mortal Kombat and Injustice franchises), TT Games (LEGO Star Wars, LEGO Marvel, etc.), Monolith (Middle-earth: Shadow of Mordor), and Rocksteady (Batman: Arkham series), among others.
Today, the remaining gaming entities are bucketed under the larger "Studios" segment, one of three major divisions at WBD (the other two being Networks and Direct-to-Consumer). Studios is also home to the company’s TV and theatrical revenues (e.g. "Dune Part Two", "Sweet Tooth", etc.), making a proper accounting of the gaming-specific performance difficult to ascertain.
What we can say for certain is that gaming revenue declined by 41% year-over-year in Q2 ‘24, driven by dismal performance from Suicide Squad: Kill the Justice League and extremely difficult comps from Hogwarts Legacy in Q2 ‘23. This has resulted in layoffs at Suicide Squad developer Rocksteady and rumors of further divestitures in the gaming division. This news comes just two months after Mortal Kombat developer NetherRealm axed its entire mobile team.
The disappointing results make Hogwarts Legacy, the breakout hit of 2023, seem like more of an outlier than any indicator of continued success. The open world RPG set in the Harry Potter universe was the top-selling game last year, beating out heavyweights like Call of Duty and Zelda. WBD executives seemed to acknowledge the unexpectedness of that outcome, expressing a desire to avoid the “volatile” nature of one-and-done releases and an intent to lean into live service offerings. CEO and President of Global Streaming and Games JB Perrette elaborated on this at a Morgan Stanley conference earlier this year:
He said: “Rather than just launching a one-and-done console game, how do we develop a game around, for example, a Hogwarts Legacy or Harry Potter, that is a live-service where people can live and work and build and play in that world in an ongoing basis?”
This, of course, is easier said than done. WBD’s first attempt at a AAA live service game, IP mashup MultiVersus (previously covered by Naavik here), has struggled to hold players’ interest. After multiple beta releases in 2022 and 2023, the platform fighter finally saw an official release in May of this year. Unfortunately, reviews are currently “mixed,” with multiple outlets citing concerns over long progression grinds and annoying microtransactions. Engagement has fallen off a cliff as a result.
With the caveat that the gaming press has never been particularly welcoming to games-as-a-service products, these sound like classic growing pains of an organization unaccustomed to live service systems design.
Nevertheless, WBD continues to support the product and has acquired MultiVersus development team Player First Games. MultiVersus may not turn out to be the roaring success WBD had hoped for following its initial momentum, but it’s probably too early to give up on the game entirely.
Where WBD has really shown its inexperience with developing live service games is with Suicide Squad: Kill the Justice League. Rocksteady’s latest release took more than seven years to make, only to be met with a tepid response from fans and critics alike (Metacritic currently shows a “mixed or average” score of 60 out of 100 from critics, and a brutal “generally unfavorable” 3.5 out of 10 from users).
The poor performance of Suicide Squad led WBD to record a $200M loss on its Q1 ’24 financials. Later, a Bloomberg exposé revealed management miscues, numerous delays, “a constantly shifting vision,” and a mandate to implement a games-as-a-service model — “a field in which Rocksteady had no prior experience.”
WBD is far from the only major publisher to struggle with the transition to games-as-a-service, of course. EA, Ubisoft, and Sony (to name a few) have all had stumbles of their own at one point or another, resulting in failed projects, internal reorganizations, and further changes in strategy.
Unfortunately for WBD, though, it can’t afford these sorts of costly misses. The company’s stock is down nearly 70% since the merger with Discovery was consummated in 2022, and Wall Street is pressuring management to turn things around. According to its Q2 results, WBD has a massive $41.4B in gross debt compared to just $3.6B cash on hand. That debt total is more than double the company’s market cap, at the time of writing, and though the average duration of the outstanding debt is 13.7 years, the company will have to get creative to make headway against it. This would explain the recent talk of potential divestitures and emphasis on the recurring revenues of live service games.
What's Next?
One might naturally expect the company’s mobile portfolio to be an area of focus, given the focus on live service, but that does not appear to be in the offing. In fact, the mobile group has been steadily downsizing.
There was the aforementioned divestiture of Playdemic, a move that at the time was labeled “part of our overall strategy to build games based on Warner Bros. storied franchises” by WB Games President David Haddad. There were also the layoffs at NetherRealm, which brought an end to Mortal Kombat: Onslaught (a squad RPG that grossed less than $3M in lifetime revenue, according to data.ai). Mobile CCG Harry Potter: Magic Awakened, co-published with NetEase, is also shutting down a year after launching (though it will still run in some Asian and MENA territories).
What remains of the mobile portfolio is, for the most part, Game of Thrones: Conquest, a 4X game first launched in 2017 that constitutes a steadily increasing majority of WBD’s mobile gaming revenue (greater than 60%, as of August 2024). WBD’s next largest revenue generator on mobile is Mortal Kombat Mobile, a fighting game launched in 2015 as Mortal Kombat X to coincide with the mainline version. After that comes Injustice 2 (another aging fighter, shipped in 2017) and a few smaller titles. (Note: we’re excluding revenue from streaming apps like Max and Discovery Plus.)
Given the recent trends here, if WBD does indeed decide to sell off some gaming assets, mobile might be the first to go. At minimum, the company has not publicly disclosed any forthcoming mobile titles.
On the PC and console front, there’s Harry Potter: Quidditch Champions. A standalone Quidditch game has been hotly anticipated by fans of the franchise, particularly after it was left out of Hogwarts Legacy. Interestingly, a digital version of the game launched for free for PlayStation Plus subscribers and retailed at $29.99 on Xbox, Steam, and Epic Games Store, while the physical version (as well as a Nintendo Switch release) is expected to come later.
The relatively low price point, combined with the fact that the game features no microtransactions (despite sporting a seasonal events model, battle pass system, and cosmetic economy), speaks to management’s modest aspirations for the title (and perhaps a recognition that not every new product needs to be a live service). Given the operational costs associated with maintaining that sort of content treadmill, it’s likely Quidditch is meant to be a stopgap while WBD focuses on a Hogwarts Legacy follow-up, currently “one of the biggest priorities” at the company.
Outside of Harry Potter, WBD has said very little in terms of upcoming PC and console releases. Another Mortal Kombat game is inevitable, though NetherRealm is still actively supporting the latest iteration (2023’s Mortal Kombat 1). It’s also possible (and indeed, heavily rumored) that NetherRealm is working on another Injustice title, though nothing has been publicly confirmed. TT Games is working on another unannounced LEGO title, with job postings hinting at a “major IP” (though it’s also worth mentioning that TT Games is not involved with the upcoming LEGO Horizon Adventures game).
Beyond these titles, the only other project of note (beyond a somewhat baffling Batman VR project) is a single-player Wonder Woman game from Monolith, creators of the Shadow of Mordor franchise (and the beloved "Nemesis" system). Billed as a single player open-world action game, the project was unveiled via a teaser video shown at The Game Awards in 2021. In the nearly three years since then, WBD has hardly mentioned the game. Rumors describe the game’s development as “troubled,” with WB Montreal being brought in for support.
Regardless, one has to assume that even a best-case scenario Wonder Woman launch will have difficulty moving the needle for such a large company. After all, it will be entering a crowded field of single-player superhero titles (including Sony’s Spider-Man franchise, EA’s forthcoming Black Panther and Iron Man games, and Skydance’s Marvel 1943: Rise of Hydra, to name a few) at a time when superhero fatigue may be at its peak.
So, what other options are available to WBD? Despite the rumors of divestitures, selling off gaming assets is tricky given the various interwoven licensing agreements. An interesting candidate might have been NetherRealm, given its clear focus on fighting games and the Mortal Kombat IP, but even that is now tied up in WB’s movie business (with a new entry due in October). Another option would be to sell TT Games, given the flexibility and evergreen nature of the LEGO IP. Neither of these seem likely, however.
An easier path for the company would be to take an approach akin to Disney: licensing out its hoard of intellectual properties to third-party developers. This, too, has its challenges, but for a company with a huge debt load and mounting expectations from Wall Street, this would at least appear to be a less capital-intensive approach to game development. WB Discovery CEO David Zaslav has acknowledged as much, stating not only that the company wanted to keep leveraging its gaming assets, but that there's "also a lot of interest among others in coming to take advantage of some of that IP for gaming, which we're looking at."
Also far more likely is the sale of nongaming assets (Polish broadcaster TVN has been mentioned as a candidate, for example). The company seems potentially set to lose its long-term deal with the NBA, too, which could result in lower viewership, additional cuts of related productions, and less pricing power in the Networks division in the future.
WBD, as a whole, is in a tough position, and nothing outlined above feels like an exciting, optimistic path that will get investors (or players) excited. The gaming division has a couple of lean years ahead, and given the brutal debt load and headwinds in the company’s core networks division, further changes appear inevitable at WBD.
The big, long-lasting question is: To what degree will gaming be part of any solution? The more time passes, the more likely it is that WBD’s debt burden forces it into divestitures. Perhaps the market may provide answers sooner than the company itself can, in the form of a deep-pocketed buyer looking to acquire assets, say, or new licensing opportunities arising from the content engines of the cable networks and linear television.
For WBD to right the ship on the gaming front, the winning strategy will probably be some combination of all of the above: asset sales, licensing, and favorable market changes. Sadly, it doesn’t seem like the talented internal gaming teams will be given an opportunity to have much say in the matter.
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