INDEPENDENT MARKET REVIEW: NCSoft and Paragon Studios Shutdown
INDEPENDENT MARKET REVIEW
NCSoft and Paragon Studios Shutdown
September 15, 2012
The following is a cursory, independent, white paper review, based on publicly available information, on the potential ramifications of the NCSoft execution of the closure of Paragon Studios. The review is intended for public distribution to all interested parties. The report is highly speculative, and cannot attribute all factors. As such, it should not be used to make significant decisions on its own.
NCSoft continues to be a major player in the gaming market, especially in the Eastern Markets, showing the equivalent of $146,000,000 in Q2 sales alone (1).
The Western market is a minor one for NCSoft (less than 6%) (1). Its handling of the shutdown of the City of Heroes (COH) franchise, operated by Paragon Studios, has given the impression of poor judgment in dealing with that market. Its actions have resulted in a series of events creating negative press that has had a disproportionately large effect on NCSoft interests, which could have been mitigated or avoided.
These actions have likely weakened NCSoft’s standing in the Western market, for the short term, and will likely hamper its ability to introduce and maintain titles in this secondary market in the short to mid term. Further, NCSoft has taken no public action to mitigate the situation, while consumer reaction has taken a strong foothold in industry related and general news media, effectively unchecked.
All of these factors combine to give the impression of either a lack of direction in the Western market, or a lack of commitment to the same, indicating proactive measures by competing firms could be especially well timed.
City of Heroes launched in 2004 and has remained a dominant product in the Superhero themed MMORG realm throughout its life cycle. Most notably, it has maintained a substantial foothold in the US market, while major competitors, such as World of Warcraft, were introduced. Recent, Superhero competitors have not been well received in comparison.
The City of Heroes franchise was purchased in November 2007 by NCSoft from Cryptic Studios. In June 2011, the game was switched to a hybrid free to play model.
Without significant investment in advertisement outside of the immediate player population, City of Heroes maintained stable revenue of approximately $2,500,000 quarterly for the last 8 quarters, appearing to have reached a stable level.
Extensive community outreach
Staff at Paragon studios have engaged in a strong outreach program to the consumer playerbase, and have been highly successful in building subscriber loyalty. Further, the control of the individual player over their own COH experience, evidenced in character customization tools, player run base designs and player created content, has created a sentiment of ‘partnership’ between the playerbase and development studio.
Playerbase outreach efforts have also grown from inside the game, involving several charity related programs, started by players who began communicating inside the COH game.
The reaction to the closure announcement has been overwhelmingly negative in the Western Market. Within two weeks, petitions against the closure had reached over 18,000 signatures (2). Articles and commentary widely expressed sympathy to COH players and Paragon Studio staff are found in number across much of the gaming industry websites and blogs(3-7). The event has garnered mainstream media attention at CNN(8). While the playerbase continues to raise awareness and to date, no official response from NCSoft has been made to acknowledge or address the consumer reaction.
In particular, three major factors seem to be fueling public reaction to the closure:
- The immediate closure of Paragon Studios and resultant immediate lay off of all staff has struck a resonance with the predominantly American market. Aside from feeling a sense of partnership with Paragon staff, the playerbase also empathizes with the struggling economic times in general.
- The continuing work on new expansions (i24) and release of new powersets and in game content led to confidence in the health of the game. Many players came back or subscribed to VIP status as a result of these efforts, and felt particularly mislead by the abrupt and unpredicted closure announcement
- City of Heroes has developed a very strong social network, and people seem to react to the loss of that community as much if not more than the game itself. COH is a game which is accessible to a wide range of ages, disabilities and ethnicities, due to its ease of operation, low violence content, and gradual learning curve. COH almost certainly benefited from a nostalgic factor, which is also being seen in other games.
Mischaracterization of Western Market
Numerous factors seem to indicate that NCSoft is out of sync with the player demographic in the US in general, as well as the local population of City of Heroes.
Despite a steady influx of younger gamers which remain as foundation population set to the gaming industry, many adults have continued to play, creating a large population themselves. These tend to be more loyal subscribers, with larger disposable incomes and posses a range of professional skills they bring to bear in internal game organization (guilds, events, etc).
City of Heroes in particular, capitalizes on the West’s love of the Comic Book Superhero, which is a major industry unto itself, considering the Marvel (Disney) and DC franchises. This is a genre that many can trace back to early childhood, and the hero concept is deeply embedded in the American consciousness(9).
Finally, there is an expectation for a Return on Investment when it comes to loyalty from many gamers in the United States. Players, who have established long term commitments with the game, expect a certain reciprocation of loyalty from the parent company. Once example is SOE’s Everquest, which still offer servers with content updates for dedicated players despite its 13+ year age.
Confidence in NCSoft has almost certainly slipped in the Western market as a result of the City of Heroes closure. The company is considered ‘out of touch’ with its market. A percentage of players are reluctant to commit or try new NCSoft products without the security of a reciprocation of loyalty. For example, Sales of Guild War 2 has been negatively impacted by players who do not want to ‘invest’ time into an NCSoft product in light of the City of Heroes closure, feeling the game could be removed without notice or warning. The degree of this effect remains to be studied in depth and may be insignificant.
Little if any showing of a proactive effort to mitigate the negative publicity being generated has been shown on NCSoft’s part publically. While it is nearly certain attention to this is being given internally, the lack of outward leadership gives the impression that NCSoft either does not care to, or does not know how to address the issue. This lack of attention to an event resulting in a falling consumer confidence, however niche of a market it comes from, is baffling from an investors perspective.
The subsequent announcement of the release of Sword and Soul also gives a very confusing message, to both players and investors. By ending a stable product catering to a target demographic and introducing a new product not aligned to that market in its place, NCSoft leadership could be interpreted as showing a marked lack of innovation and even competency. Instead of recognizing the value of an existing product, NCSoft leadership seems determined to push existing formulas, regardless of the market demographic.
While NCSoft is covered largely by EULA statements, there are potential avenues for cases for fraud being brought against NCSoft in the case of long term advance subscription purchases. By allowing for Paragon Studios to continue work on expansion content, heavily advertising that content, and releasing new content, it is reasonable to assume many paying customers were doing so with the expectation of being able to play said content. If it could be shown NCSoft intended to do this in advance intentionally allowing Paragon to continue with the expectation of offering time on new releases (example: Guild Wars 2) as compensation, ‘bait and switch’ related fraud charges might be successfully applied in US and UK courts.
For reasons that are unclear, NCSoft seemed to undertake an approach for the ending of the City of Heroes franchise without a solid approach to sunsetting the product. Instead, it seems to have decided to simply ‘pull the plug’, without much preparation for consumer reaction. Consumer loyalty, in what most other scenarios would be considered a tremendous asset, has been turned into a liability though actions which continue to paint NCSoft in a negative light.
The overall behavior by NCSoft appears to be reactionary, potentially indicating either an internally localized lack of experience or a wider lack of direction when it comes to ongoing interaction in the Western market.
Internal efforts to address the situation may be occurring, but at this stage it appears the fire is being left to burn, in what can best be described as a clumsy ‘scorched earth’ move. At this point, NCSoft may be looking for a win-win exit strategy to this situation, or may simply be willing to write off the entire Western market place, both scenarios being potentially leverageable.
The overall situation created by the NCSoft decision is complex, involving international factors, a complex market place and multiple stakeholder factors. The situation is time sensitive, in that public reaction efforts continue to gain media traction, while any potential salvage efforts from NCSoft could be less effective as former Paragon Studios staff disperse into the workforce. Additional, expedited research on the topic is recommended prior to any outside investor actions.
- (NCSoft) 2Q 2012 Earnings Release, Aug 8, 2012
- NcSoft: Keep NCSoft from shutting down City of Heroes!, Megan Russel, Change.org, (link).
- A Mild Mannered Reporter: The fight to save City of Heroes, Eliot Lefebvre, Massively.joystiq.com, (link).
- Leaderboard: Fight for City of Heroes or let it go, Justin Olivetti, Massively.joystiq.com, (link)
- Hang Up Your Cape: City Of Heroes To Close : (, John Walker, rockpapershotgun.com, (link)
- Save City of Heroes, Scott R Kurtz, pvponline.com, (link)
- Gamers Rally to Save City of Heroes: Ian Mat, starburstmagazine,com, (link)
- Affecting Change Through Social Networking and Virtual Capes, CNN.com, (link)
- Why Do We Love Superheroes? Ben Sharpiro, Frontpagemag.com, (link)