Mad Catz Cuts Harmonix Ties
JUNE 6, 2016 • After realizing less than expected revenue from its Rock Band 4 co-publishing deal with Harmonix Music Systems Inc., Mad Catz Interactive, Inc. has finalized an exit agreement and will clear out remaining Rock Band 4 peripheral inventory by September 9. In a financial conference call, chief executive Karen McGinnis explained that the game sold well when launched last October but consumer demand was significantly lower than expected. To try and build interest, additional capital was spent on extra marketing at the same time there were aggressive pricing promotions to drive sales. After the holidays, Harmonix disclosed changes coming in the game for 2016 that would necessitate modifications to Mad Catz’s hardware. Given the circumstances, Mad Catz decided it would not invest additional development resources and tooling to design new Rock Band 4 hardware, and Harmonix chose to search for a new hardware partner. Mad Catz attributes its net loss of $11.6 million dollars for the fiscal year ending March 31, compared to a net profit of $4.7 million for the previous year, to its Rock Band 4 business. The loss came despite net sales of $134 million, an increase of 55% from $86.2 million in fiscal 2015. Mad Catz estimates the value of remaining Rock Band 4 inventory at $8.3 million, based on how much the firm believes it can sell the hardware for, and where.
Impact: No doubt about it, Rock Band 4 was a big bet for Mad Catz. So big the peripheral maker focused little on other new product development going into 2015. Naturally a product like Rock Band 4 was going to drive a growth in net sales for fiscal 2016. The problem is the cost of driving those sales was too high given the soft consumer demand, deep discounting and extra marketing spend. This is a prime example of how the game industry is in many cases a net loss industry where companies spend more money making and marketing a product than what is generated in revenue. Betting in a big way on a genre and franchise that had peaked many years ago was a major gamble. Of course, if the game had sold as expected, the company’s financials would be different and management could have declared a big win.
Unfortunately for Mad Catz, there were good reasons why the music game segment lost its appeal with consumers by 2010: too many sequels and too much pressure to purchase new peripherals, and the global recession all played a part. A reboot of either the Guitar Hero or Rock Band franchise may have been moderately successful, but with both releasing new titles last October, it is understandable why there were insufficient consumers for the kind of success either series needed. Faced with redesigning its Rock Band 4 hardware without a major holiday sales success to support the changes, Mad Catz made the wise decision in declining to make the investment.
Not surprisingly, the focus on Rock Band 4 rearranged Mad Catz’s business for fiscal 2016. Sales of products for the current console generation grew from 21% to 70%, while PC products dropped from 46% to 19%. Sales of Mad Catz-branded products (versus other brands like the premium Saitek PC devices) also jumped from 34% to 71%, plus sales in the Americas grew 215% to $87.8 million while Europe dropped 17% to $38.4 million and Asia Pacific fell 35% to $7.8 million. The upsurge in console sales provides some insight on why Mad Catz chose to roll the dice on Rock Band 4. Whether those inroads can be leveraged is unknown, yet moving forward the firm intends to concentrate further on consoles with more specialty controllers, as well as extend its Tritton brand of headsets. Success in the game market is all about moving on from a product failure to the next opportunity. In the end, it is hard to see where Rock Band 4 left Mad Catz with any tangible benefits outside of a short-term revenue increase. Unfortunately, we do not see another captive controller opportunity. With a market value under $15 million, and very strong competition from many fronts, it is hard to see how Mad Catz can come back from such a major disappointment.