CD Projekt released a strategy update on its website on 30th Mar 2021.
In this strategy update, CD Projekt confirmed that its flywheel strategy to build game franchises – anchored in rich single-player AAA games and then create incremental game content and expansion into broader entertainment format.
As I mentioned in my previous CD Projekt post:
“In some sense, CD Projekt has a very similar business model to Disney. Disney use movies to anchor its IP franchise which can then be further monetised through theme parks, merchandises and video games. For CD Projekt, it anchors its game franchise with flagship AAA games such as Witcher 3 and Cyberpunk 2077 and then develops spin-off games based on these core game franchises. It also produces TV series to further expand the influence of its game franchise.”
This is an important point for CD Projekt’s long-term earning potential because game franchises once established are not only a recurring revenue source but can grow over time.
Currently, CD Projekt’s Witcher is a well-established franchise while Cyberpunk 2077 could become the next best game franchise.
It is also interesting to note that CD Projekt picked already proven fictional worlds such as Cyberpunk and Witcher to build game franchises. This is a very shrewd move and massively increase the probability of success.
The other interesting is that organisationally, CD Projekt is going to build cross-project functional teams that can support multiple game development projects at the same time. Or said in another word, CD Projekt is getting more serious about building a game development infrastructure within the company to support larger-scale game development efforts. This is a very sensible and logical solution to a growing game company. Historically Netease also performed this transformation to scale its game development efforts. While this will improve game development efficiency, it doesn’t mean that the games are more likely to succeed. This is simply a cost of growth that CD Projekt has to deal with to take the company to the next level or in the company’s own words: “to become world’s top three video game developers”.
Finally, the company announced that they will take a more incremental approach to online multi-player experience and remain anchored in a single-player experience. Frankly, I find it a bit disappointing. I suspect that CD Projekt is forced to take a more incremental approach because it simply doesn’t have the technology nor the talent nor the company-wide commitment to developing high-quality online game experiences. CD Projekt’s game development culture is deeply rooted in single-player experiences.
The company is very cagey on details about its online multiplayer plans. The company is planning to include some multi-player experience within the single-player AAA game. Not sure what it really means and also no clues on monetization. We will have to wait.
On a high level, I think the company is doing the right things and moving in the right direction. It seems like CD Projekt is embarking on a multi-year journey to 1) expand development capacity 2) upgrade technological infrastructure and 3) acquire new competencies in online gameplay.
I believe CD Projekt is ambitious enough and has a unique culture to have a reasonable chance of making the transformation. As a long term investor, I am willing to be patient here.
Investment action: keep holding