Saturday, January 31, 2015

Maxis and SimCity: a trip down memory lane

I played a lot of computer games as kid growing up in the 1990s, and one of my favorites was SimCity 2000. I knew that the company that published it, Maxis, had been publicly traded, and nostalgia motivated me to look into its history.

SEC filings and news articles show that Maxis had a short, star-crossed life as a public company. It went public in May 1995 as SimCity 2000 sales were cresting, and the stock tripled from its $16 IPO price within a few months. Unfortunately, it was all downhill from there. The games that Maxis released immediately after SimCity 2000 didn't match its success, and after several years of growing profits the company began to lose money. Two years after the IPO, Electronic Arts acquired Maxis for $11 per share. Before the acquisition the stock had traded as low as $7.

Maxis' origins

Youtube has a video of Jeff Braun, Maxis' co-founder, giving an interesting presentation about the company's history.

SimCity was the first game that Braun and his partner, Will Wright, made. When it was released in 1989, most computer games took after arcade games-- there were clear rules about how to win and lose, and winning meant achieving a specific objective or getting a high score. SimCity was radically different. There was no one way to win and no scoring. The game involved designing and building cities, and there were infinite ways that the player could do so.

SimCity's departure from convention made it impossible for Braun and Wright to find a publisher:

No one wanted it. [Will Wright] took it to a bunch of publishers and the consensus was, these publishers published games, and so they asked him "How do you win?" and he said "You can't win. It's like a city," and they said "Well, if you can't win it's not a game. We don't want it."

And so they self-published, working out of Braun's house. Sales were slow for the first few months, until Newsweek profiled the game in its first-ever video-game review. After that, it sold more than a million copies. Braun jokingly describes the game's appeal and his motivation for starting Maxis:

I had a $4,000 computer and I loved games, and so I was playing all the games that were available, but they were all for teenage boys and [with] my reflexes I couldn't get past the first level, and I'm like, "How is it that games are being produced on the PC for people that can't afford them? And what about games for people that can? And I bet there's a market for games for people like me."

True to his hunch, many of the people who bought SimCity were new to computer games. In its wake, Maxis released a bunch of other simulator games that were modest successes: SimEarth, SimAnt, SimLife, and SimFarm. 1994's SimCity 2000 was the proper successor to SimCity and an even bigger hit than the original.

Going public and The Sims

Maxis went public the following year. Around the same time, Wright began designing what would eventually become The Sims, which did for people what SimCity did for cities.

There was a lot of opposition to The Sims within Maxis. The game's working title was Dollhouse, and many people couldn't see past the dumb name. Braun says that he and Wright opened a satellite office away from Maxis headquarters where they could develop the game in secret, without any criticism from the marketing department and the board of directors.

Despite its rough beginning, The Sims ultimately became a runaway hit. For a while it was the best-selling game of all time. Like SimCity, it succeeded by departing from industry convention and creating a new market: Braun estimates that 70% of players were women.

Unfortunately, it wasn't a runaway hit for Maxis: by the time it was released, Electronic Arts had acquired the company. Maxis didn't last long enough as an independent company to reap the rewards of its most successful idea. Arguably it never should have gone public, since its revenues were lumpy and its biggest products had no real precedent or predictability.

A cross-section of IPOs

The New York Times used to publish a weekly notice of new stock offerings. While researching Maxis, I found the notice for the week it went public. It was one of 29 companies that either IPOed or conducting a follow-on offering that week.

While Maxis' performance as a public company was poor, it wasn't atypical. Many of the companies with contemporaneous offerings did even worse.

Harmonic Lightwaves, Hardinge Brothers, and NGC Corp. all subsequently changed their names-- to Harmonic, Hardinge Inc., and Dynegy, respectively-- but their stock prices haven't changed. All trade at the same price as in 1995. Integrated Device Technology is lower today than in '95. Felcor is 60% lower, although it's paid significant dividends in the meantime.

Borders, Boston Chicken, Computer Learning Centers, Number Nine Visual Technology, Uno Restaurants, and Videoserver all went bankrupt. Kmart, Borders' former parent and the offering shareholder in its IPO, also went bankrupt. Computer Learning Centers was a fraudulent for-profit college that David Einhorn mentioned in Fooling Some of the People All of the Time.

Altron was acquired by Sanmina, which is down 40% since then. Altron was flat from May '95 until its acquisition.
Nexgen was acquired by AMD, which is down 80%+ since then.
Teltrend was acquired by Westell, which is down 80%+ since then.
Adflex was acquired by Innovex, which went bankrupt.
Uunet was acquired by Worldcom, which went bankrupt.

All of these companies were acquired for stock, so long-term shareholders have shared in the acquirors' pain.

APPS Dental was taken private two years after going public. Its annualized return in the interim was 9%, respectable but far less than what the major indices returned.

ITI Technologies Inc. subsequently merged with a competitor. GE acquired the combined company in 2002, giving shareholders a 7% annualized return.

Kenneth Cole Productions was taken private in 2012 after inflicting years of bad returns on its shareholders.

Tekelec was taken private in 2011. Long-term shareholders who invested in its 1995 offering earned a 5% annualized return.

Four of the offering companies were REITs that have since been acquired. I wasn't able to find accurate performance figures for them, but news releases suggest that their aggregate performance was fairly strong. They are men on a lifeboat in a sea of bad returns.

A recent study finds that the median stock underperforms broad stock-market indices and that many stocks experience catastrophic, permanent losses. The performance of Maxis and its peers, while anecdotal, is a stark illustration of that.

1 comment:

  1. I didn't read the study, but it makes sense that the median stock underperforms the index. A stock can only go down 100%, but it can go up >100%. I'm not a statistician, but given that, it makes sense that the average return (i.e. the index return) is higher than the median return of its constituents.


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