ESA Talks Problems, Perceptions, PromisesS

Over the past month the Entertainment Software Association has lost a number of high profile members, acknowledged that they spent more than $5 million to move E3 to Santa Monica for a year and taken heat for the role, or some say lack-thereof, that CEO Michael Gallagher has played in the industry since his appointment.

Earlier this week we had a chance to ask a number of pointed questions of Gallagher about some of the news that has recently rocked the association that he runs.

In this exclusive first in-depth interview with Gallagher about the perceptions and problems plaguing the ESA, he reveals that the annual E3 tradeshow made up about 85 percent of the association's operating funds and that the membership dues increases sparked by the show's downsizing were in some cases "substantial." He also offers his thoughts on why companies like Activision, Vivendi, LucasArts and id have left the fold of the association and why the ESA, despite the recent troubles, is still an important and viable part of the industry.

How much advance notice did you have that Activision, Vivendi, Lucas Arts and id were going to leave the ESA?

Each company gave the ESA ample notice. In discussions, they expressed gratitude for our work and continued support for the mission of the ESA. The public comments from all involved reflect that.

What reason did they give for leaving the ESA?

I would refer you to those companies for their reasons. They are publicly on the record supporting ESA's mission, but their own business circumstances led them to that decision.

The business environment for video games is very complicated today. Some games are hugely successful – and very costly to develop and publish – but those are greatly outnumbered by those that do not do well in the marketplace. Even though the industry as a whole had a record year last year, with revenues up over 43%, that success has not been spread evenly.

Do you think that the increased cost of ESA membership factor into their decision?

Again, I'm sure this was a tough decision for those few companies, but would encourage you to contact them.

How much did ESA membership dues go up, percentage wise?

To answer this, it's important to provide some context. In the past, E3 was a revenue-generating entity. As such, approximately 85% of the ESA's operating funds resulted from that event. The trade show surplus allowed the ESA to provide membership at significantly discounted rates.

With the introduction of the new E3 Media & Business Summit, our Board of Directors increased membership dues to fund the ESA's work. In some cases the increase in dues was substantial. Without getting into specifics, which are private and specific to individual ESA members, each company pays a certain amount based on North American sales.

Do you have any sense how happy your current member companies are?

Again, I would direct you to the member companies for that answer. The video game industry is very fortunate to have an abundance of strong, innovative, successful companies. Those companies are still very much engaged and supportive of ESA and its mission. In the past year, our industry has faced serious state government challenges, including attempts to regulate the sale or distribution of video games, which we have successfully beaten back. In addition, computer and video game companies are currently enjoying great economic and critical success and ESA has been a leading force in amplifying that good news to key audiences that are critical to a robust environment for the industry. We know our members appreciate these successes and remain deeply engaged in the ESA's activities and are supportive of our mission.

Is the exodus from ESA over or do you expect more to follow suit?

The membership of any association fluctuates over time. For example, though it didn't receive much attention by the gamer press, in the past nine months we added four new members-Epic Games, MTV Games, NCSoft, and Codemasters. What's important to remember is not the changes in membership rolls, but the value the ESA provides to the industry –- a proven track record of defending First Amendment rights, educating elected officials and the uninitiated about computer and video games, and creating an environment beneficial to the entire industry. I would expect that the ESA will continue to make adjustments to ensure that we are delivering the best value and highest benefit to our members in the years to come.

Our industry has changed dramatically since the association was formed 13 years ago, and it is experiencing significant growth and change today. One thing that has become very clear in my first year on the job is that the huge growth the industry has undergone – 43% revenue growth last year, the expansion of online gaming, new revenue streams and models – has given rise to scores of entities that would benefit from participation in the ESA. This overall industry growth is going to be reflected in the ESA of today and tomorrow regardless in the number of members we have on our rolls on any one day.

How unanimous was the decision by the ESA's board to downsize E3? Were any of the now former members of the ESA dissenters?

That decision was made well before I arrived and I am not going to talk about the specific votes of individual board members. The ESA Board collectively made the decision. What I will say is that the E3 Business & Media Summit in July will display the best the entertainment software industry has to offer. And, the exclusive, invitation-only nature of the event will help ensure an intimate environment, conducive to meeting business and media needs.

How unanimous was the decision by the ESA's board to move to Santa Monica? And to move back to LA? Were any of the now former members of the ESA dissenters?

Again, that decision was made well before I arrived at ESA, and I am not going to talk about the specific votes of individual board members. The ESA Board heard the feedback provided by exhibitors, journalists, guests, and their own staffs and decided to move the event.

Was the roughly $5 million penalty paid by the ESA to the LA Convention Center the entire cost of breaking the contract that ran through 2012 or was that only for breaking it for a year?

t's important to note that the $5 million figure that was reported isn't a penalty or fine assessed by the LACC. It was the cumulative one-time sum from a number of different factors—all of which are normal when moving an event.

Was the decision to move back to the LACC in anyway tied to the penalty paid, in other words did it lessen the fines?

No, the decision to hold the E3 Media & Business Summit in Los Angeles was made to meet the needs of both exhibitors and participants. It offers a centralized location for the number of activities and events occurring during the Summit and has the necessary infrastructure to support the number of attendees, staff, and personnel required for a successful Summit.

How did the ESA manage to land space at the LACC so quickly? Are you in a new multi-year contract with LACC? Did the ESA have to pay more than usually to get space in the center on such short notice?

The LACC space was available and we were able to close quickly on a contract because of our long-standing good relationship with both the city and the LACC. I'm not going to get into specifics our agreement.

Will there be an E3 next year?

Absolutely, The E3 Media & Business Summit will remain the preeminent gathering for the computer and video game industry on this continent. As we have done in the past, we will survey participating companies, members of the media and other Summit participants to learn after this year's event and decide how we can consistently improve subsequent editions of E3 next year and in the years to come.

Is the continuation of E3 in doubt or up for discussion by the board?

See above.

In today's state of video gaming, with the industry often being included in mainstream coverage, both as a form of entertainment and as business news, does there need to be an E3?

Yes. Remember, the E3 Summit is first and foremost about getting business done. The Summit provides key players within our thriving industry a much-needed window for high-level meetings in a business-like setting. E3 also provides a time and venue for valuable networking opportunities and dedicated time for interaction with key analysts and members of the media.

Is the board considering shifting their attentions to a new event that is open to the public, perhaps as a way of replacing E3?

To be honest with you, the ESA and our members' E3 Summit teams are right now wholly focused on ensuring a productive, efficient, and professional experience for attendees this July. That's where our focus belongs. As we have done following past editions of E3, we will survey various participants and, based on that input, we will set about designing the 2009 edition of the Summit.

Does the recent exodus of member companies reflect a loss in faith or of value of the ESA?

The loss of a few members reflects the individual choices these companies made for their own business reasons. There are hundreds of trade associations in Washington. Members come and go over time. The same has and is happening at ESA. We added members last year and have lost a few members this year.

ESA's success in helping to create an ecosystem conducive to the growth and innovation we are seeing in the computer and video game industry is indisputable. Our industry is growing and evolving and these changes are going to be reflected in the ESA's membership, mission and activities. The industry of today will likely be different than the industry of 2015. We look forward to continuing our role as the voice and face of the industry in Washington, DC and in state capitals around the nation in the years to come and carrying forward the policy agenda that promotes an environment where video games thrive now and in the future.

With first amendment and gaming issues fading away, the level of awareness in the rating system rising and E3 no longer the preeminent gaming event in the world, does there need to be an ESA?

I actually disagree with the premise of your question. First amendment issues aren't fading away at all. In the past year we've seen serious state government challenges, including attempts to regulate the sale and distribution of computer and video games. We also are starting to see unconstitutional proposals that would tax video games differently than other forms of first amendment-protected material. Now, more than ever, we have to maintain our vigilance and promote the ESRB rating system, public/private partnerships, and applaud elected officials who work with us to ensure the games children enjoy are appropriate.

Look, it's a simple equation. Unconstitutional limitations on entertainment software inhibit not only developers in what they can create, but also in the types of games consumers enjoy. Also, the tax proposals we see hurt ordinary consumers, too. The issues we're at the forefront fighting are not just publisher or developer issues. They are challenges to the entire art and entertainment of video games.

Knowing this, gamers need to be involved in letting their elected officials know that gamers are politically active and vote. We encourage all those interested to visit www.videogamevoters.org and sign up.

ESA is the leading defender of the industry in all of these challenges. As an industry, we will continue to face challenges as we grow into new business models. As online gaming blossoms, issues of privacy, law enforcement, and helping parents to protect children will be a part of a larger discussing. ESA will continue to be the singular voice of the industry in those debates. Where foreign governments are not fully protecting our industry's investment in innovative and creative products, ESA is leading the charge to encourage sanctions and open up new markets and opportunities. Similarly, where misguided and unconstitutional state legislative proposals are defeated, ESA will be front and center, defending the creative forces within this industry.

These opportunities and challenges have not, and in the foreseeable future will not, disappear. As our industry grows and changes the need for representation in Washington and state capitals will grow and evolve. The political battles we are fighting today could be very different form the battles we fight next year and five and ten years from now. As a result the need for the ESA will exist for many years to come.

Some anonymous company sources have expressed concern over Michael Gallagher's leadership, they say he isn't vocal enough and blame some of the recent issues with the industry on him? How do you respond to that?

As a matter of policy, ESA doesn't comment on blind quotes and speculation. If they are anonymous, it shows the quality of the source. Many industry leaders have publicly endorsed the ESA mission and my leadership.