In 2007, the big trend was simple home games with complex controllers. Products like Guitar Hero, Rock Band and Wii Fit are selling for $100 and more because they feature fancy controllers. One of the best selling games of 2007, Nintendo's Wii Play was nothing but nine simple mini games packaged with a Wii controller. It is the packaging that distinguishes these games. A product like Dance Dance Revolution is widely available for free online, but without the fancy dance pad it is just not the same.

Of course, the problem with bundling a game with a complex controller is obvious. From the manufacturer's point of view it is no longer a simple or inexpensive proposition. The inventory risks are large and retailers and publishers must make a big bet that consumers will be willing to fork over a significant sum for a hunk of plastic. For products like Guitar Hero, much of the appeal comes from the expensive licensed music IP. Clearly there will only be a handful of products that can follow this model and they will tend to come from the most well-capitalized players like Nintendo.

The good news is that there is a growing opportunity for simple games to be distributed to a mass audience at a low cost. Through online connections there is the ability to go back to the old arcade model where consumers spend billions of dollars a few cents at a time. This is the microtransaction model that is just starting to emerge. The game industry has been dependent on an expensive retail distribution model that encourages most products to sell in the $20 to $60 range. This leaves no flexibility to capture the consumer that is willing to spend a few dollars on some quick discretionary entertainment. For several years, the casual game industry focused on a $20 digital distribution model, but this was too much like the current retail distribution model. The ability to sell products online for less than $10 will open up entirely new opportunities for the game industry in coming years.

This begs the question of what will happen to the complex epic game with the $20 million development budget and $60 retail price tag. The answer is a huge and growing chunk of consumers are out there waiting to play these type of products. In 2007 the big revenue generators included epic games like World of Warcraft, Halo 3, Call of Duty 4, and Mass Effect. However, a true mass market game platform needs to play both the epic games and the simple games.

The first two PlayStation systems sold over 100 million units each because they appealed to the full spectrum of consumers, from the casual consumer to the hard-core consumer. Ironically, it was Nintendo that helped invent the era of the epic game with the launch of the complex 3D adventure Super Mario 64 in 1996. For the Nintendo 64, Nintendo only wanted to focus on the large epic games. Titles like Super Mario 64 and The Legend of Zelda: Ocarina of Time remain some of the best-selling video games of all time, but as a game platform the Nintendo 64 was outsold by the PlayStation over three to one.

On a worldwide basis for 2007, it looks like the PC passed the PlayStation 2 as the leading revenue generating platform. The PC has become a platform that can satisfy the wide range of consumer game interests, from the casual to the hard-core gamer. Not surprisingly, the diverse PlayStation 2 still had a strong year even after the development focus has shifted to all the new systems. Going forward, the challenge faced by the Wii is that it is not that strong when it comes to the more complex epic games.

It is likely that 2008 could be the year of the epic game (with a focus on the number 4). Products like Devil May Cry 4, Metal Gear Solid 4 and Grand Theft Auto IV could be the big stories for the first half of 2008, and all these products are coming out for the Xbox 360 and/or PlayStation 3 (but not the Wii). The key challenge faced by Microsoft and Sony is to avoid the Nintendo 64 syndrome of being locked only into the market of serious gamers. DFC estimates that this is a worldwide market of over 40 million gamers, which is clearly nothing to sneeze at. However, Sony alone is used to selling over 100 million game systems.

Microsoft and Sony are clearly not ignoring the market for simple games. The good news is that the Xbox 360 and PlayStation 3 can both do an excellent job at BOTH simple games and the more complex and graphically rich epic games. The problem has been more one of packaging and positioning. Microsoft has made a big focus on Xbox Live Arcade and products like Scene It, but so far these seem to have attracted the hard-core existing Xbox 360 owners that want to take a break from Halo 3. The simple Xbox Live Arcade game Geometry Wars created quite a sensation in the early days of the Xbox 360 where it was available as a $5 download. In late 2007, Vivendi Games launched a version of Geometry Wars: Galaxies for the Nintendo Wii and DS priced at $40 and $30 respectively. Once again it is less about price and more about packaging and marketing. Microsoft at heart is a technology company, not a consumer entertainment company, and they have struggled with packaging products for the more mass market consumer.

Sony faces a different challenge with the PlayStation 3. The good news is that the PlayStation 2 has remained strong and the PS3 is coming down in price. In addition, the Xbox 360 had a huge lineup for 2007, but after two years on the market the system failed to reach the 20 million mark that DFC said would probably be necessary for the Xbox 360 to establish a sustainable lead over the PS3. The bad news is that the price and lack of product is still a major issue for the PlayStation 3. Sony has done an excellent job of reaching the mass market gamer, but only if they have the right product. The PlayStation 3 has a long way to go to expand its appeal and start to look more like a mass entertainment product, as opposed to a product for the bleeding edge technology consumer.

DFC Intelligence forecasts that 2008 will be far and away the biggest year ever for the game industry. Simple games, complex games, portable games, PC games, Wii, Xbox 360, PS3, consumers will be buying it all. It is all about reaching the consumer in the right place with the right product. If 2007 showed us anything, it is the game business is clearly an entertainment industry, not a technology industry. Products that are fun and exciting are not necessarily the most complex. The companies that fail to grasp that basic concept that will struggle in the years ahead.

Reprinted courtesy of DFC Intelligence