We all know this a year of change in the video game market place. The future of the industry is very much at a crossroads with the big 3 bringing out their new platforms and many questions remain unanswered. Maybe it's time to say "the Emperor Has No Clothes." The video game business is clearly broken and is in desperate need of fixing. This is not just another console transition—we are 6 years away from the last one and in a totally different world. Here are my observations on the problems with the current model.
1. Perception, Games as Media - Publishers and retailers still talk about video game "product" as if it's the inanimate DVD boxes that sell. A fundamental shift has happened and we need to look at video games as Media, not as products. Think about how the entertainment landscape has shifted since the last console transition—then there was no iPod, no MySpace.com and online gaming was still very limited in scope to hardcore gamers. Today games are competing for timeshare almost more than dollars. If your key demo is 15-34 there is a lot more choice of activity where they can spend time and money. Last year there were only 10 million people on MySpace, this year it's 100 million. If you don't think this is competing for the same entertainment time as a game then you're fooling yourself. If you think of "games as media" you get a new perspective on what's important for the product and ultimately the franchise. The key words of successful game products (like World of Warcraft) and new platforms (like Xbox 360) are community, participation and engagement. As games involve users more, they grow more attached and participation drives community, which in turn builds value. Think about ABC's Lost series and the almost rabid communities built around that and the fierce loyalty it's driven.
2. Upside Down Metrics - Will rising costs mean increased sales? Almost every technology driven business relies on the bell curve of early adopters at the front end with high costs and small demand then a transition into the mainstream with dropping costs, increased product supply and broad adoption. Think of anything from PCs to cell phones to DVDs. The game business has the opposite trends now. Currently a minority of released titles are profitable. With the next generation development costs are increasing rapidly, which means more units must be sold of each title to turn a profit. The PS3 requires a level of financial investment that clearly puts it beyond the impulse buy of a mainstream entertainment enthusiast. Will Blu-ray be enough to drive its sales to the mass market?
3. Increased Risk Means Decreased Creativity - The next-gen systems require publishers to place very large bets with each title. This will mean decreased risk taking and just regurgitated sequels of big brand franchises. How many publishers will take risks with multiplatform original IP? This is clearly not good news for the consumer as innovation has driven our industry from the beginning. The irony is that the amazing tools, capabilities and quality of the new systems may very well doom what is most important, which is the game itself. Reconciling what a creative team wants and what the executive suite needs in terms of profits will be a growing challenge for many companies.
4. Pricing - Talk is that games will be more expensive for next-gen systems. [They already are on Xbox 360 and will likely be similarly priced on PS3 - Ed.] Increasing prices is never a good stimulant of demand, especially when thinking about the cost of games vs. the cost of the competitive landscape of Internet services, music and other entertainment. This is a very sensitive subject for publishers and retailers and I'll dive deeply into it in the final column.
5. Growing the market - Where will the growth come from? Will the size of the hardcore audience suddenly double and triple or do we need the broad base of the mainstream to grow the business? The answer is obvious and so far the winners seem to be Microsoft with Xbox Live Arcade and possibly Nintendo with its easy to use and enjoy Wii games.
At a recent trade event, a game retail representative said that video games are "not a business but an industry." There is a lot of nervousness out there as to what's around the corner. Recently investor Stewart Alsop of Alsop Louie Partners said that this is not just another console transition but a fundamental change of market. What are the publishers' and retailers' strategies to react to the new landscape? Will online distribution be additive to the retail model or directly competitive? Is there a business model for many game publishers or is there just room for a few gorillas who ultimately consolidate everyone else?
The good news is that consumers love games and new markets have been opened with casual games appealing to women. The industry needs to rethink the fundamental premise of create a game, replicate disks, ship to retail, advertise and hope for the best.
Will our industry be able to adapt to make games into a growing business?
Please send us your opinion of what works, what doesn't and what needs to change. We'll be happy to publish your feedback (with, or if you'd prefer, without your name).
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You can check out Mark's Part 1 in the series, "Are Videogames the New Soccer?" here.
References:
Are big budget games sustainable?
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