The Video Game Industry is Dead – Long Live the Video Game Industry

The video game industry has enjoyed a multi-decade run of enormous economic success. It redefined the way consumers engage their televisions. It has given birth to a new breed of storytellers, ones that include programmers and designers who are capable of producing characters, narratives, and worlds on a par with the best Hollywood has to offer.

In spite of all this, the video game industry is on the precipice of a massive retrenchment. The industry many of us have come to recognize, one dominated by sophisticated gaming consoles and $20-$60 retail games, will change into something very different and, in my opinion, much stronger.

But first, why is the industry in its current form so troubled?

  • The cost of game development has roughly doubled with every generation of new consoles. A world-class game for PlayStation3 can cost as much as a mid-tier Hollywood movie, i.e. $20-50 million.
  • Retail pricing has not kept pace with these increased R&D costs, putting massive pressure on margins.
  • R&D, marketing and production costs drain cash flow because most of these investments are required before a company makes a single penny of revenue. As a result, a single under-performing game can bankrupt a company.
  • For all its growth, the traditional console games industry is built on the back of a very narrow demographic of consumers. Males 18-29 (and their parents) do most of the purchasing and/or playing. The industry long ago surpassed new movie box office revenues, in spite of the fact that I can’t think of a single person in my parents’ generation who uses a gaming console. Remarkable.
  • The things that justified the creation of new consoles – faster processors, more storage, better graphics – have been compromised by the simplicity and ubiquity of relatively low-tech but elegant and low cost games for mobile devices and social networks. These new breeds of games were built for short bursts of gameplay and, sometimes, thousands of other players competing at once. They care less about graphics than five minutes perfectly spent playing something like Wordament or Angry Birds.

In other words, building traditional video games is costlier than ever, while pricing remains flat or even decreasing when adjusted for inflation, and consumers care less and less about console horsepower because they can experience terrific games on their mobile phones and social networks for free or a fraction of the cost. For years, gaming industry experts predicted that one day, video games would break through their demographic barriers and achieve true mass market appeal. Turns out, they were right, though not in the way they ever could have imagined.

So why is the industry poised for rebirth? The fact that social and mobile games have finally brought older players and females into gaming means that it has become a mass market medium. I just don’t think that the industry’s giants can survive unless they successfully navigate some monster decisions.

1. Can the console gaming industry do anything to address its weaknesses?

To survive, the industry first must tackle the economics that have produced stock charts like this one. One area to attack has to be production costs. Can they reverse their upward trend? Can the console manufacturers deliver tools that make it easier and cheaper for gaming developers to create mind-blowing graphics that console gamers expect? On the other side of the ledger, can they embrace more of the monetization models that have given rise to a mobile and social gaming industry, including in-game purchases, in-game advertising, and subscriptions? Companies like Activision-Blizzard give other traditional incumbents glimmers of hope because it has shown that there are millions of customers who are willing to pay premium monthly fees for the privilege of playing a deeply engaging game like World of Warcraft. So, too, does Xbox, which supports both high end console games and lighter, less sophisticated games alike. If I had a studio to run, I’d focus on building games for lower retail price points, that feature multi-player gameplay, and that can support in-game purchases.

2. What role should consoles have in a gaming company’s portfolio?

Unless the cost of console game development comes down substantially, games publishers won’t just need to determine how much of their portfolio will be built for consoles versus social and mobile games. They’ll need to determine if consoles have a role to play at all. If I were running a console gaming company, I’d challenge my product development team to build a model that supports cross-platform play, e.g. a version for smartphones, tablets and consoles, that is complementary and integrated. If they couldn’t do that, then I’d pull anchor and move away from consoles entirely.

3. Can traditional gaming franchises find relevance on mobile and social?

If a traditional gaming company like Nintendo can’t invent a reason for a significant number of players to pony up hundreds of dollars for a standalone gaming console and then hundreds of dollars per year in titles, it then has to determine if it wants to bring its franchises, e.g. Mario, Halo, Grand Theft Auto, to social and mobile platforms. If I ran Nintendo, I’d have my development teams working on a version of Mario Bros. for smartphones, if only to build the expertise needed to start running a mobile business one day. As this column has repeated many times before, simply porting existing content tends not to work well because consumers expect different things from smartphones and tablets than they do PCs and consoles.

Without changing itself, the industry has a strong indication of its future. For years, flight simulators were a dominant genre, until the cost of development crushed balance sheets and competing genres peeled audiences away. The rise of mobile and social gaming has shown us the future of gaming is much brighter than we had imagined even five years ago. The traditional gaming giants have marvelous franchises and years of expertise that could make mobile and social gaming even better. The current trajectory is unsustainable. Will they have the guts to lead the change that is happening to them? I hope so.

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2 comments

  1. Overall good observations Matt, but any discussion of the “Video Game” business is inherently skewed because the business is not one business but many. Console, mobile, browser based, hand-held, arcade (essentially dead in the US) and other types of games are often lumped in because the content is similar. This is like lumping the TV, Movie and Music Biz together as “Entertainment.” If you do that you can also throw in books, comics, live shows and more. Where do you stop? The issue is the broader the definition, the less accurate the observations. The console business is suffering from the same problems the old arcade business suffered when it reached it’s peak: Production costs exceeded what people were willing to pay for the content and a new competitor emerged which offered a similar (though not quite as good) experience that people could play at home. Consoles got bigger, faster and their games got more complex, as did their controllers. The more complex the game and the controller, the less likely a mass audience will play it. – Everybody played video games when they had one joystick and one or two buttons – PAC MAN, Tetris, In the console business, installed base has always been very important. Much of a console MFG’s job was to increase the size of this installed base because they made all their money on licensing fees (about $7 per game at full price). How can they compete with the installed base of the mobile phone when everyone has one? They can’t. It is a different business. How can they compete with a race to the bottom on price? They can’t. This is similar to the Movie biz making $100M+ movies vs TV biz making reality shows and much cheaper scripted shows. Somehow they will learn to live together. They will find the right size for their respective markets. They will optimize their production costs, distribution and sales methods and marketing efforts. In the mean time lots of folks from the console biz are out of work wondering what the heck happened. Trust me, being from the “console” biz in no way guarantees you a position at a company making money in the “mobile” biz. they are not really the same business.

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    1. Thanks for the comments, Laddie. I think we can agree that the challenge awaiting the console space as it prepares for the next generation of HW will be finding a way for this segment of the industry to remain relevant and profitable in an era of smartphone ubiquity. I’m concerned that the console business will not adapt to a world in which better graphics and faster performance mean as much as they once did. I spent over seven years working for 3rd party video game publishers – in fact, you and I overlapped for a time at Infogrames/Atari – and I certainly hope the industry can figure out a way to convince more consumers to pay for their stuff. This next generation of consoles will reveal whether they’ve got the mindset and orientation they need to evolve.

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