The State of the Video Game Union
Longtime followers of Padinga, and previously BreakmanX (and maybe if you were one of my readers in the pages of Extreme Gaming Monthly? Anybody? No?… well, that’s why we got canceled) will know that every year, I like to do a little State of the Union address that covers all of the changes that have, and will, come about in the gaming industry. This one comes almost 4 months late.
Why so late? Well, see, I think a big change is on the horizon. Its been building for a while now. The Game Show has become rife with speculation about what the future would bring. Blu Ray discs became talk of digital download, and guesses for what might lay beyond that. The Wii inspired talks of immersive game experiences, the Kinect and Move followed suit, and the 3DS brought new visual realization to even the portable markets. But even beyond all of these… it seems like something even BIGGER is on the horizon… or maybe… smaller? But different to be sure.
Either way, this year has seen the shape of gaming industry begin to change, to mutate, and its time we take a look at it, ask some hard questions, and try to divine just where we will be in the upcoming year. This E3 may well set us on a new path… who will be there to guide us along the way?
The market is still, on the surface, divided 3 ways. Sony has the PS3, Microsoft has the 360, and Nintendo has the Wii. This year saw the PS3 finally climb above the 360, as far as total units sold (greatly due to PS3 having some acceptance in Japan, and the 360 basically having none. The 360 pwns the PS3 in the US), and the Wii, while still far above the other two systems as far as total units sold, saw system sales slow drastically, and software sales continue to sag.
On the portable front, the 3DS was released by Nintendo to replace the normal DS, to great acclaim. Sony is looking to replace its essentially dead PSP with the PSP2 this year, and the new model is once again capturing the imagination of techophiles, who look to E3 for a release date and price.
Overall, the 3DS shows that there is still some energy in the market, and all of the core systems are still finding new homes. However, the rate at which they sell is steadily declining. Sales in 2010 on systems and software both were down from 2009, which in turn was greatly down from a terrific 2008. Its not all doom and gloom or any
thing, yet, but with sales slowing and costs increasing, the industry will be looking for something to give it a shot in the arm. If this year’s Move/Kinect combo wasn’t it (both selling ok, but not building the steam of the Wii) then what will it be?
While this debate rages, off in the corner stands the dark horse: the iPhone, and to a lesser degree, the iPad. Apple has been verbal about wanting to get its fingers into the gaming pie for a couple years now, and brother, they just got a taste…
You ask around, they’ll tell you, Maul is the OG. Basically, it means I don’t really get to play games anymore. Don’t get me wrong, I love ‘em. But working, writing, chasing the ladies, its all higher priority. However, I still keep up on the market. Games have been with me for ages, and I’m always very curious about where the industry is going to go. I grew up on Atari, I worked in game stores for 10 years, I owned every system (outside of Neo Geo, but my buddy had one o’ those to blow money on). At this point, I follow the industry with more of an insider’s eye, and it seems like uncertain finances are about to spur on a change. Every year, I just like to look at where we’re going.
This year, I saw something that looked like a battlefield.
EA flagged, and reported sales way under its projections for 2010, Q1 11. Activision took some hits this year, with music games dying off, and their continued misuse of the Tony Hawk franchise (proper use might be letting it go?). Activision, who’s stocks are currently a very active topic on a lot of financial trading boards, is essentially held aloft by
Blizzard (despite top selling Call of Duty, who’s profits are now part of a complex lawsuit with developer Infinity Ward), who continues to pull in revenue from World of Warcraft, as well as Starcraft II, though many question the continued viability of World of Warcraft as a center of business. Activision prides themselves on high profit margins, but if they hadn’t acquired Blizzard all those years ago, they would surely be singing a different song this year. Of the big money boys, none took more damage than Square-Enix, who released Final Fantasy XIV at a great loss. Lucas Arts saw Force Unleashed II under-perform, and has yet to release the expensive Old Republic MMO, and issued lay-offs this year.
While all of these companies still made a profit, their profit margins were achingly small. EA claimed in a press conference that its profits were reached primarily off of the strength of international sales of FIFA, and mobile content from things like iPhone Apps. Many of their larger, high profile projects didn’t meet sales expectations. Square changed their 2011 profit projections down to 1 Billion Yen, from 12 Billion Yen. I happen to have a stock holder report for SE from 2010, and it shows that from March to December of 2010, the company’s assets devalued by approximately 57 Billion Yen. 2010 was a rough, rough year, and 2011 hasn’t started well.
The big guys continue to limp along in the face of the nationwide economic downturn, but what is hard for the old school to maneuver through has been a death trap for the smaller guys. While there are some great success stories for a few enterprising indy studios, others heard the death knell. Red Octane, Krome Studios, Visual Concepts, Neversoft, Raven Software, Realtime Worlds, Budcat, Luxoflux, Radical Entertainment, Propoganda Games, all of these companies saw poor sales and shuttered their doors. The disturbing issue is that many of them were killed by essentially one flopped title, such as Realtime Worlds being killed by APB. Propaganda was killed by Tron Evolution.
Others still are dead, dying, or are in a position where they may see their assets be gobbled up by another bigger gaming company.
Meanwhile, EA continues to try to stay ahead of the curve. The behemoth has taken the flagging of its tentpole franchises as a sign, and is looking for new avenues of revenue. At last years Game Developer Conference, EA mentioned that their research had shown that digital distribution was the most profitable form of gaming right now. Even more so than Micro Transactions (Farmville) and Subscriptions (WoW), small, downloadable games, and expansion packs for existing titles, generated the most revenue for the smallest amount of effort. EA hoped to earn $750 Million this year from digital download expansions.
And lets not forget the Angry Birds phenomena. Its a game played by everyone and their mother, spread via the iPhone’s App store. The game sells there for $1, and has sold 7 Million copies. On a phone. Its now available on the PSN and XBL networks as well. The game, which has become a pop sensation, apparently cost the developers $200 and a weekend to develop, as its profit margin has been widely lauded as the biggest surprise of the year, and has everyone wanting to make their own cheap, quick, and fun casual market game.
So, its been a rough year, but it could be worse. Better that the Atari collapse of ’83. You whipper-snappers.
The change. For sometime, we’ve seen it coming. I think this year we’ll see its introduction at E3. 2012 will see its implementation. What will it be?
When Blu Ray discs started being hyped a few years ago, Hollywood wanted us to believe it was the next big thing. On The Game Show, I surmised that it would be a niche market, but that digital downloads would be the next real step in media evolution. Blu Ray has become a stable part of the market, but has not revitalized DVD sales the way Hollywood hoped they would. In the meantime, Netflix and Amazon’s digital services continue to serve as the heralds of the digital download age. With the popularity of the XBL and PSN networks, we knew digital download would follow for games as well. But maybe not in the form we imagined.
We expected Halo 4 to eventually be out as some sort of major download. One day, all of our major franchise releases would be available for purchase over the network. This may still occur one day, as bandwidth allowances increase, but for now, smaller games are where its at.
Look at it from a business standpoint. I’ve got Square Enix’s numbers here, so we’ll use them as the example. This year, they’re poised to make a net profit of 1 billion Yen. For a company as big and experienced as Square, that’s really skimpy, about $12 million. Their Gross profit, what the sales of their games will bring in before expenses are deducted, will be something around $900 million to $1 billion (looking at a 4 year trend of their business reports), meaning the expense of creating and marketing their games is somewhere in that same ballpark, $800-900 Million.
Now, I’m no business major, but it seems like bad business to invest a billion dollars for a $12 Million return. Your business model usually wants to turn about 20% profit to stay alive, and Square-Enix is expecting a 1.2% return on their business investments this year. And then, you look at something like Angry Birds, which made $7 Million from iPhone sales, probably another million or two from the PSN and XBL sales, and suddenly, their profits are almost the same as Square’s, off of one game, and it probably only cost them a couple thousand to make.
And while Angry Birds is the big name, they’re not the only one to rake in the dough. Across the gaming world, lots of indy publishers have been talking about using the digital download networks to sell their games and make their profits. The games have to be trimmed down, yes. You can’t make a Halo-sized game for download, so programming has to become a model of efficiency, but ultimately, it just makes more profit than selling your game through a publisher like EA, who eat up all of your profits as a result. And in the end, making smaller games keeps the cost of development down, so a game that doesn’t sell as well, won’t necessarily cripple your development company.
See, Gaming, as an industry, is very similar to Hollywood. They follow the same kind of business patterns. For years, Gaming was more profitable, and seemed to develop faster as an industry. Now, they’ve caught up to Hollywood’s trends, almost overnight, and likewise they have the same kinds of growing pains. They have cultivated a market, us gamers, who want bigger and better things all the time. The ‘hard-core’ gamers are used to big graphics, big sound, complex play, and we want major technical advancement constantly. “We’ve almost hit the 5-year mark, where’s our new system? Rabble rabble.” But the cost of developing these games, even as the tech has aged, hasn’t really gone down all that much. The systems are cheaper, but the cost of developing the software is still astronomical. Its high enough that one bad game will kill an indy publisher, and only the big boys can take any risks… but as anyone knows, big companies don’t really like taking risks, even if they can afford to.
Its kind of the same in Hollywood, where the movie-going market demands bigger and bigger movies. Indy films can’t do that. Only the big studio system can afford to make Transformers and Inception. You get films like Superman Returns and Tron Legacy that have budgets exceeding $200 Million. And if those tank, they can ruin a career. You can see what Gaming is going to do next, like a premonition, by examining the business model of recent Hollywood. Here come the predictions, folks:
- First off, there will be a bi-lateral market. Big studios create big games. Indy studios stop being able to afford the risk or get financial backing, and only do little games. The only time you will see Indy developers’ labels on big games, is when they get bought up by one of the big guys and have their assets assigned to develop a property. Indy developers will become the ‘straight to DVD’ developers of Gaming.
- As soon as any Indy developer becomes successful enough from little releases to maybe do a big release, they will immediately be bought out by one of the big studios. EA, Activision, THQ, Square, Capcom, Konami, these mega publishers will become the ‘studio system’. (and, Hell, I wouldn’t be surprised to see some of them combining one of these days, via a mega-merger) Activision recently looked into Take 2, and EA tried to buy Rockstar games. All of the moderately-sized studios are on the dinner table, and their shareholders want them sold into the conglomerates.
- Fewer and fewer big game releases. In fact, maybe just fewer game title releases overall.
- An alarming number of big releases become sequels, prequels, and reboots. Franchises are where its at for Gaming’s model, as well as Hollywood’s. Moderate, efficient Indy groups like Atlus will continue to look for new IPs, but the big guys only want them if they look like they’ll make about 8 sequels. Tomb Raider reboot, Mortal Kombat, Castlevania, God of War, the same titles, once proven viable, will get made over and over until they are beaten to death… and beyond. Don’t even get me started about Mario.
- Digital download rules all. Tons of little games, and add-ons for your pre-existing games, will become the focus of many companies. Even the big guys like EA will start focusing on iPhone-like apps. Over time, more and more phones will support app games, and everyone has a phone. So, essentially, everyone has a game system. A game system that supports highly profitable, low cost games. That casual market that the Wii sought to capture (and did, to a point)? Its here, a captive audience, driven by their need for a phone, and general boredom, waiting in line at the supermarket, buying up those cheap games. Mid-sized developers will also start to stick to simple, slick games for PSN and XBL to increase their profit margin. The need to push their boundaries and costs skyward for the development of technologically advanced games will be a thing of the past.
- The only real question left is: will mobile gaming actually eclipse system gaming this year? It may sound impossible, but hey, there are as many iPhones and iPads in the world as there are Wiis, about 85 million. And while there are 40 Million Wii owners in the US, an impressive number, there are 302 Million Cellphones active in the US, enough to cover 96% of the population. Over time, all of those will be able to support apps. Even if they don’t take a bit out of the home gaming systems’ sales, that’s something for portable game developers to be looking at.
Now, I’ll never say that Gaming and high end games will be gone. Never. But when you’re looking at profits, and all the game companies do, the best profits come from smaller games marketed towards the widest audience: the casual. We’ll always have big games, but with rising costs and segmented sales, it may become more and more of a niche market, only dealing in sure-shot sales. We’ll always have a Halo and Mario, because those franchises always sell. But over time, original games like Okami and Shadow of the Colossus will be small, efficient titles that are downloaded instead. Only the big boys can afford the risks, and they refuse to take them, generally. It may not be a good long-term business model, always pumping out rehashes of the same ol’ ideas, but in the moment, it seems safe.
The ONLY thing that might throw a wrench into this series of predictions, and I’m very anxious to see them do it, would be the arrival of Nintendo’s anticipated new system at E3. Nintendo came back with a bang when they released the Wii, and now all eyes are back on them. The Wii is still a viable platform, but with sales slowing, Nintendo is already looking at all of the same things I’m seeing, and they have a response. What they do next may well shape the Gaming industry during this transition. Will they fight against the upcoming mobile gaming revolution, the digital frontier, or will they embrace it?
My roommate recently picked up an issue of Game Informer (Issue 217, if you’re interested). I’m glad he did. I hardly buy game magazines, because they’re a month behind what we’ve already reported, but they do have some good writers working there, and I’m glad to support their work once in a while. Recently, they asked a series of questions about Gaming and its future, and they are valid. They’re the things that are hanging off of this State of the Union like dangling plot threads. I think a couple should be addressed, so:
Will Japan Regain its Relevancy?:
Ouch. Sorry Japan. Way to open up an article, GI. This is a tough issue, in a way, as Japan obviously still has a foothold in the market. Without Nintendo and Sony, there wouldn’t even be a gaming market. Microsoft is a force now, for sure, but it stands on the shoulders of giants. There’s no doubt, though, that most of the relevant games of the last few years have come from American studios, and there are some great looking games coming out of Europe.
Keiji Inafune, father of Mega Man, and a major force at Capcom, left the company recently. When interviewed, he cited a lack of excess resources, a generation gap that could not bridge creative differences, and a closed society that refused to adopt innovations created by the West. Hideo Kojima recently said of Japan “we are lacking motivation” , saying that Western games have more focus and ambition.
Japan once was the developer of almost all games, but over time, their market share has dwindled. I’m personally not sure this is a bad thing. They created a product, the world loved it, and the world decided to make some of their own. Gaming is a world-wide phenomenon. Each country infuses their own style into their creations. Gaming in Japan will never die, I think Japan just has has to embrace the idea that they are one of many countries with the resources to make games, and they need to find and promote the creative minds amidst their own people. Likewise, they need to promote and appreciate their artists so they don’t flee to US companies, the way Ninja Gaiden creator Tomonobu Itagaki did.
The days of Japanese dominance are likely gone from Gaming, but it doesn’t mean Japan and their creators aren’t still a major influence on the industry. It is no longer a Japanese monopoly, Gaming is an international community.
Will the Motion Control Craze Last?:
I think GI’s quote from Electronic Entertainment Design and Research analyst Jesse Divnich summed it up quite nicely, “Motion gaming will always have a spot in our industry, but we still have a long way to go before it becomes a standard… At the end of the day, a [controller] can do things that are not technically possible with motion games.” This is true, but the opposite is also true, there are things a motion sensor picks up on that controller’s cant. And as time progresses, visual sensors will become more advanced and pick up on more subtleties in body language.
At the end of it, though, there are two directions that Gaming has always tried to travel in. One of those is immersive entertainment. You are playing out the part of a hero in an adventure, and over time, with First-Person graphics and our attempts at Virtual Reality, we have tried to capture the feel of the real world. There is a limitation, though, imposed on the gamer by having to hold the controller. We can make the graphics look as real as possible, but in the end you are still sitting down, only linked to the world by the plastic lump in your hands. Motion gaming attempts to get your heart rate moving, to get you to feel some of that motion, to make a world that reacts to your physical commands, rather than your button presses… or at least, that’s the thought. Mario Party8 isn’t exactly indicative of this.
The other direction, though, is leisure entertainment. You want to come home, do something fun, and relax after a day at work or school. Exercise is important, but sometimes, hell, most of the time, you just want to sit in a comfy chair and zone off. There are a lot of gamers who simply don’t want to come home and swing their arms around to swing a sword. They don’t want to have to stand while they play video tennis. And if you’re playing a marathon session of some RPG, its really just impossible to put that kind of endurance into a game.
Regardless, there are both types of gamers. Motion controlled games will continue to have a place in the market, and will likely be a part of every system in the future. I don’t know that they will become the dominant component of every system, like they were with the Wii, but that really depends on the advancement of the technology, and how fast, fun, and accurate we can make the games. In time, true immersion may come, but for now, its just another controller option.
Again, Nintendo may punch the words right out of my mouth at E3. We’ll see.
Is it time to jump on the 3D Bandwagon?:
God, I hope not. I don’t know if any of you guys have noticed, but 3D is a gimmick that is already failing. Nintendo seems to have found a nice niche with 3D in the 3DS. Its pretty cool, because it doesn’t need glasses, and from a tech standpoint, I love it. Combine that with the fact that the DS was already a beloved system, and you’ve got a smash-hit portable.
But, have you noticed that 3D movies aren’t really garnering any extra income? Ticket sales on 3D movies continue to fall month after month. The market is saturated, the product is not up to par with our expectations as a market, the glasses suck, and the cost is too high. Its fun once in a while, and were it a seldom seen, quality add-on, I’d go 3D all the time. I think audiences have been burned too much by shoddy 3D, and I know the film market isn’t being helped by it. And as for games… does anybody out there actually own a 3D TV? I’ve seen them at some big box stores, and people stop, look at the glasses, go OOOOHHH, and then walk away.
Again, the word comes up, immersion. It would seem like a 3-D, motion controlled world would be the eventual goal of gaming. A true adventure sim. That being the case, I’ve no doubt that eventually we’ll see technology advance in both 3D and motion gaming to the point where I have a video room with 4 3D projection walls, motion controlled gaming, and a stimuli suit that makes me feel shit when get hit by something in a video game… I would so buy that. But as the tech is right now, with a basic, gimmicky 3D image coming from the box in the middle of my living room…. eh, I’ll pass, thanks. And so, I think, will the market at large.
There we have it folks, that’s where the industry stands now, on the verge of some sort of major change. Joysticks to control pads, cartridges to CDs, 2D environments to 3D, pads to analog sticks, analog to motion control, and now… regression to 2D an an empahsis on mobile gaming? That seems to be the way. Its not bad, but it is different. If these predictions hold true, this might be the first evolution in the industry inspired completely by business reasons and not artistic growth and inspiration.
At the moment, it seems, Gaming has become Post Modern. It began s simple entertainment, grew and became art, and now has become a cold, faceless business. Well, what hasn’t, these days? Either way, we’ll be here to find the artists, lost in the folds of their corporate publishers, and cry out in celebration of their creations. Gah, Jesus, I sound like a hipster or something. Hold on…
“But whatever changes happen, Gaming will always be there, and Padinga will always be there to give angry, snarky commentary on it.”
…yeah, that’s better.
*feature image by Alex Ross
** Evolution of Gaming Image by EpicPonyz