Posted on 06/26/2002 11:24:34 AM PDT by wallcrawlr
A rare bright spot in the gloomy technology industry, video games are growing up
IT IS an enthralling scenario, worthy of a summer science-fiction blockbuster: three vast empires mass-produce millions of electronic drones and send them into battle. The balance of power shifts repeatedly, as technological advances and cunning tactical footwork give first one empire, then another, the upper hand. But this is no movie. It is the video-games industry, the scene of a vicious three-way fight between Sony, Nintendo and Microsoft.
Nothing illustrates the battle's ferocity better than the eye-watering price cuts of the past few weeks. Sony, whose PlayStation 2 console has sold 30m units since its launch in March 2000, cut its price from $299 to $199 in America, and made similar cuts elsewhere. The move was intended to head off competition from Microsoft's Xbox and Nintendo's GameCube, both of which were launched in November and have sold around 4.5m units each. Microsoft followed suit, cutting the price of the Xbox from $299 to $199. Nintendo responded by cutting the GameCube's price from $199 to $149.
All three firms are losing money on their consoles, though exactly how much is difficult to say. But just as shaving companies make money on blades rather than razors, the industry works by selling consoles at knock-down prices and making a profit on the games, which typically cost $50 each. Around $10 from each game sold is passed from publisher to console maker as a licence fee. The PlayStation 2's popularity—it is outselling the Xbox by at least two to one—is due to its huge choice of titles, which the newer Xbox and GameCube cannot yet match.
Global sales of games will total $17.5 billion this year, predicts Goldman Sachs, comparable to the film industry's box-office takings and catching up with sales of music CDs (see chart 1). According to one forecast, sales of games will overtake CDs in Europe in 2005. Console sales are expected to exceed 45m this year, bringing in another $8.7 billion, predicts Shawn Milne of SoundView Technology Group, a San Francisco investment bank. In short, the games industry is now a big part of the entertainment business.
Kids' stuff? Not any more Yet there is more to the industry's growing maturity than its hefty revenues, argues Nick Gibson of Durlacher Research. What was traditionally a disorganised and fragmented business is now far better managed, and it is consolidating fast. The largest publishers, such as Electronic Arts and Activision, have revenues around the $1 billion mark. Jessica Kourakos of Goldman Sachs notes that the industry leaders have also sensibly diversified, so that they are no longer reliant on the success of a single game or console.
But the most important shift is demographic: gaming is no longer the province of children and teenagers. According to a survey carried out by the Interactive Digital Software Association, 60% of Americans play games, either on consoles, handheld devices or PCs. Of those gamers, 61% are adults; 43% are women; and the average age is 28. Figures from Europe and Japan tell a similar story. A generation that grew up with games has simply kept on playing. And as gamers age, their disposable income increases, making gaming an extraordinarily lucrative market.
Sony's PlayStation business currently generates around 60% of the firm's profits. That figure has exceeded 100% at times. Although the cost of producing a top-quality game has tripled over the past five years to $2m-5m, a successful title can bring in $200m-300m, as much as a blockbuster movie. These days, the most popular games can rack up sales of more than $100m in their first few days in the shops.
The games business goes through a cycle every six years or so, as one generation of consoles succeeds another (see chart 2). As new hardware emerges, it takes a year or two for software developers to hit their stride. Then a boom ensues. The market grew by 10% last year, and is expected to grow by 15-25% a year until 2006, by which time new consoles will have been launched. This cycle is inevitable, given the nature of the industry, but it does have one advantage: the games business is, in effect, isolated from the broader economic climate. The current boom has occurred despite a weakish American economy; the previous one, in 1991-93, came amid a worldwide recession. (The one area of the industry that is unaffected by the console cycle is PC games, whose sales are roughly flat at $3 billion a year.)
Plug and play The industry's biggest challenge is the shift towards “network gaming”, which offers the prospect of solid, reliable service revenues alongside the volatility of games sales. Consoles are standalone machines, but Sony, Microsoft and Nintendo all intend to release plug-in adaptors to link their boxes to networks.
The popularity of online gaming on PCs suggests that network gaming on consoles will take off too. Sony's “EverQuest”, for example, a fantasy role-playing game, has over 400,000 subscribers paying $13 a month. So addicted are they that almost none stopped playing when the subscription was raised from $10. Sony's margins in online gaming, says Mr Gibson, are typically 65-70%.
But the expected bonanza in networked-console gaming has been postponed because of the surprisingly slow rollout of high-speed “broadband” Internet connections. Both Sony and Microsoft decided that ordinary modem connections were too slow to do justice to their advanced consoles. The lack of widespread broadband means that most observers do not expect a boom in online gaming until the next console cycle, starting in 2005. Despite this, Sony, Microsoft and Nintendo are pressing ahead with their plans in order to test the market and prepare for the next round.
Sony and Nintendo both plan to release adaptors for their consoles, and will then leave it to Internet access providers, cable companies and others to set up the infrastructure to link players together and host games. Microsoft is taking a more aggressive approach: the company has announced plans to spend $2 billion over the next five years building a dedicated network, Xbox Live, to support online games for Xbox owners. Subscription fees will be payable to Microsoft itself, which will run the network and link players together. Some publishers and access providers have criticised this approach, which they see as an attempt by Microsoft to hijack their customers.
Which of the two approaches will prevail is a matter of opinion. Mr Gibson thinks Sony's approach is more pragmatic; the company will not have to build any infrastructure, or get involved with different network technologies and billing systems in different countries. P.J. McNealy, an analyst at GartnerG2, thinks Microsoft's is the better strategy. It may offend larger games publishers, he concedes, but it will encourage smaller ones to develop innovative multiplayer games. Ms Kourakos says it is too early to say which approach is better, or what is the right business model. One possibility is that online gaming might be subsidised by advertising.
But a bigger prize than this is at stake: the opportunity to create a network of consoles through which all kinds of entertainment content, including films, games and music, can be distributed. That was Sony's original aim with the PlayStation 2, and it is what ultimately led Microsoft to move into the games market. Despite slower than expected sales of the Xbox, this is a fight Microsoft intends to stay in for the long term. The battle between the PlayStation 3 and the Xbox 2, which are expected to be launched in 2005, is likely to be the industry's most brutal yet.
It may be bruising for the console makers, but the battle for control of the games industry is wonderful for the players. Intense competition has driven down prices and led to a surge of new games, from the ultra-violence of “Grand Theft Auto 3” to the surreal delights of “Pikmin”. Gamers, on whatever console, are the winners.
Other than it may just be the most fun video game of all time (for adults).
Thanks stainless ... but I have a LoJack system installed in my C ... OH! You were talking about video games ... sorry ... I stopped at Pacman. &;-)
I guess your standard applies to watching R-rated movies, the Sopranos on HBO, listening to any type of profane music, thinking any unpure thought, etc. Let me guess, you support enforced morality in entertainment? (By the way, the game is rated Mature and is not to be sold to children under 18.)
Video games are theatre of the mind, just like radio, television, and movies. If that sort of thing ain't your bag, that is your business. But don't call me a sicko for playing a video game. Pahleeze.
So by your logic anyone who played cops and robbers when they were kids were also sick individuals. At least the ones who were the robbers, right? And people who create haunted houses during Halloween are also sicko's, right? What with people dressing up as axe murderers, goblins and zombies who want to eat the flesh of the living. Such sick behavior! Pretending to be such evil people!
I guess by your logic Lon Chaney, Vincent Price, Bela Lugosi, Boris Karloff, Stephen King, John Carpenter, and an endless host of others are also on your list of "sicko's", right?
Look up the term "vicarious thrill", it is an entirely human emotion that you obviously are not familiar with.
But I am, as you state, a sicko, so feel free to disregard my words.
Lately I've been playing a lot of Civilization III. A co-worker tells me that Morrowind is really good, so I'm looking forward to checking that out.
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