Among next year’s trends, big changes for mobile gaming and independent developers.
As the hectic holiday shopping binge winds down, video game companies in 2005 were shocked to find that kids weren’t exactly begging Santa for their games this year. It was no big surprise to analysts, who had predicted weak sales due to poorly targeted game titles and problems in the hardware supply chain (see Holiday Game Sales Freeze).
But it appears video game giants like Electronic Arts and Activision were caught off guard by the gaming public’s modest appetite for games. Both companies warned about weak sales for the holiday season, while analysts like Piper Jaffray’s Anthony Gikas said video game sales this holiday season declined 20 percent over last year (see EA Warns on Game Sales).
That’s hardly jolly news for a company like Microsoft that used the holiday season to launch its new game console, the Xbox 360. As the first product to spark the next-generation console wars, Microsoft cranked up its marketing engine this year to try to ensure that the console made a splash upon arrival.
An event dubbed “the Burning Man for gamers” brought 3,000 gamers into the desert to play the Xbox 360 for 36 hours straight, while long lines circled around the retailers before launch day, often 24 hours before the store opened (see Xbox’s Desert Launch).
The buzz worked, though hype wasn’t the software giant’s problem―supply was. Microsoft has sold out all its roughly 500,000 Xbox 360s available so far, but a lack of the units in stores sent holiday sales down even further (see Europeans Brave Cold for Xbox).
Analysts like Wedbush Morgan’s Michael Pachter called Microsoft’s marketing weight and weak manufacturing experience a mismatch. They also said the Redmond-based company would have likely stocked up more supply and launched next year if it weren’t for its goal of beating Sony to the market. Sony’s PlayStation 3, a rival to the Xbox 360, is expected to launch in 2006 (see Xbox 360 Starts Console War).
This year also saw a knock-down brawl over video game violence and kids. When gamers uncovered hidden sex scenes in one of Take-Two Entertainment’s Grand Theft Auto game, politicians and concerned parents declared that graphic game sales to kids had reached a tipping point (see GTA Gets ‘Adults Only’ Rating).
Senator Hillary Clinton and California Governor Arnold Schwarzenegger set laws into motion to restrict sales of graphic games to minors, while the $25-billion video game industry used its weight to cry censorship. The real loser ended up being Take Two, which lost millions after the offending game was taken off shelves (see Sex Hurts Game Maker Profits).
But with 2006 just around the corner, game execs can start looking past frozen holiday sales and the effects of Grand Theft Auto’s “hot coffee mod,” the name of the hidden sex scenes in the GTA game. Next year the industry can look ahead to new players in the console war, new trends pushing games ahead, and no doubt another violent video game scandal to start the hand-wringing all over again (see Gaming Death Stirs Debate). We can’t wait! Here’s RedHerring.com’s take on the top five video game trends in 2006.
The Year of Sony
Sony’s new PlayStation 3 game console comes out next year, but the Japanese giant has been stumbling a bit as of late. Some weak financial results, slipping sales of consumer electronics and problems with its digital rights management software have all kept the heat on Sony CEO Howard Stringer. But Sony is still the game God and next year may well quiet Microsoft’s Xbox 360 machine.
Around 50 percent of gamers who intend to buy a next-generation console are waiting until Sony’s PlayStation 3 comes out next year, according to Nielsen Media Research. Sony is thought to release its console mid-2006. If history is any indicator, the Japanese electronics giant could show a finished product at the year’s massive game convention in May, E3.
Expect as much hype, if not more, over Sony’s sleek PS3. But more important, look to Sony to use its manufacturing history to hit its supply targets. As the long-dominant leader in the console market, Sony has the supply chain know-how to avoid the mistakes of still-learning Microsoft. Microsoft might sell 3 million consoles by February 2006, but Sony could start gaining on Microsoft’s head start by year’s end.
Mobile Games Mature
The mobile game market had its first major acquisition in 2005, with Electronic Arts buying Jamdat Mobile for about $700 million (see EA Buys Jamdat for $680M). Analysts like Piper Jaffray’s Mr. Gikas said that price was roughly $200 million too high.
But the deal size will bring in a slew of big companies looking for their own mobile game houses. Game developers like Activision, along with Internet companies like Yahoo and Google and even carriers like Sprint, will be scouring the market for cheaper mobile gaming arms.
Companies like Glu mobile could get high asking prices, though Glu CEO Greg Ballard said the company will likely go public next year (see Time Warner Attaches to Glu). Either way, the mobile games market will continue to mature and consolidate. The successful companies will make nice exits, while the bottom feeders will just plain exit. Mr. Ballard said 2006 will be the year when the mobile game market starts to “weed its garden.”
Independent Developers
With the console battle getting two new entrants next year, all eyes will be on Sony, Nintendo, and Microsoft as they wrestle for market share. But the business model of building console games will get even more strained next year.
Analysts like David Cole of DFC Intelligence compare the development of console games to the Hollywood film industry—massive amounts of money go into a few hits that have to carry the game developer companies for the entire year. It’s a risky business model with few companies with enough cash to sustain it.
However, with new entrants like the combined BioWare and Pandemic game developers, smaller independent game companies are finding niches with less money and creative talent (see Bono Fund Grabs Game Makers). Gamers are getting tired of the rehashed sequels that dominate the console business. And independent developers are trying to find a way in to add creativity and hopefully find a hit.
While PC games are a smaller business, PC game companies are popping up to make cheap but rich games for computers. Companies including PC game firms like Wild Tangent and PlayFirst have margins a lot higher and costs a lot lower than console game makers. Next year, the console blockbuster business model will likely break a few console game makers, pushing them deeper into the PC game market or just pushing them out period.
China’s Online Games
Every industry touts China as its killer market several years out, but Chinese online games are already a massive business in 2005 (see China’s Wild Online Game Biz). The market hovers about $580 million today and is expected to hit $1.7 billion by 2010.
The World of Warcraft counts 1.5 million Chinese players out of 5 million players total (see WoW Boasts 5M Paying Gamers). But next year, China will see a growing number of companies changing the business model to suit the Chinese gamer. That business model will be the future of the global online game industry.
Most massively multiplayer online games (MMOs), use a monthly subscription fee model collecting roughly $15 per month from players along with additional costs for added services. DFC Intelligence’s Alexis Madrigal said an increasing number of MMOs in China will become free to gamers next year, while the companies rely on sales of in-game items to bring in profits.
Several companies have already switched over to the new business model, and the market for in-game items that are sold outside of companies’ watchful eyes is already about $200 million. That’s hundreds of millions that the companies are missing out on.
Chinese game companies are some of the first to get wise to the switch in sales. It’s also smart to run a service off of in-game sales, when piracy of games in China is so prevalent. Chinese game companies find it hard to make money off of the pure-play of games because pirates are always one step ahead.
But it’s the future of the global games industry. In the era of growing broadband penetration, the global game market will face similar damage from piracy and will be forced to adopt a similar model. Expect the early movers to head that way next year.
Responsibility of Going Mainstream
With the growth of the video game market reaching $28 billion by early next year according to David Cole of DFC Intelligence, games will rival the recorded music industry for the first time. It’s a major milestone, and proves that video games have major heft as a medium to reach a much-coveted demographic of 15- to 35-year-old males.
As advertising dollars for old media like newspapers and television drop, new media like the Internet and video games are getting more eyeballs and winning over ad dollars.
Every medium, from movies to music to television, has seen its share of backlash and concern from critics. But video games, now more than ever, are mainstream. That means that the hullabaloo over the video game violence of 2005 could subside as politicians and parents get more comfortable with the medium.
But that’s only if the creators of the games take responsibility for game content. As a medium that many teenage boys play regularly, game creators will more than ever have to stick to already-established guidelines set by the Entertainment Software Ratings Board.
Next year, few parents and politicians will sit back and watch another company “pull a Take-Two” and fail to rate one of its own games with the correct label. If an irresponsible company somehow follows in the path of the hot coffee mod, the year of 2006 could see a battle of violent games that even outweighs 2005.
