Analysis: 2011 Game Industry Overview
MAY 27, 2011 • The times they are a changing. So sang Bob Dylan in 1963 as his music helped define a generation of youth. In 2011 Bob Dylan celebrated his 70th birthday, still touring and playing to his fans of 1963, as well as an entire new generation of children and grandchild of those listeners in the 1960s. Dylan was right… the times were changing. But what at the time was often described as a gaming revolution can now, in hindsight, be regarded as part of a fairly inevitable cultural gaming evolution.
Dylan’s career took off during a momentous transition from hit single delivery formats to thematic albums on long playing records. New technology helped change how we listen to music. Now all of these years later, music has come full circle back to singles downloaded via iTunes instead of 45 records. In many respects the history of the music industry can provide some strong analogies for the game industry.
It often seems that in 2011 we are in the midst of a revolution: Don’t waste resources on big budget, graphic intensive games! Make money by giving away games for free! Retail is dead, long live the power of the social network! It is hard to see current conditions as a part of a continuum, which is why often society is doomed to repeat history. The reality is that what some are describing as a revolution is actually more of slowly unfolding industry evolution. In many cases, this revolution/ evolution has taken substantially longer than early pundits predicted.
DFC Intelligence got its start out of a consulting project founder David Cole was doing for the music industry in 1993/1994. The challenge was to envision what society in general and more specifically the music industry itself, would look like in 10 years (2003). The conclusion: things looked pretty bleak for the music business.
During the late 1980s and 1990s, music sales tripled driven by the introduction of CDs and just as importantly the emergence of adult consumers that still listened to the music of their youth as they aged. The thinking was that CD prices could actually go up as popular music increasingly appealed to a growing number of well-heeled adults. Unfortunately this clearly was not the conclusion that was reached after doing some heavy research and analysis on the subject. It was clear in 1993 that the music industry of 2003 would be in big trouble if some serious issues were not faced.
In 1993, the music business faced three big issues looming on the horizon. First, the music industry had over-priced its CD product at $15 and above. Second was the inevitable growth of digital distribution that would one day undercut the high price of CDs that mainstream consumers were already grumbling about. These factors made the impact of digital distribution a question of when and not if. Thirdly, it was clear that the youth generation of the 1990s and beyond was starting to replace music with a new passion: video games and computers.
DFC Intelligence was founded in 1994 with the realization that the largely ignored video game industry was the foundation of growth for all of digital entertainment. At the time, adults over the age of 30 by and large simply did not get video games because they had never been a part of their life. A common statement used to dismiss the game industry was, “where is the growth potential, there are so many kids and they can’t really play more than they already are.” At its founding, a major thesis of DFC Intelligence was that the game industry would benefit the same way the music industry did. Video game playing children of the 1980s and 1990s would still be playing into adulthood. Of course, this would be a slow migration, taking many years to play out. In addition, just as new audio technology like LPs had encouraged broader artistic ambitions, so too would new digital technology create an opportunity for steadily more ambitious games.
The other big argument for games was the potential growth that digital distribution could provide. DFC published its first report on digital distribution in 1995, as shareware was proving a success. The conclusion at the time was that the game industry, unlike the music business, would greatly benefit from digital distribution. This was because, in reality the appeal of music breaks down to a bunch of individual songs that are 1) easily distributed digitally, and 2) have a natural price range of under $2 apiece.
Starting in the 1960s, the music industry began artificially bundling songs by an artist into a complete work of art called “an album.” The album concept allowed music to be bundled for marketing and distribution at higher prices. Unfortunately, with a handful of exceptions, consumers were generally more interested in a handful of good songs by a given artist, rather than a hodge-podge of some good tunes, and many subpar songs. The album concept forced consumers to buy an entire album of songs when in reality they would have preferred to cherry pick the individual songs. What saved the LP was that many musical groups embraced the challenge, and began creating music within the context of an album format, plus FM radio pushed the concept to a wide audience. Music lovers still had a predilection to cherry-pick, but as long as they got value for their money, they didn’t complain. But not every album is a winner, and an obvious attraction of digital distribution of music is the ability to buy individual songs for a $1 instead of having to pay $10 or more for a full CD.
Games are a different beast. A game is a more complete concept that is harder to break into individual chunks. Also a good video game tends to leave the user begging for more. Finally, games are social, especially in the early days when arcade drove the business. With the advent of online connections, the potential to operate games as an ongoing service seemed unlimited in the days when services like America Online were just starting to take off and most people had never heard of the Internet.
DFC Intelligence released its first major report on online games in 1996. At the time, broadband was coming and we were closely watching Electronic Art’s development of the pioneering subscription game Ultima Online. The idea that users could pay an ongoing fee, making a game like a cable TV subscription, opened entirely new possibilities. The issue was how soon would the masses be willing to pay such a subscription fee?
The other important point to note about game industry growth was the future potential for games to have more flexible pricing. In 1994/95 video games often were a very expensive entertainment proposition at over $50 to as much as $100+ for a single game, many of which only provided a few hours of entertainment. This was due to the high cost of goods in delivering the product on the cartridge storage mechanism, which was preferred at the time for reliability and compact size. The disc-based media in the early 1980s, such as laserdiscs, employed 12inch discs. It was a testament to the strength of the medium as entertainment that games sold so well at such high price points. The promise of cheap CD storage, combined with the ability to deliver products online pointed the way for an industry ready to have explosive growth.
During the period 1994 to 1996 revolution was is the air as the world was headed towards the digital frontier. At DFC Intelligence we watched and waited, and watched and waited some more. It often seemed like watching an iceberg melt. With the CD-driven Sony PlayStation, software prices came down slightly and a greatest hits program gave new life to some older games. Of course, the industry steadily grew in its leaps and bounds. However, broadband penetration was slow to come and online games were limited to a core niche of PC gamers. Subscription games like Ultima Online, EverQuest, and Asheron’s Call carved out a dedicated, but comparatively small user bases.
Flash forward to the 1999-2001 timeframe and it is all about the Internet. Electronic Arts looked to spinoff an online division. Sega promoted the Dreamcast as a free device with an Internet subscription. The PlayStation 2 promised to deliver a great online experience with the possibility of “episodic games” and “micro-transactions.” Microsoft launched the Xbox with a core strategy of using online connections to provide services to the living room.
The PlayStation 2 was a huge success but it had nothing to do with online connectivity. The Internet bubble burst in 2000/2001 and it became all about retail games sold on a disc for $40-plus. Electronic Art’s online division only had Ultima Online and Pogo, the casual game service, to show as success stories from this era. Products like Motor City Online, Majestic and Earth & Beyond never panned out. However, while millions of consumers were playing casual games on their PC, most were playing for free.
It was not until the late 2004 launch of Blizzard’s World of Warcraft that we saw online subscription games explode on a major level. Nevertheless, retail sales of games started to grow at record paces and we started to see the trend of consumers continuing to play games as they reached adulthood. Over the next few years, monster franchises like Grand Theft Auto, Halo, Guitar Hero, Wii Fit, and Call of Duty would set records for revenue that an entertainment product could generate at launch.
The 2006 launch of the Nintendo Wii was the start of several wakeup calls for the game industry. For two years before the new console was released, Nintendo preached far and wide that games could be smaller, leaner and more fun in order to appeal to a wider audience. The Wii was the fruition of that argument, and appealed to the “gaming family.” In other words, offering something for all family members, even mom. This was a continuation of the trend Sony started with the first two PlayStation systems, which in reality had truly broad appeal with popular products like the EyeToy (motion camera) and Singstar (karoke) showing the way for the family gamer.
On the other end was Microsoft, which, while wanting its system to appeal to the entire family, found its biggest success among core gamers… especially core gamers that liked first-person shooters. The good news was that the game industry had grown so large and broad, there were enough of those gamers out there to support an entire console system.
The other major trend that really started to pickup steam from 2004 on was the growth of broadband households. With the launch of the Xbox 360, Xbox Live’s user numbers started to soar. Much of this was due to the fact that it was now fairly easy to get a system connected to a broadband network.
It was also around 2004 that the true global potential of the games industry became evident. Like many companies, DFC Intelligence spent its early years primarily tracking the U.S. DFC did not start covering Europe in earnest until 2000, followed by Korea in 2001 and China in 2003. By 2004 it was clear that much of the future of the industry was based on watching global trends.
The market in Europe had been severely limited by weak technical infrastructure, multiple languages and the difficulty of dealing with different distribution channels in each small country. Many of these issues remain, but they have been greatly improved by Europe building out a broadband infrastructure and seeing a gradual improvement of physical distribution. World of Warcraft was the first big online game hit in Europe and it was a major sign that Europe’s growth potential had not yet been tapped.
Asia was a different story. Rampant piracy and legal issues meant the major game manufacturers of the U.S. and Japan by and large stayed out of the market. Home grown developers took a different approach and started delivering games for play at the many Internet Cafes that started popping up first in Korea, later in China and the rest of the world. NCsoft launched the online game Lineage in Korea during 1998 and a decade later it is still earning over $100 million a year. Surprisingly, when Blizzard launched StarCraft in 1998, Korea became the number one market.
As broadband penetration in Asia grew, the market for online games started to soar. This resulted in the exploration of new business models to monetize usage. Instead of a subscription-based model built around hourly, daily or monthly usage, the idea came about to charge a small fee for individual game components. In other words, the game would be offered for free and consumers could buy game components as needed. Like a subscription, these components would generally be used up requiring the consumer to pay more money to continue playing the game.
By 2006, the concept of a free-to-play (F2P) game monetized by virtual items had become extremely successful in Korea through companies like Nexon. In China companies like Shanda started to explore F2P business models.
In North America and Europe the F2P business models have been slower to take hold. Much of this is because of technical barriers. Broadband speeds in the U.S., and a large portion of Europe, are painfully slow when compared to a country like Korea. This has meant that many of the more popular games have been forced to work within the browser to reach the largest possible audience. Of course, this has been most successfully done by Zynga on Facebook. However, these games face many of the same issues as the casual PC games of the previous decade. Millions of users playing but not paying.
The other big trend in the game industry was the global migration of consumers to mobile devices. Obviously this includes mobile phones, which are now becoming smart phones, but it also includes dedicated game devices, MP3 players like the iPod Touch and tablet devices like the iPad. The Nintendo DS launched in 2004 and surprised most observers when, after a slow start, it became the best selling game system ever. Of course, Apple was the big mobile story of the past decade with its entire line of devices that can work around a single operating system. Of course, overall games for mobile devices face many of the same issues as other products that attract masses of users at low barriers to entry – plenty of users, but not many that pay.
The game industry continues its evolution at a pace that for some is way too fast, for others not nearly as fast as they thought. The biggest hit games still use retail box distribution as their primary sales driver. However, to the bulk of the industry, outside the few fortunate enough to have mega-hits, retail distribution is becoming increasingly irrelevant.
In 2011 it is extremely feasible for a startup company to build a major success without having to go to a retail store. Of course, those successes are few and far between, but at least the infrastructure is finally starting to get in place.
Going forward, most of the key issues in 2011 are the same as they were in 1994. Having the best content is nice, but distribution is king. Those that control the distribution channel can buy up the best content. In 1994, it was all about who could get product physically to retailers. In 2004, nothing had changed. Even in 2011, the strongest companies all have a strong retail distribution component.
However, success going forward is different. Distribution also means delivering products around the globe to consumers in their own languages, across multiple platforms, using multiple business models and payment mechanisms. It is an entirely different process than pure physical distribution. The successful companies of tomorrow are the ones that both understand this and are able to meet the challenges. They may or may not be some of the companies that are successful today.
This article gives a high level overview of some of the key platforms and trends including: mobile games, console games, PC games, SNS games, F2P games, consumer segmentation and other issues.
The Game Consumer
The very first thing about understanding the game industry from a macro level is to get a basic understanding of the consumer base and how it has grown over the past 10 years. DFC uses the pyramid concept to do a high-level segment of the game industry.
The pyramid concept divides consumers into three broad categories:
1) The bottom of the pyramid is consumers that play games but pay little or even no money on games
2) The middle of the pyramid is consumers that play and purchase games as part of their regular entertainment budget. For these consumers games may even be a significant amount of their budget but they are not an all-consuming pastime.
3) The top of the pyramid are consumers that spend a great deal of money and time on games and are passionate about the hobby.
Obviously as you go up the pyramid the number of consumers in each category shrinks but the revenue per user increases. The biggest changes over the past 10 years are:
1) Growth in the overall pyramid; and
2) A change in what demographics fall in each category
In 2001, DFC saw the consumer base for video games as about 200 million users in North America and Europe. At the bottom of the base you primarily had the casual PC gamers. These were consumers who started playing games like Freecell on their PC and were just getting into casual online games like those found at places like Pogo, MSN and Yahoo.
The middle of the pyramid in 2001 consisted of mostly console gamers. This was the core of the market and they were the ones that helped make companies like Sony, Nintendo and Sega successful in the 1990s. This consumer group leaned heavily toward males under the age of 30.
At the top of the pyramid was the bleeding edge. These were consumers that were experiencing their first MMOG games, and started playing first-person shooter games online, often on an office LAN. This group was almost all male and leaned heavily toward the PC as the platform of choice.
Flash forward to 2011 and the pyramid has not only doubled in size in established markets, but entirely new markets have become established in places like Korea and China. In other words games are a truly global business.
The bottom of the pyramid is still dominated by people that play but don’t pay a lot. The difference is these consumers are more diversified, are connected online and are slowly coming around to the concept of paying for games. Obviously games like Farmville are helping expand the horizons for these consumers. Secondarily, consumers who have suffered economic instability at the hands of the recession, and can afford an online connection but not game purchases, are also in this group. In many places worldwide, especially Asia, meager earnings can only afford a seat at an Internet café, but there are millions of such people playing these F2P games daily.
The middle tier has become significantly more diverse. It is this tier that drove the success of systems like the Wii and DS. This group now has females that use Wii Fit or play DS games. These consumers are starting to experiment with buying games for their iPhone or Android smartphone. Parents now play games with their kids starting at a very young age. This is the new middle tier. The Xbox 360 Kinect was firmly targeted at this segment.
Meanwhile, the middle tier of 2001, has now by and large migrated to the top tier. These are consumers that understand the value of gaming, are online, own multiple gaming platforms and play all kinds of different games. On a PC they may play World of Warcraft, on a console Call of Duty, for their portable systems of course they own Angry Birds. This consumer group is actually a potential target for any cool new product.
The top tier has grown 10-fold over the past 10 years and that has arguably been the biggest driver of growth over the past decade. However, life is crowded at the top and much of the current investment focus is aimed at the middle and bottom tiers of the pyramid where the perception is more growth potential is present. Of course, it is also important to understand that a great deal of new investment has always been focused bringing people up from the lower tiers. A core emphasis of DFC Intelligence is understanding how this is likely to occur and what strategies are most likely to work.
Video Game Consoles
Dedicated video game console systems that attach to the television set have dominated the game market since its early days in the 1970s. However, this model is extremely threatened. It is not because of lack of consumer demand that the console business is struggling. Consumers love their video game hardware and seem to clamor for more. No the real problem with video game consoles is on the supply side.
The basic problem facing the console business is that it has traditionally been supported by but three manufacturers: Sony, Microsoft and Nintendo today; Nintendo, Sega and Sony in past generations. These companies spend billions to research and develop hardware, bring the hardware to market, create demand for that hardware and build an installed base. The development and marketing these companies undertake creates the ecosystem through which third parties can deliver products and services.
The issue for two of the three companies – Sony and Microsoft – is the model is not working. Nintendo has made the model work because the gamemaker dominates its own platform more thoroughly with its own products and services. In addition, the Wii extended the technology of the previous Nintendo system, the GameCube. Therefore the Wii did not require a huge development investment. Nintendo could price the Wii more cheaply than its competitors, and still make money on every sale. Meanwhile, Sony and Microsoft invested huge amounts of money in their high-powered consoles and were forced to sell their game systems at such a loss that their software products and services have difficulty recouping the investment. When Microsoft and Sony have launched their recent game systems, it has taken years for them to slowly start making their investment back.
It is for this reason that DFC sees a drawn out console lifecycle with Nintendo launching the first new game system, followed by Microsoft in 2014 and Sony which is estimated way out at 2016. Even when those systems finally appear, they will not offer anywhere near the advancement in technology that gamers took for granted in the early part of the century. Either the new consoles will be an extension of the existing platforms, or the emphasis will be on selecting existing components off the shelf to cobble together new hardware.
The lack of a major push for new consoles is likely to mean that console software revenue will not see significant growth over the next few years. In fact, DFC Intelligence forecasts declining retail console software sales over the next five years. Additionally, despite products like the Wii and Kinect bringing in more mainstream consumer to the gaming family, these new entrants tend to buy far fewer new titles per year than gamers at the top of the tier. Instead much of the growth in the console market will be for delivering products digitally. This is something the PC game business has done very successfully over the past decade, and the console makers are steadily emulating.
The PC Game Market
When it comes to reaching the full spectrum of consumers in the pyramid the PC as a game platform cannot be touched. The PC has become ubiquitous as a necessity to thrive in the modern world. However, having a conduit to consumers is different from actually selling products directly to those consumers.
The PC market suffers from too many products, from too many providers, with many products available for free. Obviously with this type of competition it makes it very hard for any one product to standout. This means that in the PC market one successful strategy has been to aggregate many products from multiple providers and sell those products to as many consumers as possible. This strategy does not work very well in the console market. Take for example Xbox Live Arcade. Xbox Live Arcade can reach a user base in the 30 million range where a similar offering on the PC would easily reach an audience of over 10 times that amount.
Of course, another model on the PC is the classic boxed model shared with console systems where products are sold in a box for $50. This model has not gone altogether well for the PC. This model that has been on the decline over the past decade and is what people refer to when they talk about the decline of the PC game market. In reality the $50 boxed copy model has been migrating away from retail and toward more profitable subscription and usage models. This has resulted in steady growth for the PC game business over the past 10 years. For those that do want to buy a high-end product a service like Steam has become a better alternative than trying to find a physical retailer. This is good news for suppliers that can bypass the retail channel that, by and large, has been talked out of the PC game business and no longer wants to deal with the headaches of staying in the market.
The biggest growth area for PC games has been in the platform’s better ability to deliver products as a service and charge consumers based on usage. This subscription or usage model has many advantages including higher profit margins and longer product lifespans. In this respect the PC is now pioneering the future of the entire game industry.
Games as a Service: Lessons from Asia
In most parts of Asia, with the exception of Japan, a console game market never emerged. Either from illegal piracy, or high government import tariffs, there was little financial incentive for gamemakers to make the attempt. To build a legitimate market in these territories, companies had to pioneer new business models. It was in this context that the concept of games as a service finally showed its full potential.
The games as a service concept grew in places like Korea and China going back to the arcade days of the 1970s and early 1980s when consumers spent billions of dollars a quarter at a time. It started in Internet cafes where consumers would pay by the hour or day to play a game. As more households became connected, this model has gradually migrated into the concept of monthly subscriptions, and more importantly, giving access to games for free with consumers paying, extra to essentially rent virtual items that enhance game play.
It is important to understand that the virtual item model is not so much about selling a product, but is more about renting a product. Most items are rented for a period of time or consumed. In other words, if a consumer quits paying they lose access.
The beauty of this model is that consumers can pay in smaller chunks and make their investment based on how much they enjoy the game. From a supply side, it allows games to scale up based on demand and increase or decrease development and marketing expenditures accordingly. Most importantly, successful games will grow over a period of time and often become most profitable several years into the lifespan.
Many of the top products in this market are from the class of 2004/2005 and include such names as World of Warcraft, MapleStory, Kart Rider, Legend of Mir 2, and Fantasy Westward Journey. These games continue to make their operators hundreds of millions of dollars a year (billions in the case of WoW).
In North America and Europe, getting consumers to buy games as a service has been slow to take off. The biggest success story has been World of Warcraft, whose primary source of revenue has been a $15 a month subscription. However, Asia has proven that there are potentially many other business models that can generate revenue for online-only products. Furthermore, these models can reach a large portion of the consumer base in a variety of income brackets.
World of Warcraft was a product that targeted the top-tier of gamers. An entirely different type of product is now targeting the entire range of the consumer pyramid. These are games distributed via social network games, most notably Facebook.
Social Network Services
Like the PC, Facebook has started to become ubiquitous, although not nearly as essential to basic prosperity. Companies like Zynga helped to define a category that some insisted as describing as “social games.” In reality, social games are more about a way to distribute easily accessible products to a mass audience, rapidly, at a low cost and on an increasingly global basis.
It is important to understand that social network services do not change the basic consumer pyramid. Instead, when one considers distribution as king, Facebook is best noted as a major new distribution pipeline that is radically different than what came before. However, when it comes to the type of games consumers like to play, “social games” are not the revolution some in the industry tend to claim.
Facebook actually does a great job highlighting the concept of the pyramid. In other words, there are many users that play, few that pay and even fewer that pay a lot. Companies looking to distribute a product via a social network service need to understand where they are on that pyramid.
To date, the most successful products on Facebook are those that target the lower tiers of the pyramid. These are games that make money off a high volume of users. Zynga has been the leading driver of this growth. This is an extension of the casual game business of 10 years ago and it is worth noting that casual game pioneer PopCap has been one of the most successful early companies in delivering their games via Facebook.
The next big question for delivering games on a social networks service is how well does it extend up to the top tier, big budget consumers. Established game companies and startups like Kabam are betting there will be substantial growth in this space. The fact that investors have funded Kabam to the tune of nearly $125 million is a sign that many smart people believe there is a gold mine out there to be tapped.
Of course, in any new area like social networks, the gold rush mentality means there will be a great deal of failure. The Internet bubble went bust 10 years ago. Did the Internet stop growing? Of course not… it is stronger than ever. So at some point there will be a shakeout and someone will be left holding the bag. This is true of not just games on social network, but all exciting new markets attracting more new players than the industry can support. This is even more true of the other global growth area for games, mobile games.
Games on Mobile Platforms
The growth of consumers playing games on mobile platforms has closely paralleled the console and PC game industry. Mobile game devices have been a fixture of schools and road trips since the 1970s. A dedicated portable game device with a retail software model has been consistently established since Nintendo launched the original Game Boy in 1989. Flash forward to 2011 and the mobile device market has exploded to the point where cell phones, like PCs, are an essential part of functioning in today’s society.
It is a proven point that consumers like to play games on the go. However, the mobile market has lagged behind the console and PC market both in technology and the amount consumers are willing to spend. These are of course related. Better technology means a better experience, which also means consumers are willing to pay more.
The mobile game market can broadly be segmented as follows:
1. dedicated devices whose primary purpose is playing games and;
2. multipurpose devices with many functions, a phone being one of the most notable.
Of course, these broad categories can be broken into multiple sub-categories, but at a high level the distinction between dedicated to games and games as a secondary application is a key point.
The big change in the mobile game market in recent years is the growth of Internet connected smartphones, and the introduction of new connected devices such as general entertainment devices (iPod Touch) and tablets (iPad). These devices allow consumers to easily obtain products via digital distribution and make it feasible for developers to reach a global audience at a very low cost. This is much like what started to occur for the PC game market over 10 years ago when PCs started to go online en masse.
In many respects, dedicated portable game devices parallel the dedicated console devices and the multipurpose devices parallel the growth of content on the PC. In both cases, business models, the type of consumer and the basic market challenges are similar. The main difference is that the mobile game market is smaller and the market tends to lag several years behind what is happening in PC games.
In the dedicated game device, the Nintendo DS capitalized on the same pyramid trends that helped the console market. Not just kids, but entire families started to play games on mobile devices and in many cases each family member had their own system. The DS will set a record for the best selling dedicated game system of all time. Nevertheless, DFC believes no single dedicated device, portable or console, will ever reach the level of penetration set by the DS.
However, this does not mean games on dedicated portable game devices will go away. Instead it means this has become a more mature part of the business where there is not a huge amount of growth potential. The biggest growth potential for dedicated portable game devices is likely to be the many emerging markets around the world.
A multipurpose device, like a cell phone, is more like the PC: it is ubiquitous and everyone needs one to function in modern society. Of course, like the PC, when one talks about the addressable audience of hundreds of millions and even billions of users, it is a pretty meaningless figure. The market for delivering games on phones trails the market for delivering games on PC by at least 10 years.
A product like Angry Birds, which is currently a major success story for mobile devices, is comparable to PopCap’s Bejeweled back in 2001. Bejeweled was a franchise that grew out of the early efforts to provide game content to the masses online. It helped grow an industry and is still going strong today.
In other words, the mobile game market in 2011 is pretty much where the PC game market was in 2001. There is a large audience, but it is fragmented and the market is overcrowded with free or very cheap product. Standing out from the crowd or getting consumers to pay is tough.
In 2004, the PC game market saw products like World of Warcraft and F2P games from Asia spur major consumer spending. A big question about the market for games on multipurpose mobile devices is: will we see these types of “killer applications” in the next five years?
The game industry is expected to continue to grow over the next few years. However, this growth will occur in many different directions and thus create new opportunities for the creative but also many risks for the establish players looking to do business as usual. In many ways this mirrors the diversification of the broadcast television business after the advent of cable and satellite providers. The overall pie increased, but the rush of new competitors made it more challenging to sustain or grow substantial market share.
Some key points:
The number of consumers in all tiers of the pyramid should continue to grow at a steady base. This growth comes primarily from:
• Older gamers who continue to be active and spend money even if they do not play as much
• Younger gamers who enter the pyramid in childhood
• New markets that expand the pyramid
• Dedicated console systems will still be around but consumers will be more fragmented and hardware manufacturers will not be making as much investment in seeding the market
• Dedicated portable gaming systems will still be a strong market but controlled by major device manufacturers
• Smartphones/tablets will be huge and operated by all segments of the pyramid, much as PCs are today.
• Innovation and scope in game applications for these devices lag PCs by at least a decade
• The top two tiers of the pyramid will own multiple devices which they use to play games
• Two or more consoles and dedicated portable devices per household
• Continue to play games on PC
• More games on other mobile devices
• Social Networks – already big, but still low revenues on the whole
• Already here as an extension of the casual gaming market that has been popular for 20 years
• Can it work for top tier gamers?
• With so much investment will there be a shakeout like the Internet bust of 10 years ago
• Other possible distribution channels that extend the market
• Cloud technology as a new way to reach masses that can’t afford dedicated hardware
• More devices such as smart TVs that can play applications
• Distribution is king: With any new device, the type of content or distribution channel is a prime aspect of the business, and one must understand how it fits into the consumer pyramid