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Forecasting the Video Game Industry June 29, 2005 We know that there is a great deal of interest in the new video game systems after our brief last month caused such a stir. This week DFC Intelligence will actually be releasing the forecasts that are behind so much speculation. We always release such numbers with trepidation, knowing the potential for their misuse. We are the first to stress that any forecasts for platforms yet to be introduced must be taken with a grain of salt. In many respects trying to forecast sales for specific platforms is like trying to place a bet on the winner of the Kentucky Derby. A knowledgeable better can probably be pretty close in trying to estimate the winning time based on past races. However, betting on which particular horse will win and how close the race will be is a different story. This is why we have handicapped the field by putting out multiple scenarios for the game market: a Microsoft Best Case Scenario, a Nintendo Best Case Scenario and a Sony Best Case Scenario. Of course, not all scenarios are created equal. To extend the sports analogy lets look at the Major League baseball season going into the All-Star break. We don’t know who will make the playoffs, but we feel a lot more confident making predictions than we did at the beginning of the season. St. Louis looks like a sure thing, the Yankees we are not quite as confident about as we were at the start of the year, and the Washington Nationals took us by surprise. Nevertheless, based on past history, we would still probably bet on the Yankees over the Nationals to win the series. Where the sports analogies start to breakdown with the game industry is trying to say there will be a definite winner and loser. The interactive entertainment market is headed towards an increasingly diversified market in both platforms and revenue streams. Multiple ownership of platforms will further confuse matters and make the overall hardware installed base race less significant. The companies that will be successful will deliver a library of content across multiple platforms and generate multiple revenue streams from that content. Going back to a sports analogy, money can be made by betting on Nintendo to show. The latest forecasts are some of our first to start to try and combine retail sales with emerging forms of online revenue streams. One of the biggest stories of the next generation will be the new ways consumers buy and consume video games. No longer will it be solely about going to a retail store and putting down $20 to $50 to buy a game in a box. Subscriptions, digital downloads and advertising will all play a part as game systems become connected. Our latest forecasts have tried to account for digital distribution and microtransactions, such as buying an extra level or character. However, we have not fully integrated all sources of online revenue into these forecasts, including subscription revenue and advertising revenue. Going forward we will be working at breaking out these emerging revenue streams into greater detail. With all that being said, the one thing we predict with confidence is solid growth for the game industry. Consumer spending patterns and demographics are very favorable. The current generation of game systems blew away past metrics for game consumption and forced us to rewrite our economic models. The PlayStation redefined the sales potential for game systems, but still left room for the competition. Midway through 2005 there are no signs of slowing and we expect the game industry to reach record sales over the next five years.
Given our bullish nature on overall growth there are two important points we must make about our forecasts for individual game platforms. First we expect all three major platforms (PlayStation 3, Revolution and Xbox 360) to carve out a respectable installed base. Sony, Nintendo and Microsoft are well established and have the resources to bring these products to market. So far, we have not seen any major missteps by the manufacturers in regards to the new game systems. It is worth noting that there has not been a hardware flop from a major player since the days of the Sega Saturn (no not the Dreamcast). There are enough consumers in the market to ensure that even the third place system has a solid base. Thus in every one of our scenarios, the worst performing system outsells the current Xbox and GameCube. The other major point about our forecasts is that we see Sony as the favorite to be the market leader. Even in our worst case scenario for Sony (Microsoft’s best case scenario), we see the PlayStation 3 as the overall worldwide sales leader in 2010. The Xbox 360 may do better in individual markets like North America or Europe, but we think that Sony is so strong on a global basis they will be hard to beat overall. Until we see a major mistake from Sony we see no way a rational bettor can not consider the PS3 the favorite. We know that the tendency is to focus on market share and winners and losers. We also know that our forecasts will tend to only increase the focus on individual performance. So, to stress the obvious, revenue and profits are not the same thing. Even as it grows, it is becoming more difficult to succeed in the interactive entertainment market. The smart companies are looking at diversified revenue streams, new business models and the best ways to leverage content in multiple arenas. In other words, hedge your bets.
As part of our ongoing research efforts DFC Intelligence is delivering monthly briefs on hot topics in the interactive entertainment and video game industry. You (or a colleague of yours) have signed up to receive these briefs. DFC Intelligence’s research services provide detailed strategic analysis of the interactive entertainment industry. A sample of reports on the video game and PC game market include: Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry Complete five-year forecasts for all individual console and portable game platforms by region (Asia, Europe, North America, rest of world)) through 2010. Also included are PC game forecasts and historical sales figures. The report has several scenarios for future market growth including an analysis and forecasts for new systems from Sony, Microsoft and Nintendo, as well as portable game systems. The Business of Computer and Video Games This report includes an historical analysis, overview of individual hardware system, top-selling games, game genres, consumer demographics, business models, retailer profiles, marketing elements and case studies, industry trends. Market Leaders in the Video Game and Interactive Entertainment Industry This 750+ page report profiles major companies in the interactive entertainment industry. Each individual company report is about 25-50 pages and has an historical background, financial overview, product analysis and a frank assessment of the outlook for that company. The Online Game Market This 660 page report contains a comprehensive analysis of the online gaming market. Includes current sales trends, market forecast, and in-depth company profiles.
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