Will New Technology for Next Generation Hardware Drive Innovations in Gameplay?

March 31, 2005

As the interactive entertainment industry gets ready to enter a new platform transition, DFC Intelligence is taking a close look at technology trends in the upcoming report The State of Game Technology.  Considering that March is the time of the annual Game Developers Conference (GDC), we thought it would be appropriate to give some of our thoughts on some of the technology trends.

There was an interesting comment made at GDC by an Electronic Arts programmer on the team working on Will Wright's current in-development project.  To paraphrase, his bottom line was that the next-generation of systems were technically optimized for media and graphics but poorly if not detrimentally optimized for AI, game logic, and the other important types of code that determine good games.  This is a crucial point because once we've gotten past the beauty of next-generation graphics and audio, many aspects of next-generation gaming will be the result of next-generation AI, physics, story-engines, and more.  Yet each console will use a multi-core CPU, bus architecture, and graphics pipeline that is optimized for media processing.  This may level the playing field among companies  for graphics (artistry notwithstanding) but create a very uneven playing field for everything else because "gameplay code" on multicore processors may be more of an art then a science for quite some time.

This is especially interesting when coupled with past statements from Nintendo’s legendary designer Shigeru Miyamoto that he feels the GameCube gives him more then enough graphics power to do many of the game ideas he currently is thinking of.  Nintendo has focused more on functionality as opposed to raw power, as clearly shown by the innovative, but moderately powered, DS.  Of course, in the case of the GameCube this has not served Nintendo well at the cash register.  However, we believe this may be more of a case of market perception then reality.  The Xbox and PS2 clearly don’t outdo the GameCube graphically to the point the GameCube seems antiquated.  Many hard-core gamers have a surprising level of respect for the GameCube, its size, games, etc.  Unfortunately for Nintendo, for some reason it just hasn’t shown up in market share.

With the success of the PS2 and Xbox, and disappointing performance of the GameCube, it is easy to see why there is a push towards raw power.  However, in this case, the past may not be a good guide.  Collectively we're seeing signs of a more heartfelt push from key developers that are saying increasing graphics capability isn't the answer.  To be honest this is not a particularly new attitude.  Game designers are always wondering out loud whether more graphics processing will achieve anything.  Graphics vs. gameplay is one of the seminal arguments every year.  Of course, the game industry has advanced significantly from improvements in graphics over the past few years so it's silly to downplay what could potentially be achieved by more graphics processing power.   Better graphics can mean more emotion in games if it's used well.  Having more objects that can move around a scene in lifelike ways may enable new types of games.  However, the chorus of designers who don't feel graphics and engines are a particular bottleneck for gameplay is growing not only louder but more precise everyday.  Even the graphical wizard of Id, John Carmack seems to think we're about 10 or so years from having Lord of the Rings style real-time CGI.  In doing so he even sounded somewhat bored of the pursuit.  No wonder he's spending time on pursuits like commercial space flight, it's probably more interesting then the next graphics engine.

What does this all mean right now for the industry?  It means the key challenge for companies is to break out of the media-processing spiral that sits at the heart of next-generation hardware.  If not we think the industry's stalwarts could see more bubble like quarters that pop a la Electronic Arts' recent announcement of a disappointing fourth quarter.  There are clear signs of gamer fatigue, but we don’t think it is because the current systems have peaked in terms of processing power.  Despite revenue gains by the industry it is getting harder to keep users coming back year after year for games that are slightly better but essentially the same.  Here are some interesting factoids that may point to evidence of gamer fatigue:

• EA's recent quarterly earnings warning showed its fat-middle was sliding.  Namely its back catalog (titles out for more then a month!) performed below expectations.  Some of this could be attributed to other issues (console shortages) but in general we think some of it could be attributed to essentially gamer fatigue.
• The two biggest titles of 2004, Grand Theft Auto: San Andreas and Halo 2, sold extremely well and received almost universally positive reviews.   However, we started to see many complaints from fans that these titles were boring and the same-old/same-old.  Our own review of Halo 2 and discussions with many gamers shows the title while good for multiplayer is somewhat boring and repetitive, and even flawed (too many Covenant weapons and a fairly incoherent storyline to start).  Of course, it is hard to argue with such success and Xbox Live! features alone provided a dramatic improvement over the previous version, but we don’t think any of the big titles of 2004 really advanced the medium.
• Take-Two Interactive’s assault on EA's games caused a meaningful price war.  Not only were the games just as good (or better), they were less expensive.  When a product is a commodity its pricing scheme suffers and sports games are suffering exactly for that reason.  The result is EA has to spend a lot of money to lock up licenses and other partnerships.  EA Sports may regain market share but at what cost?
• Katamari Damacy, Dance Dance Revolution, EyeToy, WarioWare, Donkey Konga, etc. were all great titles lauded by gamers.  Sales have ranged from modest to fairly strong.  All of these titles either featured novel gameplay or dramatically shifted the computer-to-human interface of gaming.  These products may not be topping the bestseller list, but the fresh response from consumers might be a critical sign of things to come.

Will a new round of graphics processing solve any of the above problems?  If what we're seeing is graphics processing power that potentially levels the playing field among teams because of its sheer power can we expect differentiation to be achievable?  A race to distinguish games based on graphics could start to resemble an expensive arms race.  Differentiation will come from artistry and attention to artistic detail.  In other words this translates to more artists, more textures, more refinement, more time, and bigger budgets.

The potential rise in development costs is what makes Hecker's comments all the more alarming.  Right when the industry needs to be breaking its own rules it's reinforcing them.  We're reminded of two southern sayings, "Dance with the one that Brung Ya" and "That dog won't hunt."  The game industry has advanced in recent years largely on advances in graphics technology, so there is a tendency to want to keeping pushing that bar.  However, you can’t always rely on what has worked in the past and eventually everyone will need a new dog.

So what are we looking for as we evaluate the fundamental issues that result from technological advances the industry is or isn't making?

1. Will the entirely new programming model of next-generation hardware stunt the growth of breakthrough game mechanics, AI, and other functionality that could create breakthrough products?

2. Will the need to be ahead in graphics mean too much attention around artistry and its exponential costs?

3. Will we see increasing commoditization of key genres (sports, racing, etc.) that shrinks the profitability of key market segments either through price wars, or through expensive licensing and business deals that starve off otherwise viable competitors.

4. Are we in for more surprising quarters from key players whose stalwart titles wither under better-but-same incremental advances?

5. Can we definitively say the battleground is shifting toward companies that can truly innovate new forms of games, genres, and interfaces?

In the past transitions to new hardware have always been met with a dramatic clamoring by developers for that power so they could unleash games on us that were not possible before.  Where is that clamor now?  Sure, moving to processing that can drive HDTV capable sets (so long low-res NTSC!) will cause some stir.  We just aren't sure the upgrade will be so dramatic that we'll see markedly different games as we did with the shifts witnessed before.

There are two groups of innovations we think will be critical given what we’re starting to hear about next-generation systems.  One, on the graphics side the innovation that could unleash new gameplay may be to make everything as procedural as possible.  If we do indeed have all this processing power geared toward graphics, then can that power be used as much as possible through procedural systems?  This is what Will Wright demonstrated with his Spore demo at the recent GDC.  Combined with user created content this could be the path toward harnessing the graphical power in ways to enable entirely new gameplay dynamics.

The second area of innovation that we’re looking for has to do with what can be done to improve the user experience beyond the increase in media processing.  Procedural algorithms aside it has been clear that some of the more original work in gaming has centered around dramatic shifts in input devices, user created community tools and content processes, and innovative online systems and experiences.  These are all issues that rest outside the CPU and GPU.  This means that they could be key last minute differentiating parts of the next-generation battle both at the hardware and software level.  Some of these innovations may even make up for the fact that the key components of next-generation systems are themselves growing the gap between the code that is key to providing the next breakthroughs and the code that makes it all nice and shiny. 

In our upcoming State of Game Technology we focus especially on this theme.  The value-chain of game technologies, processes, tools, and talent is shifting and many think some of the traditional pipelines are beginning to crack under the pressure of the economics of the market.  While we may still see the market prove us wrong, we think that its more likely things may start to be challenged.

This isn’t to say innovation is dead, or that the next-generation is the path to the dark side.  Nevertheless, the challenges created by some of the fundamental decisions and paths being taken are significant in ways that maybe traditional analysts aren’t thinking about.  The good thing is that sometimes it takes such challenges to force people to innovate in ways they hadn’t thought of before.  Our bet is much of that innovation will take place in parts of the technology value-chain that have been previously under-stated.  Our evaluation as to the health of key players will in part rest on if they’re working toward such innovation and not simply succumbing to the hardware model that they’re going to be presented with.

As part of our ongoing research efforts DFC Intelligence is delivering free 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 2009.  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 new 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.

Order Desk