Top Ten Myths of the Interactive Entertainment Industry
Excerpt from U.S. Market for Video Games & Interactive Electronic Entertainment

A large portion of DFC Intelligence research deals with discussing some of the major misperceptions that many people have about the interactive entertainment industry. In some cases, these "myths" may have a grain of truth to them. However, even true statements can be misleading. Issues tend to be complex and a trend can be interpreted in many ways. The main requirement for success in the interactive entertainment industry is an open mind and a willingness to accept new possibilities. Therefore it is essential to question even the most basic assumptions.

Myth 1
The PlayStation 2 (or any other game system) is a sure bet to dominate the market.

The interactive entertainment industry is filled with hype and no one is better at hype than the major platform providers. Everybody is now talking about the new generation of systems. In today’s market, the Sony PlayStation and the Nintendo 64 are the current leaders. The problem is that today’s darling is often tomorrow’s also-ran. Consumers are the one’s that have the final say. Already many consumers are tired of the PlayStation and Nintendo 64 and only get their blood flowing when talking about Sega’s Dreamcast, Sony’s PlayStation 2 or Microsoft’s X-Box. Of these systems, most people think that the PlayStation 2 is almost guaranteed to be the market leader.

In 1999 and early 2000, it seemed many people expect the PlayStation 2 to not only dominate the interactive entertainment market, but also revolutionize the entire consumer electronics and computer industries. While we forecast the PlayStation 2 to be a market leader, we also caution that the interactive entertainment market is extremely fickle and it is never possible to say with 100% certainty that an unreleased system will be the market leader. For its part, Sony faces many challenges and the PlayStation 2 will be hard pressed to match the success of the initial PlayStation.

It is difficult to predict exactly how well a given system will do. With interactive entertainment, everything can be changed by a handful of developers working in anonymity. The industries successes are built on the sudden appearance of software titles like Super Mario Bros, Sonic the Hedgehog, Legend of Zelda, Doom, and Pokemon. These are the titles that sell hardware systems. The problem is that no one can tell exactly when or where the best titles will appear.

Of course, it is possible to make educated guesses. Financing and marketing are an important component of success. In addition, companies have track records and relationships with developers that are a good indication of how successful they will be. It is possible to create scenarios that anticipate the future with a reasonable degree of accuracy. At the least, a company can make different plans based on the many possibilities the future holds.

Right now there are four serious contenders with new 128-bit console systems: Nintendo, Sony, Sega and Microsoft, the new kid on the block. These companies have the distribution, software support and technological capabilities to successfully launch a new hardware system. All four companies have the potential to launch a system that will emerge as the industry leader.

A case study of Nintendo and Sega shows what could go wrong for the PlayStation 2. The history of the Nintendo 64 provides an example of how the PlayStation 2 could do well, but not dominate the market. Of course, the original PlayStation was a very successful system and PlayStation software outsold Nintendo 64 software by a margin of about 2 to 1 in 1998 and 1999. However, many people forget how tight the race between the PlayStation and Nintendo 64 originally was. The Nintendo 64 launch was extremely successful, but the system eventually suffered from a small software library, limited third party support and the high price of cartridge based media.

The Nintendo 64 is also a perfect example of how one "killer application" can cause a major market shift. The PlayStation had a much broader product library at more attractive prices, but the Nintendo 64 still did relatively well. With the Nintendo Dolphin, the playing field will be more equal as Nintendo will no longer have to rely on cartridge based media. There are still many questions about Nintendo’s future. Will Nintendo learn from its mistakes with the Nintendo 64? Is Nintendo stuck in the rut of being simply a toy for kids? Can the Pokemon craze continue? Will Nintendo see their market share further erode over time as more companies target the Nintendo audience? Can Nintendo leverage its considerable talents into the broader interactive entertainment space? Is the Dolphin being released to market too late? Despite all the questions, the history of the Nintendo 64 may actually indicate that Nintendo, not Sony is the favorite to dominate the 128-bit market.

The Nintendo 64 was the hot new system right after its September 1996 release. Super Mario 64 is quite possibly the most successful game ever in terms of the sheer excitement it created in the marketplace (Nintendo’s The Legend of Zelda would be a close second). Nintendo has a loyal following, incredible marketing and distribution and an eye for top quality content. These are the key ingredients for success in the interactive entertainment industry. In late 1996 and early 1997, many people believed Nintendo to be invincible. Of course, Nintendo proved to be very vulnerable.

The Nintendo 64 continued to carve out a healthy share of the hardware market, but Nintendo is a company that used to have 90+% of the market. Now their share is significantly less than 50%. There are many reasons why Nintendo is not as dominate as before. Nintendo 64 games were priced at about $20 more than PlayStation games. Then there is the unavoidable fact that many titles, most notably sports games and RPGs, appeared on the PlayStation and not the Nintendo 64. Mario excitement died down and Nintendo was in the difficult position of trying to come up with a second act.

The late 1996 success of the Nintendo 64 shows the fickle nature of the interactive entertainment market. In 1995 and early 1996, the Sony PlayStation was the most hyped system on the market. It sold 100,000 units in its first two weeks of North American release and ended the year with close to 400,000 units sold. Industry analysts at the time pegged the PlayStation as THE next generation system to beat.

The PlayStation won round one, but in many ways it was only a minor victory. At the end of 1996, the PlayStation had an installed base of around two million hard core game players. It was just beginning to penetrate the mass market when the Nintendo 64 came storming on the scene.

Nintendo came on very strong with the initial release of the Nintendo 64, and if they had an immediate follow-up act to Mario, or possibly some more sports and RPG titles, the Sony PlayStation would probably not have done nearly as well as it did. As it was, Sony was able to keep the lead and outsell the Nintendo 64 into 2000. However, there is a real question of how long the PlayStation will be successful, and more importantly will Sony be able to parlay the PlayStation’s success into continued involvement in the interactive entertainment? Is the PlayStation Sony’s crowning achievement in video games or will they go on to bigger and better things with PlayStation 2?

The PlayStation 2 is almost guaranteed to be a success on some level. Every major software publisher is supporting the platform and pre-sell orders are likely to set an all-time record. However, there are warning signs. As the Nintendo 64 showed, strong early sales do not guarantee market leadership. So far, most reviewers have been underwhelmed by PlayStation 2 software. This is likely to change over time, but the PlayStation 2 is priced at $300, twice that of its competitor the Dreamcast. Consumer perceptions could start to gel in the first year of the PlayStation 2’s release. If PlayStation 2 software is not significantly better than the competition, than consumer reaction could quickly turn against Sony. This could be especially troublesome if consumers perceive the Nintendo Dolphin and Microsoft X-Box as more technologically advanced.

One problem Sony has is internal software development. Sony’s in-house team did do a commendable job in having some quality titles available for the PlayStation, but other than the all important sports category, Sony’s in-house team simply does not have a well-rounded track record. Most hit PlayStation titles like Crash Bandicoot, Final Fantasy VII, Metal Gear Solid, the Resident Evil series, and the Tomb Raider series were developed outside Sony. Sony’s in-house team has been stronger than expected, but they still have not proven to have the proficiency of companies like Sega and Nintendo.

In the 128-bit market Sony must also deal with a rejuvenated Sega. Of course, Sega finds itself in the position of being a huge underdog. However, that is a position in which Sega tends to thrive. Sega seems to have its biggest problems managing success. There should be no underestimating the hole Sega dug for itself. The company essentially overextended itself by trying to be all things to all people. With numerous hardware systems, as well as software titles, Sega simply lost focus. Sega has made many promises it didn’t keep and systems like the Sega CD and Genesis 32X were failures that turned off many of the company’s best consumers. The Saturn was a decent system, but because of some mistakes it fell badly behind the competition and the system did not go anywhere in the U.S.

However, it would be a major mistake to write Sega out of the picture. Sega has thrived in the underdog role before with the Genesis and could very well do it again with the Dreamcast. Sega still has a strong brand name and the company is a proficient software publisher. The Dreamcast is in a similar position to the Sega Genesis in 1991 when the Nintendo SNES was released. The Genesis had been on the market for a year and a half when the SNES was released. Nintendo had owned about 95% of the market and no one gave the Genesis a chance against the technologically superior SNES. In the end, the Sega Genesis was able to match the SNES in sales. Sega already has strong software for the Dreamcast, and thus far, the Dreamcast has done surprisingly well. Of course, the Dreamcast is still a dark horse and Sega has a long way to go. On the other hand, the Dreamcast is possibly only one hit title (on the scale of a Super Mario 64) and a solid marketing campaign from becoming a well established system.

Then of course there is Microsoft and the X-Box. The company clearly has the financial resources, a strong brand name and a system and strategy that on paper looks like a winner. If Microsoft is able to build a large library of titles, the company might be able to do what Sony did with the PlayStation. Sony clearly will be Microsoft's role model, as well as main competitor. Right now it looks like Microsoft is willing to spend the money it takes to acquire top software properties. Of course, Microsoft still has plenty to learn and will have to execute flawlessly right out of the gate. One can never count out a big company like Microsoft, and if the system lives up to expectations, it will be interesting to see how the market and the competition reacts.

The next few years will be interesting and we won't know who will come out on top for a couple more years. Nintendo and Microsoft will not release their systems until the fall of 2001, and it will take time before top quality titles appear on those systems. It is likely that the main battle for market share will occur in 2002. While the 128-bit battle rages over the next few years, it is important not to get caught up in the short term hype.

The myth that the industry can only support two systems is so pervasive that many accept it as fact. However, we strongly disagree with this assessment. We believe that it would be entirely possible for three systems, and possibly even four systems, to each carve out a healthy market share of around 20% to 40% of the market.

The myth that only two systems can survive comes from past behavior. There have been many unsuccessful hardware systems in the short history of interactive entertainment. Generally consumers have gravitated towards one or two systems and the others have failed. However, the systems that failed never obtained widespread retail distribution or had a mass of quality software available. The Sega Master System, the NEC TurboGrafx 16 and the Sega CD were failures because of poor quality software. The Sega Saturn was a strong system but looked weak when compared to its immediate competition: the Sony PlayStation.

As we noted, currently, once again, there are two systems which have sales momentum, strong distribution and have a healthy amount of quality software available: the Sony PlayStation and Nintendo 64. Then there is the Sega Saturn which could possibly have generated more momentum if it could have been distinguished from the PlayStation. Many consumers have been divided into camps. There are loyal Nintendo fans, PlayStation fans, Dreamcast fans, PC game fans and even a small group of gray haired Atari loyalists.

It must be remembered that the demographics of the interactive entertainment industry are changing. In the past, video game systems were marketed as a toy for children. The new generation systems are being marketed to a diverse audience, as more adults play games. The larger number of potential owners means there is room for more platforms. In addition, there is the possibility that one system may only appeal to adults, while another appeals mainly to children. (This seems to be true of the PlayStation and Nintendo 64.) The adult market is more diverse. Children tend to follow their peers and buy the system that is most popular. Adults tend to look for something that is reasonably priced and has the software they like. Adults are less likely to buy a system simply because it is popular.

In short, there is no reason the market can not support three or four separate platforms. Industry insiders may not be happy about the fact, but consumers make the rules. As the industry expands it becomes harder for any one company or system to satisfy the increasingly diverse consumer needs and interests. The end result is a fragmented market. Software publishers may have to get used to releasing titles for multiple systems.

Hardware manufacturers will not be happy about having smaller market shares. The razor-blade model, where hardware systems are sold at cost and money is made on software, is becoming more difficult to emulate. Recently hardware companies have been forced to sell their systems at a loss. Meanwhile, with a number of competing systems on the market there is a downward pressure on software prices and royalty fees paid to manufacturers. The result will be smaller profit margins for hardware manufacturers. The next few years are likely to see a trend toward industry standards and a lessening of the role of hardware manufacturers. This will be a slow process, but it is inevitable. Look for consolidation to slowly occur as leading hardware manufacturers attempt to "buy" market share by making deals with their competitors.

A) Aggregate sales of 128-bit systems are sure to be greater than the current 32/64-bit market.
B) The 32/64-bit market is headed for a steep decline.

The first generation games for the 32 and 64-bit systems proved far superior to the 16-bit games. The next few years is likely to see the release of titles for the 128-bit systems that could not have been imagined a year ago. Coupled with this is the fact that the number of consumers interested in games is constantly expanding and the 128-bit systems will have the ability to go online and play DVD movies. Together these trends make it seem inevitable that the 128-bit systems will take the interactive entertainment industry to even greater heights than the ones set by the PlayStation and Nintendo 64.

Sales of the Nintendo 64 and Sony PlayStation will exceeded their 16-bit counterparts. An increasing number of consumers like playing interactive entertainment. However, for the bulk of consumers, games are a pastime, not a necessity. There are many compelling entertainment choices competing for limited consumer time and money. Interactive entertainment is an expensive hobby. The 128-bit systems will require a large initial investment. Many consumers already own 32/64-bit systems, and high quality 32/64-bit software is readily available at bargain basement prices. For a consumer on a limited budget, the 32/64-bit systems may provide enough interactive entertainment for the short term. Indeed, the 32/64-bit systems seem to provide more long term entertainment value than any previous generation of game systems (including the Game Boy). Instead of buying a 128-bit system, a consumer might spend disposable income on a computer, a new car, a vacation, or any of thousands of other items. In addition, many industry insiders may be surprised at the large number of current 32/64-bit owners that are unaware of the new systems.

Strong initial sales for the Dreamcast and strong preorders for the PlayStation 2 show that there is a large group of consumers ready to buy a new game system. However, there are many people that wait for prices to come down to under $100 before buying a new system After the PlayStation and Nintendo 64 lowered their prices to $99, both systems sold extremely well. These consumers are likely to be slow to upgrade to a new 128-bit system.

The 128-bit market is further complicated by the fact that there are four strong competitors. Furthermore, two competitors, Sony and Microsoft, have ambitions for their systems that extend beyond games. If the PlayStation 2 sees less than spectacular sales, Sony may be quick to start focusing on a new system (PlayStation 3 possibly?). If consumers hold on to their 32 and 64-bit systems longer than expected and manufacturers are in a rush to release even more powerful systems, the 128-bit market could see a very short lifecycle.

In the end, we think that 128-bit systems will outsell the 32/64-bit systems. From 2002 onward, all leading software developers will be focused on games for the128-bit systems. Few high quality 32/64-bit titles will be released. It is high quality new software that drives the interactive entertainment market. There are a large number of consumers that are interested in the latest and greatest software. These consumers should drive sales of 128-bit systems.

However, it is far from a guaranty that the 128-bit systems will outsell the 32/64-bit systems. Furthermore, we don’t think that 128-bit systems will significantly outsell the 32/64-bit systems. We are also skeptical about Sony’s claims that the PlayStation 2 will last longer than any previous game system and sell in unprecedented numbers. The PlayStation 2 is already being surpassed technologically by the X-Box and probably the Dolphin. At this point, the PlayStation 2 is our market favorite, but it does not look like a system that will have a spectacularly long lifespan.

Obtaining distribution in the retail channel has become a source of frustration for many small publishers and developers. There are many companies that view the Internet and the potential for online distribution as a way to open new channels and reap the profits they have previously been denied. Online distribution is coming and it is likely to wreck havoc on the current power structure. However, it would be a mistake for a company to operate under the assumption that online distribution will stop the trend towards consolidation and the need for a company to be highly capitalized. Even in a world of online distribution, an alliance with a big player is likely to be a necessity.

The claim that there is not enough retail shelf space is a myth. There are far too many products considering existing consumer demand. Few consumers would complain that there are not enough titles from which to choose at the retail store. Furthermore, few consumers complain about not being able to find the titles that don’t receive distribution.

Online distribution will be a new, more efficient channel for distribution. However, it is unlikely to replace the existing channels. Selling entertainment products is all about getting the product in front of consumers in as many locations as possible. Many purchases are an impulse buy. Impulse buys only occur when a product is physically in front of the consumer. Currently most online distribution schemes require the consumer to seek out the product. There is no chance for capturing the impulse buy.

Of course, there is the possibility of creating impulse purchases online. However, in the near future, this is likely to require capital. For example, a company can buy an advertisement that pops up anytime a user logs on to America Online (or another ISP). But guess what, the cost of buying those advertisements will only go up as they become more efficient sales tools. The companies that were once buying shelf space will start buying screen space. Even in an online world the cost of marketing will not go away, it may even get worse. Small companies must have some type of alliance with a well-capitalized partner.

This is not to disregard the many benefits of online distribution. Many publishers already have their websites set up so that a consumer who browses the website may purchase the game directly from the publisher instead of having to go to a store that might not have the title in stock. There is also a proliferation of online game stores that have extensive warehouses and carry many titles that normal brick and mortar stores cannot carry due to extensive overhead costs. These online businesses are made up of both brick and mortar stores that opened up e-businesses (such as Toys R Us and Electronics Boutique) as well as independent companies who set up shop solely on the Internet (such as gamedealer.com and buy.com). Of course, with online distribution, developers will still need to have partnerships with the retail stores in order to have their products featured online.

For years, people have been talking about the growth potential of the PC as an entertainment platform. Windows 95 promised to bring much needed stability to the computer as a game platform. It made it easier for developers to create titles that work on different hardware configurations. The installation difficulties that have plagued the computer game market in the past are partially alleviated by Windows 95. Windows 95 slowly replaced DOS as the platform of choice for computer games.

However, even if Windows 95, and its successor Windows 98, continue to deliver as promised, it will not have a large impact on the total size of the market for interactive entertainment played on the PC. Installation difficulties are only one small part of the problem with the PC as a mass market game system. The PC remains a device that appeals to a high income audience. Meanwhile, console systems are more affordable to the mass market. This trend is likely to continue over the next five years, even as the computer prices decline and newer, more expensive home systems are released.

PC prices have been rapidly going down, with decent low-end computers practically being given away in some cases. However, to buy the type of high performance PC that plays the latest game titles it is still necessary to spend well over $1,000 or more. And that is just an initial outlay. To compete with the next generation console systems, PC game developers tend to continue to develop for the high-end PCs. Many games require special add-ons like 3D cards, increased memory, Internet access and so on. Cutting edge games will continue to require the latest in PC technology and this means to continue to play the latest PC games it will still be necessary for consumers to spend about $300 a year or more just on upgrades.

Playing games on a PC appeals to a core group of hobbyists. These consumers will continue to play PC games. There will also be an increasing number of "hard core" PC gamers. The problem is the number of consumers that have both the time and money to spend on PC games is growing nowhere near as fast as the growth in PC hardware sales.

In what may strike many as ironic, the growth of PCs equipped with CD-ROM/DVD drives and modems may actually fuel the sale of console systems. The PC is a useful tool that is becoming an essential appliance. The problem is, PCs are so useful that every member of the family wants access. Many consumers may be introduced to interactive entertainment when they purchase a PC. However, people may also find themselves, and other family members, wanting to use the PC to get work done or go online. A family or individual in this situation can buy additional PCs, each specifically dedicated to a specific task or used solely by one family member. However, if a PC is going to be used mainly for entertainment, many consumers may decide to buy a console system instead. For many consumers, the $100 to $300 spent on a dedicated game machine is a better investment than spending $1,000 for a multi-purpose machine that will be used solely for entertainment.

It is true that in the video game industry, the most successful companies have been those that have released the biggest hits. However, this does not mean companies with products that appeal to a narrow segment of the market can not be successful. In fact, companies that create niche products that appeal to a loyal group of core consumers are likely to be very successful. Meanwhile many companies that continue to shoot only for hit products will fail.

The interactive entertainment industry appeals to a diverse audience. Like other entertainment industries, it is likely that interactive entertainment will evolve to the point where products are developed for a wide variety of tastes and interests. Of course, the best sellers will always be the fighting, racing, action and sports games that appeal to teenage and young adult males. However, all the major publishers will be aiming at this target group. To create a best seller will require spending increasingly large development and marketing budgets. Potential rewards may be high, but the substantial risk will leave room for only a few large, well financed players. Success requires enough capital to work on a number of big budget projects, knowing that only a few will be successful.

For smaller publishers the best chance for success is to carve out a specific niche and deliver products to consumers whose tastes are slightly outside the mainstream. Companies like Broderbund, Maxis, Sierra On-Line, Microprose, Origin and SquareSoft have done well by creating products that are not the stereotypical action titles. These companies build brands that appeal to specific consumers. Brands like Carmen San Diego, SimCity, King’s Quest, Civilization and Ultima have long life spans, across a number of titles. Then there are products like Warcraft II and Command & Conquer which can be seen as breakthrough hits in smaller, previously "undiscovered" genres. Who would have guessed a deer hunting simulation would take off, but Deer Hunter was a best seller in late 1997 and created a whole new genre.

The moral is that the economics of the interactive entertainment industry are such that banking on one or two hit titles is a surefire road to doom. The goal must be to build a franchise of products and a loyal customer base that can provide a revenue stream for years to come, across numerous titles. Any given title may have comparatively small unit sales, but development and marketing costs are amortized across a number of titles. Establishing a brand in the consumers mind then gives the company a legup when releasing new titles in the genre. Revenue from these titles flows in over a period of years. This is the model required for success in the interactive entertainment industry.

Many people predict that there will be a major shakeout in the interactive entertainment in the next few years. What this does not consider is the fact that shakeouts in the industry are constantly occurring. Publishers and developers constantly come and go. The main point is that the industry is constantly evolving and weeding out the companies that fall behind. The shakeout is an ongoing process and not anything new. People that claim "there will be a major shakeout in the next year," give the impression that this is something new for the industry. It also gives the impression that the industry is due to collapse. In interactive entertainment, shakeouts are happening all the time and are necessary for the healthy growth of the industry.

Consolidation will continue to occur. With increasing development and marketing costs significant capital is required to be consistently successful in the interactive entertainment industry. Large companies not only have capital, they know how to market products and leverage content across multiple distribution channels. These companies act as funnels that ensure only the best products make it into the sales channels.

However, consolidation does not mean an end to independent development companies. One thing large companies are not good at is creating compelling content. A well oiled bureaucracy is not the type of organization that inspires creativity. The small, independent development companies are needed to develop products for larger organizations to distribute. Larger companies are slowly coming to realize the value of top development talent. As a result leading developers are in a position where they can name their price and insist on complete control of a project. Distribution channels are likely to be controlled by a few major players. However, small development companies will thrive doing what they do best: creating the products that people want to buy.

One of the most absurd arguments that has been advanced by otherwise rational people is that knowledgeable consumers will only buy interactive entertainment if it is priced over $30. Many people say that new titles priced in the under $30 range will not sell because consumers will perceive them as being of lesser quality.

Of course, many titles originally priced under $30 have not sold well. However, there is a problem with making blanket statements to the effect that this means consumers enjoy high prices. In the past, with low priced software, consumer perception has matched reality. Titles were priced low because they weren’t any good. If quality titles are initially priced below $30, consumer perception will change immediately.

One of the past problems with lowering prices has been the high cost of goods with cartridge products. CD-ROMs and DVDs are much cheaper to manufacture and this allows for more pricing flexibility. Of course, the problem with lower prices is that it requires an increase in volume to make up for the lost revenue from the price cut. In the past, the relatively small installed base of game machines and PCs means sales volumes were naturally limited. Price cuts only drive up volume a small amount.

Software prices are rapidly coming down to reflect reality. Many game titles are fun, but only for a short period. Other titles provide many hours of enjoyment. Currently pricing tends to be the same for all types of titles, when it should reflect the amount and quality of game play a title provides. Titles that only provide a short amount of game play must come down in price to compete with the rental market and other pay-per-use options. Titles that provide long term game play can command a higher price.

In the console game market, the price of new games averages over $40, but that price is coming down. Sony is leading the charge, having priced a great deal of new software for the PlayStation at $34.95. Many older titles for the PlayStation are now below $20. These are often quality titles and their low prices are an indication of things to come. The biggest attraction of CD platforms may prove to be lower software prices. However, the first generation of PlayStation 2 titles will have a MSRP of $49.95.

On the PC side, the price decline has perhaps been more dramatic. With educational PC software, prices under $30 are now standard. Hit PC games still sell for about $40, but after a few months on the shelf PC game titles drop dramatically in price. Myst was able to stay on the best seller list because its price was dropped to $19.99. Then there is a whole line of value titles like Deer Hunter and Who Wants to be a Millionaire that are launched at a price of $19.99 to $29.99 and enjoy very strong sales. This has become an industry with real pricing flexibility. This means titles have longer lifespans through lifecycle pricing, as well as the potential for lower priced add-on packs.

Of course, teenage and young adult males are still the main buyers of interactive entertainment. However, the demographics of the industry are changing. There are now many young adult males that grew up playing interactive entertainment and are continuing to do so as adults. There are another group of adults that are being introduced to interactive entertainment when they buy a multimedia PC bundled with software. This group includes a substantial number of females. "Multimedia" has received an enormous amount of attention from the general media, and even adults that have not played interactive entertainment software are curious about this new form of entertainment.

Systems from Sega and Sony actually targeted young adult males as the PRIMARY demographic. This was shown by the marketing plans for the Sega Saturn and Sony PlayStation and so far has continued with the Sega Dreamcast and Sony PlayStation 2. People in the 18 to 35 year old age group had a large say in making the Sony PlayStation such a huge success. This is problematic in some ways because the younger age group still remains the leading buyer of interactive entertainment. Both the Sony PlayStation and Sega Dreamcast emphasized racing, fighting and 3D shooting games. These are traditional game genres that appeal to the traditional video game audience: teenage and young adult males. Many adults like these types of games, but generally not enough to justify a purchase of a new system. Adults are notable for their diversity of tastes and interests. They are a harder mass market to reach and penetrate. The one genre that does well with a large number of young adults, and with most audiences as well, is sports games. Many consumers will buy a game system to play only sports games.

Beyond sports games, the main thing to note about the adult market is that it will take time to penetrate. A system must build up a diverse library of software that appeals to the wide variety of adult interests. It will also take considerable time for adults to become aware of the new systems. Unlike children, interactive entertainment remains a fringe interest for most adults. Few adults read the consumer magazines or keep up with the latest hot titles. Generally adults become aware of a system through hands on experience. They see a demo in a store or play a game at a friend’s house.

The major mistake companies like Sony have made in targeting only an older market is assuming that they have more economic spending power than the youth market. In fact, the adult market is more price sensitive than the youth market. To a 10 year old boy, a Nintendo 64 may be all he wants out of life. For this type of consumer a game system is one of life’s necessities. However, to a teenager or young adult, a game system is usually well down on the list of important purchases. The adult market is growing, but the youth market will continue to be the bread and butter of the interactive entertainment industry.

On the other hand, there are many analysts who claim that interactive entertainment is always doomed to appeal only to children and a small group of young adult males. The argument is that consumers do not want to be interactive. After a hard day at work people want to come home and be entertained, without participating. This argument has gained particular credence among traditional media companies in the film and music business. What this argument ignores is the fact that people have always been interactive and continue to be so, even in the face of expanding passive entertainment choices. Sports, card games, board games, books, puzzles, online services, location based entertainment and many other activities, are all interactive in the sense that they require significant participation from the end user.

The problem interactive entertainment has faced is that it has been targeted towards a narrow audience. Not everyone wants to play intense shooting and hand/eye coordination games. Many consumers prefer more cerebral products. Females in particular do not seem to go for the traditional action games. However women do enjoy card games and board games. They also enjoy certain interactive entertainment titles like Tetris, Monopoly, Myst, Who Wants To Be A Millionaire?, and You Don't Know Jack!, and SimCity. These are non-traditional video games that have a broad appeal.

Of course, in many cases interactive entertainment must compete with the real thing. Why play a game like Monopoly or Wheel of Fortune on a television screen or computer when it is more convenient to play the actual board game or watch the show on TV. To be successful interactive entertainment must add value that can not be found in traditional activities. This could be in the form of giving a consumer competition when other players are not available, or adding game features that make the electronic version more fun than the real thing.

History has shown that many games do well in electronic form. Companies like Hasbro, Mattel and Avalon Hill got started making board games. Now these games tend to do quite well when they are released as computer games. The computer allows for more complex simulations and more convenient game play than the traditional board games.

In the long term, an interactive entertainment machine should appeal to a broad range of consumers. Currently the PlayStation and Nintendo 64 console systems have a narrow appeal because they have limited software categories and only focus on a narrow category of interactive entertainment. However, this should slowly change with the release of the new generation of systems, as more consumers become aware of the plethora of features these new machines offer, such as Internet access and DVD movie support. It will not happen overnight, but games are starting to appeal to all age groups and sexes. Someday, game machines will be purchased for the enjoyment of the entire family.

Technology is improving and more people than ever are interested in interactive entertainment. Many analysts feel that there is no limit to the growth potential for interactive entertainment. Of course there are some major limits. The interactive entertainment industry will experience steady growth but it will be over a period of years and generations, not the exponential growth many expect.

While more adults and females will start to play interactive entertainment, it will be a gradual process. Technology changes rapidly, but consumer behavior evolves slowly over time. People become accustomed in their ways. The most radical change occurs among children. It is difficult to get an adult that has never used a computer to start playing interactive entertainment. On the other hand, children are not afraid of change and will embrace new technology. Furthermore children continue to use the products of their youth as they age.

The problem is that children age slowly. A ten year old today will be a starving college student in the year 2010. This is bad news for a company that wishes to broaden its demographic appeal today. The good news is that interactive entertainment has been around for over twenty years. There is now a significant portion of the population under the age of 40 that grew up playing video games and using personal computers. These adults are comfortable with interactive entertainment.

However, even assuming adults buy into interactive entertainment, growth potential is limited. There are many products and activities competing for limited consumer dollars. The number of ways a consumer can enjoy his/her valuable leisure time are constantly increasing. Many entertainment choices are free or inexpensive. Interactive entertainment remains expensive. A networked family game may be very appealing, but it is competing with a deck of cards, watching TV, using the Internet or many other options that are relatively cheap or free. When there is a major difference in price, many consumers will choose the many other options available that are free and use the money saved on something else.

To realize its strongest growth potential, the interactive entertainment industry may have to support advertising in products. Advertisers support many entertainment products from television, to magazines and newspapers. The support of advertising lowers the cost to consumers. Total consumer spending will only increase gradually, no matter how compelling the content. The real growth potential in the interactive entertainment industry may be recognized when advertisers start to finance products and allow networked family games to compete, on a cost basis, with a deck of cards.

Order