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Can Traditional Publishers Handle a Diversified Interactive Entertainment Market? September 15, 2004 Next week DFC Intelligence will release its latest Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry. It should come as no surprise that one of the biggest growth areas for the interactive entertainment industry is predicted to be the portable market. The worldwide market for dedicated portable game hardware and software is expected to grow from $3.9 billion in 2003 to $11.1 billion by 2007. Most of this growth will be driven by the launch of the Nintendo DS and the Sony PSP. In addition, our portable game forecasts include products like the Nokia N-Gage, but does not include other portable devices that play games as a secondary feature. The growing portable market highlights a major theme for the interactive entertainment industry: increasing platform diversity. Consumers are starting to become platform agnostic as the ability to access games anytime or anyplace increases. The new Worldwide Market Forecast report focuses on the traditional PC and video game business. However, we are the first to admit this is only one part of the overall industry. Last month, DFC released The Online Game Market report. This report discussed how a substantial number of consumers now access games entirely online, in many cases without even owning a hardware system. When looking at the future of the interactive entertainment business, these consumers will become increasingly important to the bottom line. By 2009, DFC forecasts the traditional video game market to still be the leading segment, going from $23.2 billion in worldwide revenue in 2003 to $31.2 billion in 2009. However, in this same time period, online games are forecasted to go from $1.9 billion to $9.8 billion in revenue by 2009. Obviously these are figures that can’t be ignored. The chart below shows how revenue for the interactive entertainment industry of 2009 is likely to be split among multiple segments: online games, PC games, console software, console hardware, portable hardware and portable software. Of course, these categories are further divided into sub-categories. There are multiple, incompatible portable and console platforms. Each region of the world has different forecasts and growth prospects. The online game category alone can include everything from MMOG subscription games to mass market ad-supported games. Online games also expand distribution possibilities and open up business models like pay-per-play and on-demand distribution. Then there is a system like Infinium Labs’ Phantom Gaming Service which combines elements of a traditional console system with an online game service. Growing platform diversity will result in more aggregate consumer spending. However, it also means that companies will need to be more diversified in both their product offerings and revenue streams. There is a major question of how well existing publishers will be able to handle a more diversified marketplace. Unfortunately, the track record is not very encouraging. As a general rule, publishers excel at licensing, getting a product in a box and onto retail shelves and getting consumers into retail stores to buy that box. Publishers have not done a good job at deviating from this basic model. The one publisher that is arguably diversified across multiple product lines and platforms is Electronic Arts. Nevertheless, EA has primarily distinguished itself in the retail packaged goods business. Furthermore, much of EA’s diversification has come through acquisition of established players (its recent acquisition of Criterion Software gets EA into third-party development tools). EA has struggled to expand into new businesses via internal development. Obviously this is not promising for companies that do not have the deep checkbook necessary to make strategic acquisitions. Major platform paradigm shifts are nothing new in the media business. Every year since 1994, DFC has fielded calls asking us to comment on the “latest news that games are now as big as Hollywood.” Inevitably, this involves a conversation of how spending on games is as big as spending at the box office. What this fails to acknowledge is that since the 1950s the box office has continually declined in importance as a revenue stream for Hollywood. Television, video rentals and sales, pay-per-view, and other revenue streams far exceed box office revenue. Box office revenue is still important, but box office attendance is a small fraction of what it was prior to the advent of television. In short, Hollywood has grown by developing new revenue streams. Of course, for a long time Hollywood studios ignored the inevitable growth of television. This allowed upstart companies in the radio business, like NBC, CBS and ABC, to gain a toehold in a business which could have been a natural for the existing movie studios. More recently, in the music industry, record labels were slow to react to the shift away from the packaged goods paradigm as consumers changed their consumption patterns. The game industry is a few years behind the music industry in this respect, but a similar paradigm shift is inevitable. Being aware of the challenges presented by changes in technology is only the first step. Planning to capitalize on uncertain market shifts is even more difficult. The natural temptation is for publishers to focus on the here and now as opposed to investing in risky long-term strategic ventures. This is compounded by the fact that most publishers are public companies and Wall Street only tends to award current performance. As our forecasts show, even by 2009, the traditional packaged goods business is still predicted to be far and away the leading segment. Ventures like THQ Wireless and Atari on Demand make for good press releases, but they currently add almost nothing to the bottom line. Furthermore, these minor side efforts must compete with what are often more focused and innovative ventures from startups and companies outside the traditional game industry. The interactive entertainment industry is ripe with growth opportunities. Today the concern of many publishers is how to compete with a market player as dominate as Electronic Arts. This is obviously a very valid concern. However, even a publisher as large as EA is not immune from potential shifts in the market paradigm. The chart below shows how healthy growth is forecasted for the traditional retail game industry over the next several years. However, under this growth is likely to be a subtle, but major, shift in consumer behavior. This shift will be a major threat to the existing players. In a minefield of potential threats, the smaller, more dexterous player often has an advantage over the large, lumbering giants.
From the DFC Intelligence report Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry, September 2004 version. Does not include online game forecasts from The Online Game Market. 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/PAL, U.S., 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 600+ page report profiles major companies in the interactive entertainment industry. Each individual company report is about 15-40 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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