DFC Intelligence  

The Service-Oriented Game Industry: Paving the Way for New Business Models

September 20, 2005

Last week DFC Intelligence released a detailed report on the game market in China.  However, when it comes to China we have to be realistic.  Entering the Chinese game market under current conditions is probably not feasible for most Western game companies. However, this does not mean that companies should ignore what is going on in China and other emerging markets.  At the very least, China is providing a test bed for future game business models.  Under the worst case scenario, developers in emerging markets could eventually provide low cost competition to the development community in more established markets.

The key lesson from China is how game companies can make money in non-traditional ways.  Piracy is of course the key reason that most companies have avoided the Chinese market.  Generally, anything that can be copied in China will be pirated.  Electronic Arts has estimated that there are over 9 million illegal copies of its popular FIFA soccer game in China.  On the positive side, FIFA has built a great deal of brand share, it is just now up to EA to figure out how to capitalize on that name recognition.  The Warcraft games were highly pirated in China. Vivendi Universal Games/Blizzard Entertainment became the first Western company to cash in on that unattended brand building with the launch of World of Warcraft in China.

The forecasted $580 million 2005 China game market, has been dominated by one very particular type of game, the massively multiplayer online game or MMOG.  MMOGs are baseline more resistant to piracy than standalone games because the game is not a product but a service requiring an authenticating connection with an (expensive and technologically sophisticated) server array.  As the chart shows, these MMOG products are expected to make up over 75% of the China game market in 2005.

From the DFC Intelligence report The Game Market in China

As a service, not a packaged good business, companies in the Chinese market have had to look at numerous ways to generate revenue.  At the most basic are pay-per-usage and charge by the hour models.  However, virtual item sales and trading, in-game advertising, digital distribution, online arcade games and casual games are key features of the Chinese game market.  As the chart shows, there are a growing number of what we call “MMOG-Professionals.”  These are people that make a living playing games and acquiring virtual assets to sell for real world currency.  They currently account for an estimated 9% of the revenue that China game operators generate.

In the West, it is still very much a packaged goods business, but the handwriting is clearly on the wall.  Furthermore, leading the charge are the three primary market drivers, Microsoft, Nintendo and Sony.  Overall it is amazing how all three upcoming systems and their makers are fostering the multi-platform, new business model world.  Now, more then ever, there is reason, for many hardcore gamers (an increasingly significant market) to own more then one console system.  Given everything we've seen it only reinforces our notion that the world of semi-to-fully viable game platforms is doing nothing but increasing.  The biggest players have no choice but to orientate to a world where they publish a portion of their brands on as many as 10 platforms and many on at least three to five distinct platforms some of which can share significant code-base and others that can't.

Gaming has grown in scale that it can support more diversification of platforms then ever. Yet as Nintendo President Iwata pointed out in his Tokyo Game Show speech the game industry is being built still too much on the backs of core gamers.  His charts detailing the near cliff dive every major title takes after release are familiar to anyone watching the industry.  The slump in games sales seen in Japan, the recent U.S. box office slump, and other aspects of media slumps are certainly multi-factored but keen observers also highlight that the public is getting restless and is changing the habits by which they plan to buy, actually buy, and consume media.  These changes are challenges that the game industry, the youngest of major media forms, must grapple with. 

The Microsoft Xbox 360, is of course almost here.  This system is clearly designed with online in mind.  It is likely that people will not be talking about the initial Xbox 360 games, but instead be most fascinated by some of the new features for Xbox Live.  Microsoft has taken lessons from the first two million Xbox Live subscribers and combined it with knowledge of PC online gamers and new consumption models in Asia to create a fully-featured service focused heavily on games (as opposed to multimedia).

As it boldly promised, Nintendo may be even more revolutionary.  In its own quiet way, Nintendo has always tended to push the edge of game innovation.  The new controller for the Nintendo Revolution definitely fits that bill.  Prior to its unveiling many expected some sort of tilt control but most people were expecting something closer to a regular controller with these features layered on.  Instead what we got is something very different and, while sporting certain tilt control capability, the controller is more spectacular for its ability to act as an on screen pointing device and for the system’s ability to measure distance from the screen which in the 3D gaming world is itself quite revolutionary.  Nintendo makes a lot of play over the one handed control and no doubt some games will use that feature, but in the end it will probably be the point and click aspect of the controller coupled with the motion depth control that leads to the most usable aspects of the controller.

However, the key issue is simple: will it be easy for publishers to adapt multi-platform titles to the controller or will users be forced to buy more conventional controllers alongside the platform?  Less important in some ways is what new games this will spawn because it is likely that such games will not be playable on other platforms.

Where the exclusivity of the controller could make a big difference is if the styles of games and game play that Nintendo offers is able to bring to it an exclusive cadre of gamers and families of gamers that want a machine for all ages.  This is clearly also the intended goal behind the Revolution’s planned service for digital distribution of classic Nintendo games.

One thing that is clear, the hardware manufacturers have thought a lot about the future of gaming and are building their systems accordingly.  The main concern is that the traditional game publishers simply aren’t prepared for these changes.  Publishers will need to navigate what will likely be geographic, demographic, and now increasingly radically different styles of game play/gamers.  It is an understatement to say that segmentation is not something that the game industry is especially adept at, especially given the method by which it builds, markets, and distributes its wares.

Of course, the traditional packaged goods business is likely to be the dominant revenue generator for the next generation.  However, it is not likely to be where the growth comes from.  We think the next few years will not be about consolidation, but instead about diversification.  There are too many new and different ways to carve up the current market, and all signs point to major expansion of the worldwide market.  It will be an interesting time. 

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.

The Game Market in China This 350 page report contains a complete look at the rapidly growing Chinese game market, including forecasts to 2010, government regulations, market entry strategies, business models, distribution options, game genres and numerous company profiles and case studies.


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