In 1998, interactive entertainment unit sales were up 35%, revenue was up 26%. There was no significant change in hardware platforms in 1998. The installed base for the existing platforms grew and as a result the sales potential for any one title increased. The most substantial increase was in software sales for the Sony PlayStation. However, Nintendo 64 software sales increased significantly, and PC game unit sales showed an increase of 14%. The PlayStation was the clear shining star of the market, solidly outpacing the Nintendo 64 throughout 1998. However, U.S. sales of top 20 titles for both the PlayStation and Nintendo 64 are now well over 500,000 units. In 1997, the average top 20 PlayStation title only did 250,000 units. In the PC market, a top 20 title continues to do over 250,000 units. The bottom line is that the PC, Nintendo 64 and Sony PlayStation are all solid and growing platforms for interactive entertainment software.

Source: NPD Group SofTrends

Consolidation and merger activity is a constant in the interactive entertainment market, and 1998 was no exception. The Learning Company acquired Broderbund and Mindscape and was then itself acquired by Mattel. Other major investment activity included Cendant selling off its software divisions to Havas, Electronic Arts acquisition of Westwood Studios and Hasbro’s surprising acquisition of long-suffering Microprose. The best news from the consolidation front was that the $1 billion purchase of Cendant and Mattel’s willingness to pay $3.8 billion for The Learning Company may help validate the game market in the eyes of an Internet obsessed financial community. The fact that toy companies Mattel and Hasbro are two of the most active purchasers is further proof that interactive entertainment is a major competitor for consumer time and dollars. In a year when traditional toy sales slumped (despite Furby), growing video game usage is hurting traditional toy sales.

Increased consumer usage is perhaps the biggest positive sign from 1998. One of the most notable trends in the computer game industry has been the growth of Ahunting simulations.  These include such titles as Deer Hunter, Cabela's Big Game Hunter and Rocky Mountain Trophy Hunter. However, these titles do far more than indicate that computer gamers like hunting. On the contrary, the success of the hunting simulations is some of the best evidence yet of the emergence of more of a mass market for computer entertainment software. Over 45 million households now own PCs and there is solid evidence more and more people are starting to use those PCs for entertainment. But, instead of buying traditional computer games, many of these consumers are starting to buy products that target their lifestyles. Real-life simulations like NASCAR Racing, Deer Hunter and Microsoft Flight Simulator were major hits in the PC market. Often these titles sold to consumers that had not bought any other PC game. Meanwhile, the success of titles like Titanic, Blue’s Clues, Mattel's Barbie products and the line of classic games from Hasbro, show how the PC has become a truly mass market, especially if linked to a familiar license and priced attractively.

The biggest winner from the emergence of a broader market is Wal-Mart. Wal-Mart has gotten onboard the interactive entertainment business in a big way, completely overhauling and improving their merchandising of games in 1998. As a result, Wal-Mart’s market share has grown at the expense of such established chains as Toys R Us and CompUSA. Wal-Mart is now the most important retailer for the interactive entertainment industry and the road to mass market success goes straaight through Bentonville.

Of course, the growing consumer base and the continued strength of mass merchandisers like Wal-Mart has resulted in significant price pressure. The average price for software continued to decline for all systems. In the PC market only triple-A titles can hold a $40 price point for any length of time. The biggest growth segment for PC software is with titles that are released in the $20 to $30 range. On the console side, Sony has emerged as a clear trend driver. With lower software prices, and the PlayStation Greatest Hits program, Sony has created a lifecycle pricing model that Nintendo, with its cartridge-based model, is finding hard to match.

Pricing pressures are probably the best indication of how far the interactive entertainment market has to go until it becomes a comparatively stable business. In the long term, lower prices should benefit the market by increasing the consumer base. However, in today’s market, trends like net-to-zero pricing, the demand for MDF funds and the extreme pricing competition among retailers puts incredible strain on the margins of both manufacturers and retailers. Both marketing and development costs continued to increase in 1998, and the basic industry dynamics, where 9 out of 10 products lose money continue to hold true.

For software publishers, several ominous trends continued to loom on the horizon throughout 1998. The formation of Gathering of Developers was not significant as an immediate threat to publishers, but it did indicate the growing problem publishers face with trying to keep top talent. There is a short supply of people that can consistently develop hit games. Top developers are becoming stars and the bidding wars for these developers not only add to development costs, they make it hard for publishers to create consistent product franchises.

As a result of increasing product development instability and rising marketing costs, Wall Street has not given interactive entertainment the attention its overall revenue growth would seem to deserve. Wall Street is focused on the Internet and does not tend to view interactive entertainment as a growth industry, even with the potential for online games.

The hope is that strong growth in 1998 will translate into even stronger growth in 1999. Developers are just starting to tap into the potential for 3D games. Much of the money spent over the past several years learning how to develop 3D games will be amortized over the next two years in the form of high quality software. New platforms like Sega’s Dreamcast, VM Lab’s Nuon, PlayStation 2 and DVD-ROM may dominate press coverage in 1999, but even under the best of circumstances they will have a negligible effect at the cash register. In 1999, hardware sales for the Nintendo 64 and Sony PlayStation could equal, or even surpass their 1998 levels. In short, 1998 was an overall good year for interactive entertainment and 1999 is shaping up to be even better. Will the rest of the world pay attention? Stay tuned.