|
|
| Interactive Electronic Entertainment Industry Overview Much of the information discussed in the following article is from the report, The U.S. Market for Video Games and Interactive Electronic Entertainment, from DFC Intelligence. No surprises. That is the best way to describe the past few years of the interactive entertainment industry. For people who have witnessed the growth of CD-ROM and the Sony PlayStation, the rise of the Internet, the entry of Hollywood and an incredible level of industry hype, "no surprises" may seem like an unusual statement, to say the least. However, we submit that industry growth has occurred on a fairly steady course. No technology or product has come along to upset the apple cart. Technologies like CD-ROM, DVD and the Internet have been getting a tremendous amount of press. All are rightly seen as having enormous potential to expand the interactive entertainment industry. However, so far it has not happened to the extent many were hoping. The potential of CD-ROM and online services has been widely discussed since the 1980s. Meanwhile the cartridge based 16-bit market continued to be the dominant platform for interactive entertainment through 1995. From 1993 to 1996, the interactive entertainment industry was on the decline. This decline was caused by the collapse of the 16-bit market and the fact that it took awhile for something to come along to replace 16-bit systems. Everyone knew for sometime that the 16-bit cartridge business would only be the dominant platform for a finite period. The steep decline in the 16-bit business was natural and fully anticipated. To many companies, the biggest surprise was 1) that the 16-bit market did not decline as fast as expected and 2) there was no platform to replace the 16-bit systems. Consumers that stopped buying 16-bit titles did not necessarily start buying other interactive entertainment products. This was true even though, during that same period, there was phenomenal growth in households with CD-ROM PCs and the ability to access the Internet. Now the interactive entertainment market is on the comeback trail. This comeback has been driven, in part, by the growth of the Sony PlayStation. However, the cartridge-based Nintendo 64 has also been a major market driver. It is also worth noting that currently neither the PlayStation or Nintendo 64 is online capable. Many analysts and companies were betting that the interactive entertainment industry would migrate to the PC as the platform of choice. The past three to four years have seen the rapid growth of high-end PCs equipped with CD-ROM drives and other features which are conducive for playing entertainment software. There has been a lot of consumer spending on PC hardware. However, this hardware spending has not translated into an enormous growth in PC entertainment software. The PC business has grown, but growth has not been as fast as many expected. The disappointment in the growth of the PC game business stems from the fact that many analysts have been expecting that the PC would replace the dedicated console systems. A study by the U.S. government concluded that there was little chance the dedicated console systems could survive the growth of consumer PCs. One little note: this study was done in 1984. PCs remain too expensive to be a mass market entertainment product. The PC entertainment software business is a solid industry, but in the short term it is unlikely to replace the dedicated console systems which attach to the television set. Over the past two years, many experts have been betting that online components will cause a surge in PC software sales. Having an online component in a PC game already can help spur sales. Traditional PC titles like Diablo, Quake, Command & Conquer and Warcraft II had strong sales in 1996 and 1997. It is safe to say that sales for these products would not have been as high if they were not playable online. The online world should become a major force in the industry, however several key points should be made:
A major theme of The U.S. Market for Video Games and Interactive Electronic Entertainment is that the health of the interactive entertainment industry is dependent on the continued growth of the installed base for the 32-bit and 64-bit "next generation" console systems. This is an opinion we believe firmly in, but not one that everyone shares. To the extent we are wrong that is a major flaw in our research. The interactive entertainment industry is currently being driven by two major console systems: the 32-bit Sony PlayStation and the 64-bit Nintendo 64. These are the successful next generation systems. The good news for the industry is that the decline has been stopped. Sales for interactive entertainment products started increasing in 1997, with growth expected to continue through the year 2000. This growth will be attributed to strong mass market acceptance for the leading next generation console systems. There should also be growth for PC entertainment software, however this growth is not expected to be as great as the growth of the new console systems. Although steady growth is predicted, hardware manufacturers may not be entirely happy. There is a major market split among the two leading next generation systems. In addition, hardware manufacturers like Sega and others are looking at introducing new systems. New high-end game systems should be on the market in 1999 and there is even the possibility of a new interactive systems based on the DVD standard. This increased competition for the consumer dollar is resulting in constant price wars and significantly lower margins for the hardware companies. There will be a need for even heavier research and development expenditures to keep up with the rest of the industry. There are many that argue only two console systems can thrive on the market at one time. The support for this theory is that historically only two systems have thrived in the market at the same time. This was seemingly born out by the failure of the Sega Saturn. The Saturn had a strong software lineup and the backup of the well respected Sega brand name, but couldn’t find room in a market dominated by the Nintendo 64 and Sony PlayStation. However, we find the argument that only two systems can do well in the marketplace somewhat misleading. History may be a poor guide considering that this is an industry that is only twenty-five years old. There have often been a half dozen or more competing game systems on the market at one time. Many of the systems that failed had only limited software support. The Sega Saturn was perhaps the strongest failure ever, but its software ran a weak second to the Sony PlayStation. Never before have there been three solid, well backed console systems on the marketplace which are distinguished from each other. The PlayStation and Nintendo 64 are very different from each other. Meanwhile, the PlayStation and Saturn looked very similar, with the PlayStation having the obvious edge. As a result, the Saturn failed in the marketplace. There is no reason why three or more systems can not split the marketplace if each of these systems appeals to a slightly different audience. This is especially true given the expanding demographics for interactive entertainment. One of the subtle changes in the interactive market over the past several years has been an expanding demographic base. For its first two decades, the interactive entertainment industry’s target market was 6 to 14 year old males. Now, the industry has started growing up with its audience. There is a teen market, an adult market, and a slowly growing female market. There is room for hardware manufacturers to carve out different markets for there systems. This phenomenon is already occurring with the Nintendo 64 being targeted at the youth market, while the Sony PlayStation is targeted at the young adult market. The U.S. Market for Video Games and Interactive Electronic Entertainment has several scenarios for future growth. However, one thing all scenarios have in common is a subtle movement towards alliances between hardware manufacturers. The next few years could see a slow movement towards a common standard for interactive entertainment based around the DVD standard. The word slow should be emphasized. Even as alliances form, there are likely to be competing standards. For example, a Sony PlayStation DVD standard may compete against a DVD standard from a manufacturer like Sega, Matsushita or NEC. However, the groundwork for these alliances will just start to be laid in the timeframe of The U.S. Market for Video Games and Interactive Electronic Entertainment (through the year 2001). It should also be noted that under most scenarios the PlayStation and Nintendo 64 have healthy lifespans. In fact, we predict that the lifespans for the current next generation systems will be longer than that of their 16-bit counterparts. One must remember these are entertainment products. Consumers need to see a quantum increase in performance before upgrading. Witness how long the change from 16-bit to 32 and 64-bit systems is taking. Or the shift from cartridge systems to CD-based systems. Once consumers buy the new systems, they will not be in a hurry to upgrade. This will be especially true given the high quality of products that are expected to be released for the PlayStation and Nintendo 64 over the next few years. Of course, the forecasts are not designed to be set in stone. We use multiple scenarios to try and open up some serious thinking about the future. We realize many people want to know exactly what will happen for business planning purposes. Unfortunately this is impossible. This is a fluid and dynamic industry. It is possible to make educated guesses about the future, but it is dangerous to put all the eggs in one basket. The best business plans will be fluid and dynamic; designed to change as events necessitate. The goal of The U.S. Market for Video Games and Interactive Electronic Entertainment is to help with such critical business planning. In the long term, the growth potential for interactive entertainment is enormous. In fact, we argue that in the coming years, the interactive entertainment industry will be the tail that wags the entire consumer electronics industry. Interactive entertainment should be the key selling point for DVD-based systems. A DVD based system could replace VCRs and audio CD players. DVD products could penetrate as much as 80% of U.S. households. The DVD based system that provides the most satisfying interactive entertainment experience is likely to come out on top of this huge market. Currently hardware manufacturers have been asleep at the wheel on the issue of the potential for the interactive entertainment industry. The only exceptions is Sony. Companies that understand and are well versed in the interactive entertainment industry are likely to come out on top. Those companies that ignore this important, and growing, industry could be in trouble. The Past Two Years in Review: 1996 and 1997In the interactive entertainment industry, 1996 and 1997 were years with plenty of news, but few truly earth shattering events. This was indeed a time of "no surprises". For many companies, hoping for positive surprises, 1996 was a year of disappointments. The bad news was that, despite incredible hype, the interactive entertainment industry did not expand during the year. However, the good news is that in 1996 the seeds were planted for future industry expansion. This expansion started to occur in 1997 and the mood in the interactive entertainment industry is upbeat going into 1998. The biggest news of 1996 was the phenomenally successful release of the Nintendo 64. The Nintendo 64 was released in late September and was the most talked about product of the Christmas season. The system was sold out almost everywhere and Nintendo claims it shipped 1.6 million units. The real news with the Nintendo 64 was that it brought the mass market back into the interactive entertainment industry. Sega, Sony and the PC market had been competing for the market of hard core, heavy gamers. Meanwhile the mass market was being ignored. With the launch of the Nintendo 64, interactive entertainment was once again getting mainstream attention. In the long term, this should only help the entire industry, not just Nintendo. The Nintendo 64's 1996 success rode almost entirely on the shoulders of one title, Super Mario 64. This character based platform game had enormous appeal to the traditional video game market which had been largely ignored by Sony and Sega. The lesson was clear. The demographic appeal of the interactive entertainment industry is expanding but the bread and butter of the industry in many ways remains children. For its part, Sony, in 1996, had a consistently strong year for the PlayStation. This was despite a series of management struggles, a slight sense of disorganization and the fact that at the end of 1996 the PlayStation was completely drowned out by the Nintendo 64. The PlayStation has carved out a strong brand name and a healthy share of the teenage and young adult market. Sony has tried to reach a younger audience with titles like Crash Bandicoot, but with only mixed success. Going into 1997 the question became: would the PlayStation be able to survive the onslaught of the Nintendo 64? In 1997, it became clear that not only would the PlayStation survive, it would remain the leading system on the market. The Nintendo 64 lived on a handful of hit titles. In winter 1997, Super Mario Kart drove sales. In the summer it was Starfox 64, followed by Goldeneye 007, going into the fall. These titles became mammoth best sellers. In fact the best seller lists for 1997 were almost completely dominated by Nintendo 64 products. However, this masked a major problem for the Nintendo 64: the system was entirely driven by hit products. There were simply not many titles for the Nintendo 64. Nintendo 64 sold well because they were like the only ice cream vendor in town on a hot summer day. The lack of depth in the Nintendo library became painfully clear as the holiday 1997 season approached. Several key Nintendo titles, most notably Banjo-Kaoozie, slipped into 1998. The Nintendo 64 was able to do okay in late 1997 due to titles like Diddy Kong Racing, NFL Quaterback Club, Madden 64 and Goldeneye 007, however the door was open for the Sony PlayStation. Sony really capitalized on the weaknesses of the Nintendo 64. The Nintendo 64 lacked sports titles. The PlayStation excelled in sports. The Nintendo 64 had no role playing titles so Sony put a huge marketing campaign behind the Square title Final Fantasy VII and it became the best selling PlayStation ever shortly after its September 1997 release. In the end the PlayStation outsold the Nintendo 64 in 1997 by a small margin. It now looks like both the PlayStation and Nintendo 64 will be around for sometime. For Sega, 1996 and 1997 were difficult years, the culmination of Sega’s downward spiral that began in 1994. Despite numerous promotional and bundling efforts, and the launch of the NetLink accessory, the Saturn failed to take off and was overwhelmed by the PlayStation and the Nintendo 64. This was despite the fact that Sega released some quality titles for the system. In 1997, it became clear that Sega’s position in the U.S. market was in dire jeopardy. A planned merger with Bandai fell through, Sega of America became a ghost of its former self, and in Japan there was turnover at the very top ranks of Sega. The past three years have not been good to Sega. Sega has now backed away from the Saturn and is focusing the majority of its efforts on a new system, code named the Katana. Details of the Katana began to emerge in early 1997 when 3dfx filed its IPO and cited a contract with Sega to provide technology for a new game system. 3dfx later sued Sega when it was announced that Sega was going to use chip technology from NEC, not 3dfx. Sega now admits it is working on a new system with not only NEC and Hitachi, but also Microsoft, who will be providing a version of the Windows CE operating system for the new Katana. Details remain sketchy, but it appears that Sega will try to aim for a fall 1999 releasing date for the Katana. In the meantime, Sega, once a dominant player in the interactive entertainment market, is sitting on the sidelines watching Sony and Nintendo duke it out. On the PC game side, many companies were disappointed that CD-ROM, Windows 95 and online games did not result in a boom in the market. For many people that had been holding out so much hope for the PC game market, 1996 and 1997 came as major disappointments. The predicted market boom so many had predicted did not come to pass. Now that the next generation console systems are starting to take off, many experts are already writing off the PC game market. Despite the pessimism there were some strong signs that indicate that the PC has truly become a solid platform in its own right. Real-time strategy games Command & Conquer and Warcraft II were an enormous success. Civilization II was another major hit. Then there was the strong interest in online role-playing games like Diablo and Ultima Online. These success stories confirm that the hard core PC gamers constitute a growing market. The main problem with the PC game market is that there is a flood of product targeted toward the hard core gamer. Supply has grown faster than demand. Perhaps the most pleasant surprise of 1996 and 1997 was the growth of casual PC gamers. Over 40 million households now own PCs and there is solid evidence more and more people are starting to use those PCs for entertainment. People 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 Mattel’s Barbie Fashion Designer 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. It has become difficult to make money in the crowded PC game market, but at least it is a growing market. The consolidation trend continued in force in 1996 but slowed down somewhat in 1997. CUC International became a major force when it purchased Davidson & Associates, Sierra On-Line and Knowledge Adventure. GT Interactive continued its rapid growth spurt with the acquisitions of Humongous Entertainment, FormGen, WizardWorks, OddWorld and Warner Interactive. Electronic Arts bought Maxis. Domark and U.S. Gold merged to form Eidos Interactive. Ocean and Infogrammes merged. 3DO, freshly infused with $100 million from Matsushita, became a serious software publisher, acquiring Archetype, Cyclone, and New World Computing. Despite its troubles, Sega continued to expand, forming SegaSoft, a separate company to specialize in PC and online games. In turn, SegaSoft invested in Mpath, Rocket Science and Cloud 9 Interactive, only to see Rocket Science and Cloud 9 go out of business. In the publishing world, Ziff Davis bought magazine publisher Sendai Media and GameSpot, a leading online game magazine. Most of these deals were in 1996. 1997, can be described as the year of failed consolidation. Sega tried to merge with Bandai. GT Interactive called off an acquisition of Microprose. Psygnosis, Virgin, Broderbund, Activision, Interplay, Infogrammes and Eidos all remained independent players. There are simply not enough buyers for these medium size companies. Many large players from other industries have been quiet throughout the past two years. Philips all but closed down shop, selling off most of its software division to Infogrammes. Matsushita did not do anything with M2. The Apple/ Bandai Pippin was the expected dud. Viacom New Media was folded into Virgin Interactive Entertainment. BMG Interactive was shut down. Time Warner shut down or sold off many of its interactive holding. IBM bought Edmark and has been almost completely silent since. The promised convergence between Hollywood and Silicon Valley simply did not happen as many expected. Of course, several movie studios are still active in interactive entertainment. Fox and MGM are actively developing games. Universal Studios was the developer of the hit PlayStation title Crash Bandicoot for Sony. Dreamworks Interactive, a Microsoft venture, released its first titles and had a hit with Lost World. Microsoft continued in its efforts to become a major force in the gaming market with the release of numerous titles in all genres. Microsoft’s most notable new title was Ages of Empire, but the company also established its Internet Gaming Zone as the leading online game service with over one million users. In the educational market, Disney continued to have strong sales for its mediocre titles. Disney’s success left many established educational software publishers frustrated. As a reaction to brutal competition in the educational market, educational publishers Broderbund and Davidson are continuing an expansion into the game market. However, even Disney was not without its problems as a large portion of its interactive staff was laid off in 1997. The year 1996 was a harsh one for many companies. Acclaim had bad news on top of bad news, announcing loses that have led many experts to question the company’s continued viability. Sanctuary Woods was forced to sell off most of the company. Atari got out of the game business entirely. High profile start-ups Crystal Dynamics and Rocket Science came crashing to the ground. 7th Level, Pearson’s Mindscape division and retailer NeoStar help round out the financial disaster stories for the year. On the positive side Spectrum HoloByte reported a profitable quarter after years of bad news. Even with the consolidation trend, there were indications of why, in this industry, no publisher’s position is ever solid. Several top industry talent left high level positions with leading companies. Chris Roberts left EA’s Origin Systems to form his own design shop. John Romero and Dave Taylor left Id Software. Sid Meier left Microprose to form Firaxis, a company in which Electronic arts immediately became a major investor. Meanwhile, Peter Molyneux was rumored to be leaving EA’s Bullfrog division. Each of these "stars" was a major reason for his company’s success. In an industry so dependent on individual talent no company can ever consider itself to have an established position. Mike Wilson, a top player at Id and John Romero’s Ion Storm, is trying to capitalize on this trend by forming his own company Gathering of Developers (GOD). GOD will try and be an artist friendly company that targets star developers. Of course, the most talked about trend of 1996 and 1997 was online gaming. Mpath, TEN, Wireplay, Engage, Dwango, 3DO’s Meridian 59, Ultima Online, BeZerk, Kesmai, SegaSoft’s Heat and others received plenty of press, although only limited revenues and actual consumer usage. Sega became one of several online console systems with the release of the Net Link for the Saturn. The consolidation trend continued in the online gaming world. Catapult and Mpath merged. America Online bought the ImagiNation Network. Softbank invested in Engage, as well as several other online chat companies. The buzz over online gaming provides a perfect metaphor for 1996 as the year of hype. 1997, became the year where the hype was forced to meet reality. The Sega Net Link underwhelmed the marketplace with less than 20,000 units sold. Online gaming service found no one was willing to pay for their products. Pay services had trouble getting more than 30,000 subscribers so service started to give their product away. Mpath and Microsoft Internet Gaming Zone became free services, arguing that revenues, primarily from advertising, would come later. However, even as free services subscribers were not easy to come by. Mpath struggled to push toward the 500,000 user mark, while the Internet Gaming Zone was just heading toward 1 million users as 1997 ended. Not everyone jumped on the free online game bandwagon. In late 1996, America Online went to a flat rate $19.95 a month pricing model. AOL’s online game providers like Kesmai saw their usage soar. However, AOL did not see the revenue potential and in July 1997 started charging a premium fee for online games. Kesmai saw its usage plummet and sued AOL. With the traditional game publishing business, the reality of 1997 came a great deal closer to living up to the hype of 1996. Both the PlayStation and Nintendo 64 became platforms where publishers can make real money. Companies like Acclaim and Crystal Dynamics started on the long comeback track. Acclaim capitalized by quickly becoming the leading third party publisher for the Nintendo 64 off the success of titles like Turok and NFL Quarterback Club. So 1997, is best characterized as a comeback year. When all is said and done, the seeds were laid in 1996 and 1997 for explosive growth in the interactive entertainment industry in 1998 and beyond. Weak companies and hardware systems were weeded out. There are now only two major hardware platforms, as well as personal computers. The marketing efforts of Microsoft, Nintendo, Sega and Sony have created enormous interest in the interactive entertainment category. Consumers are finally ready to start buying. Unfortunately, many companies limped into 1997 with all but mortal wounds and have not been able to recover. However, those that have survive should be prepared for continued boom in 1998. Some of the major questions yet to be answered: can online gaming became a revenue and, more importantly, profit generator? Can Nintendo follow-up the Nintendo 64/ Super Mario 64 hype with a broader product line? Will Sega be able to get back in the game? Can Sony successfully migrate to a new game system? Can Microsoft and Intel spur the computer game market to reach the enormous expectations that have been created? Is there any potential for other hardware manufacturers in the game market like Matsushita’s M2 or the Project X platform from VM Labs? These are some of the questions that will be at least partially answered in the next couple years.
|
| ||||
