The Video Game Giants Gather at E3

July 10, 2008

The focus of next week’s E3 show in Los Angeles will clearly be on the major console announcements from the big three: Sony, Nintendo and Microsoft. There will be some sideshows from the larger publishers that make a living off of the platforms of the big three. Of course, this sideshow is likely to be dominated by Electronic Arts, and especially its Rock Band franchise. When looking at industry revenue figures, arguably this is the way it should be. Nevertheless, E3 is now perhaps most notable for what is absent.

On a revenue basis, the top five companies in the video game and interactive entertainment industry are Sony, Nintendo and Microsoft, followed in a clear second tier by the newly minted Activision Blizzard and Electronic Arts. Combined, these companies had about $40 billion in game revenue in 2007 (exchange rate issues, incomplete reporting, inter-company write-offs and other issues make exact figures impossible). Clearly this is a monstrous chunk of the video game industry that DFC Intelligence forecasts will reach nearly $60 billion worldwide in 2008. Of course, for E3 2008, only four of the top five companies will be participating. It is telling that Activision Blizzard ‘s non-attendance is perhaps the best indicator of what will be missing at this year’s E3.

Table

Aggregate revenue figures are often misleading because: 1) they don’t show profitability; 2) they include hardware figures and 3) they usually don’t indicate where the true growth niches are located. For example, Sony’s game division Sony Computer Entertainment (SCE) had record revenue in fiscal 2007 and that record was broken easily in fiscal 2008. SCE’s revenue was greater than the entire worldwide PC game industry. However, combined in fiscal 2007 and 2008, SCE lost over $3 billion. This is just one example of how overall revenue figures can be great to throw in press releases and media reports, but in reality they indicate very little about true market opportunities.

DFC Intelligence has recently released a series of reports designed to look at the video game and interactive entertainment industry on a more granular level. These reports include Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry, Online Game Market Forecasts, Video Game Genre Forecasting and
MMOG Subscription Business Models. Yes, we forecast sales for individual game systems. And yes, we think the Wii will be the number one game system for this generation. However, we also emphasize that the issue of number one versus number two and three in the console race is often merely fuel journalists use to write yet another winners/losers story.

For most companies that are not named Nintendo, the Xbox 360 and/or PlayStation 3 will be the far more profitable publishing platforms. In our Video Game Genre Forecasting report, we look at how sales are expected to break down by genre over the next two years for each of the major platforms. A platform like the Wii shows a much greater gap between Nintendo blockbusters and everything else. For many game genres, the Xbox 360 is expected to be the leading platform over the next two years.

There is also an increasing need to look at individual international markets and emerging business models. In forecasting industry growth, DFC has looked closely at revenue from subscriptions, digital distribution and advertising. We also breakout sales for genres that don’t normally show up in sales charts. This includes such multi-billion dollar a year genres as massively multiplayer online games (MMOG), casual games and a new category we call MMOG Lite, or Advanced Casual, for the growing hybrid of games and virtual worlds that are straddling the boundaries between casual games and MMOGs.

Of course, many of these products are not even available for console systems. As an individual game platform for software revenue (both retail and online), the PC was the number one game platform for 2007. None of the console systems even came in second place; that honor belonged to the Nintendo DS. The PC game market reached a record $11.3 billion and is expected to experience strong growth over the next few years.

However, once again, we caution that revenue and profitability are two very different things. There are thousands of products available for the PC game market. Together, all these products start to add up to something significant when aggregated together. However, the number of products that have true blockbuster potential is very limited. The one true breakout category is, of course, MMOGs. The revenue AND product potential for a success in that category is enormous. The DFC report MMOG Subscription Business Models breaks out expected lifespan revenues and profits for different types of hit MMOG products. However, the number of products that have the potential to reach that level can be counted on one’s hand. Casual games are a different story. Whereas MMOGs are high risk/high reward products, casual games are a low risk/moderate reward proposition. The biggest success for casual products comes from aggregating hundreds of different products in a distribution pipeline.

The other major point about the PC game business is it is a glimpse into the future, both in terms of business models and international appeal. As the chart shows, revenue from PC games is split fairly evenly across regions, and retail sales is only one, increasingly shrinking, chunk of the pie. As console systems increasingly become more PC-like, it will be inevitable that they start to follow PC business models.

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In short, E3 is still an indicator of where the biggest money is today in the game industry. However, much of the future is in what is not at E3. Companies that ignore that reality are doomed. The week after E3, DFC Intelligence will be heading up to Seattle for the Casual Connect Conference from July 23-25. This conference will showcase many for the companies NOT featured at E3 and will help provide a more rounded glimpse into the overall industry. For more information go to http://seattle.casualconnect.org.

We also urge you to contact us if you have not seen the latest issue of the DFC Dossier. This issue contains a detailed breakout of PC game forecasts, as well as a detailed profile of leading casual game company Big Fish Games. With almost no outside funding and virtually no retail presence, Big Fish has seen revenue soar over the past two years and hopes to surpass the $100 million revenue mark this year. To obtain a copy of the Dossier contact Ozzie Monge at omonge@dfcint.com.

 

 

 

 

 



 
 
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