DFC Intelligence’s Best of 2008 in the Game Industry

February 25, 2009

DFC Intelligence’s Best of 2008 in the Game Industry

Ludwig Mies Van Der Rohe is thought to have coined the phrase “Less is More” to describe furniture design, but he could have been talking about the video game industry in 2008. The Nintendo Wii continued to run away with market share despite less powerful specs compared to the PS3 and Xbox 360. The iPhone suddenly became the platform for cheap, fun and quick-to-play cell phone games. Computer users around the world couldn’t get enough small, capable, stylish, portable, connected, under $500 Netbooks. And a main computer game growth engine continued to be online casual games.

Whether by preference, necessity, or design, consumers were finding innovative new ways to secure their video game fun in 2008. The trend only accelerated as the dark clouds of financial recession spread across the globe during the fourth quarter. So as we move into 2009, we here at DFC decided to look back at some of the biggest stories of last year.  To shake things up a bit we have gone with a “Top 11 List.”

1. Fallout 3

It’s rare when a franchise that was a sales hit more than a decade ago can be resuscitated into a new genre. Fallout was a hugely popular 2D post-apocalyptic RPG for Interplay Productions back in the ’90s. But Interplay suffered a progression of financial difficulties in the years since then, and Fallout went into hibernation. The franchise was eventually acquired by Bethesda Softworks, married to the high-end Elder Scrolls IV: Oblivion engine, and re-engineered into a 3D action game.

The result was Fallout 3, one of the most engaging and captivating titles of the year. Unlike many a critically well-received game, consumers responded in droves, with more than 4.7 million units sold worldwide during its first week in release. The game was also a cross-platform hit with PC, PS3 and Xbox 360 versions.

2. iPhone

When it comes down to it, despite coming in a prettier package, the Apple iPhone is just another mobile phone among the sea of choices flooding consumers. So why are content creators, and the game industry in particular, so excited about the potential of the iPhone? When you get down to it the iPod was just a premium priced digital music player in what could have been a commodity business. But Apple made the iPod something special. Can they do the same with devices to play portable games?

Phones have been able to play games for years, but the industry has been too busy raking in money from fat service contracts to pay much attention to the comparatively small potatoes game business. However, in an increasingly commodity-like business, games and entertainment content can give a device a great deal of “sex appeal.” Cell phone manufacturers have been surprisingly unable to distinguish their products as cool and unique and this has left the door wide open for an outsider like Apple.

And unlike most of its mobile phone competitors, the iPhone is proving to be a great place for games. At the beginning of 2009 there were 18,737 iPhone titles available through Apple’s AppStore, 4,078, or 22 percent of them, were games. ComScore reports that 32.4 percent of iPhone users have downloaded at least one iPhone game, compared to 3.8 percent of average cell phone users. According to Electronic Arts, 70 percent of Apple’s Top Paid Apps list were games selling for between 99 cents and $1.99.

Those are low margins, but many popular iPhone games are short experiences treated as impulse items by consumers to be enjoyed for a short while and then put aside in favor of the next download. In that scenario, low download pricing can work since there is no retail packaging, and development budgets on smaller games are much lower.

It is important to note that it’s still early for the iPhone. Sales didn’t really takeoff until the release of the iPhone 3G in July 2008. However, with the iPhone 3G sales have exploded. For the fourth quarter of 2008 (ending 9/30) iPhone sales were 6.9 million, more than the previous five quarters combined. By the end of 2008, the iPhone was available in 70 countries and the iPhone 3G passed the 10 million mark in only six months. Clearly this is a system that is just getting started.

3. Little Big Planet

User-created content is not a new phenomenon. There were hundreds of outstanding user levels created for LucasArts’ Dark Forces first-person shooter in the mid-1990s. When fans of The Sims couldn’t wait for Electronic Arts to add more home furnishing and clothing to the game, the community made their own to share online. Map and level creation tools have been a staple of RTS, RPS and golf games for years. But in MMO environments, the necessity of maintaining order often means keeping user content out.

Sony’s Little Big Planet is a game-breaker since it was built from the ground up as a environment dependent on user-created content. Developed in Great Britain by Media Molecule, Little Big Planet is an important title for two reasons. First, with the Wii ascendant, Sony needs mainstream-friendly franchises to keep the PS3 competitively relevant. Second, the company needs to protect the huge casual-centric European player base that was built up by PS2 franchises like SingStar.

Little Big Planet is a platformer. Players take command of cute avatars called Sackboys and Sackgirls to explore with. Users can completely customize their avatars, and the environment those avatars exist in. That customization is very advanced, and extends beyond objects to actual levels that can be shared with friends. Until players become comfortable with creating their own content, the game comes with existing levels.

We believe the Play-Create-Share philosophy behind Little Big Planet is a winner, and well worth watching. As a major growth area in the games industry is clearly online and casual, the next obvious step in the service model feature base is user-created content.

4. Monster Hunter and the PSP

The right game can make all of the difference for a platform. Until now the PlayStation Portable (PSP) has seen plenty of bumps to hold it back. At first consumers balked at paying extra for movies in the UMD format, and found it easier to transfer films from a DVD to a Memory Stick to watch on their PSPs. Then gamers tired of seeing the exact same PlayStation 2 game released on the PSP, and balked at buying many of those.

Since the launch of the new slimmed down PSP in 2007, the system has quietly seen some strong sales. For its fiscal year ended March 31st, Sony reported that PSP unit sales were up 46% over the previous year and the PSP was SCE’s number one selling system. However, the system has still lacked strong game software to drive consumer spending. Despite the increase in hardware sales, software sales were flat. With a much lower installed base, PlayStation 3 software is already outselling PSP software. That all changed in March 2008 when Capcom’s Monster Hunter Freedom 2nd G was released in Japan, and it lifted PSP into a contender.

Magazine publisher Enterbrain reported that the PSP outsold the Nintendo DS by two-to-one during April in Japan, thanks in large part to the strong sales of Capcom’s Monster Hunter Freedom 2nd G. Retailers sold 380,867 PSPs, compared to 169,911 DSs during the month.

The Japan sales of the PSP just emphasize that this is still very much a hits-driven world. Much of the PSP increase can be attributed to the strong performance of the Monster Hunter Portable franchise. Whether or not this carries over to the rest of the world, DFC Intelligence has forecasted that, with a few more must-have hits, the PSP will see a resurgence and end up selling over 70 million units worldwide by 2012.

It is worth noting that in the fourth quarter of 2008, the PSP outsold the Apple iPhone. Furthermore, with a total of 50 million units sold, the PSP has an installed base of nearly five times that of the iPhone 3G. The iPhone 3G may be the future, but for companies like Capcom the PSP is a money maker today.

5. Netbooks

Inexpensive Netbook computers under $500 were the biggest product trend of 2008 in the computer hardware business. These mini-laptops feature screens under 12-inches, low-power Intel Atom processors, built-in WiFi, and come with Windows XP Home installed. Asian manufacturers such as Acer (Taiwan) Asus (Taiwan), MSI (Taiwan) and Samsung (South Korea) pioneered the segment. Now the likes of HP and Dell are entering the low-margin business.

Of the 9.9 million Netbooks shipped during 2008, IDC estimated that 6.7 million units were split between Europe, the Middle East and Africa. Another 1.4 million went to Asia, and 950,000 to the U.S. In one year low-cost Netbooks grabbed 7% of the global PC business, and the segment is expected to double its market share worldwide in 2009.

Combine the obvious allure of low-cost computing, significant global penetration, and hardware sales growth centered on emerging markets with lower per-capita wage earners, and the impact on gaming is clear. Resource-friendly online games that are monetized via micro-transactions will be a major growth engine for PC gaming, especially in emerging markets.

As we move further into 2009 Netbooks will be getting a big performance boost from NVIDIA’s ION platform that combines the Intel Atom processor used in Netbooks with the same powerful GeForce 9400M GPU going into Apple notebooks.

6. Netflix on Xbox Live

When HD-DVD lost the high-definition disc format war to Blu-ray early in 2008, that put a crimp in Microsoft’s Xbox 360 home entertainment plans. The latter had put its weight behind HD-DVD, and now needed a different way to bring high-definition video content to Xbox 360 owners, or lose a major mainstream sales point for the system. The solution was a partnership with the DVD-by-mail service, Netflix.

Xbox Live Gold ($49.95) members, who are also Netflix account holders, now had the option of streaming high-definition movies and video from the service via Xbox Live starting last November. Since then more than 1 million Xbox Live subscribers have downloaded and activated the Netflix application that enables them to stream the content. Each Xbox Live household has watched an average of 16 movies since then. In total they have watched 25 million hours of content from Netflix.

Including content sources other than Netflix, Xbox Live Video Marketplace offers over 17,000 pieces of standard and high-definition content Between December and January, Xbox Live Video Marketplace downloads grew 174 percent compared to the same period a year before.

With Blu-ray adoption steady, but slow, there is an argument that high-definition retail dics will not reach the same widespread success as seen with DVDs. If that argument proves accurate, Microsoft’s Netflix partnership will be seen as the deal that presaged the future.

7. Obama 360 Campaign Ads

Gamers and political pundits were amazed last October when all of a sudden they noticed campaign advertisements for candidate Barack Obama in Xbox 360 versions of Burnout Paradise, Madden NFL 09, NASCAR 09, Need for Speed Carbon, NHL 09, and other EA titles. The ads were part of a targeted 10-battleground state buy running between Oct. 6 and Nov. 3. No reason was given why PS3 versions of the games did not get the Obama spots, although ad sales for that platform are managed by a separate third-party vendor. EA said the McCain campaign was also offered access to Xbox 360 in-game advertising, but declined.

The ad placement was simple brilliance, although we doubt the Obama video game ads were the key swing factor for the election. However, they do indicate how video game systems have become a legitimate platform for target, short-term, timely ad campaigns. Prior to online connectivity and the rise of specialty video game advertising companies like Double Fusion, IGA and Massive (owned by Microsoft), this type of ad placement would not have been feasible.

We expect the newsworthy nature of the Obama ads could cause many other potential advertisers to take a more detailed look at the possibility of the video game platform. That will bring added revenue to the industry, as well as further cement the reality of consoles as a primary entertainment platform in the home.

8. PS2 Open Platform

Outside Western Europe, Japan and North America, video game companies like Sony have a problem. The system most people in emerging markets are likely to play their games on are low-cost PCs. After all, that’s what they can afford. Add in issues of software piracy and its no surprise console makers have not been quick to service these poorer regions with products many there cannot afford. However, in a major shift Sony has decided to challenge that status quo.

The PlayStation 2 had the benefit of a commanding video game market share globally. In many places throughout the world, a PS2 may be the only console many people have ever seen. After nine years, the platform may be showing its age, but it remains plenty powerful for people who have never owned a video game system before, and can be priced low enough for them to afford.

Yet price and global recognition are only part of the equation. First in India, and later for Eastern Europe, Sony has made the decision to make the PS2 an open platform. Sony is also recruiting local developers to partner with in bringing unique and low-cost
games to these territories.

In India, Sony Computer Entertainment partnered last April with 13 Indian developers to create games for the market priced less than the existing Rs 499 per title (about $10). The Indian games may also be distributed internationally.

By October Sony Europe was announcing a similar program to make the PlayStation 2 an open platform that no longer required content approval. Sony hopes developers throughout Europe will create and self-publish low-development cost titles and release them in their respective markets. Sony will also let developers publish without going through a licensed third-party publisher such as Electronic Arts or Ubisoft. If they direct publish through Sony, once a game has been approved, no further review will be required for episodic content or expanded downloadable content.

These open platform moves signals there is a lot of life left in the PS2 within emerging markets. It also speaks well of the growth within the Indian and Eastern European markets to date. Lower prices are always a market share stimulator, and Sony is wise to rope in more consumers at the low end who might someday graduate to the PS3. Taking advantage of the growing Indian community will also pay dividends, especially if those titles can exported elsewhere.

9. Wii Fit

During the first year after Nintendo released the Wii there was amble speculation that consumer fascination with the Kyoto-based gamemaker’s new platform would soon wane when the novelty of the Wiimote wore off, and the few really good motion-sensitive games became stale. While that hypothesis was a reasonable one, the December 2007 release of Wii Fit torpedoed it into oblivion.

Wii Fit, the refreshing and fun $89.99 package of exercise mini-games bundled with a Balance Board input device, shows Nintendo really understands the formula for bringing video games to the rest of the consumer base who don’t video game now… especially women.

To the consternation of many of Nintendo’s competitors, consumers are happily playing Wii titles for months on end. The positive word-of-mouth for the platform and its games is enormous. From its launch until Dec. 31, Nintendo reported it had sold 14 million Wii Fit units worldwide. Of the 45 million people who have purchased a Wii, 33.4 percent of them also bought a Wii Fit. That’s $1.26 billion in revenue. The only other Wii game to pass 10 million units sold last year was Mario Kart Wii at 13.67 million. At this rate Nintendo can afford to release one Wii Fit-style marquee title a year and its mainstream user base will stay happy.

In our view, Wii Fit is a complete proof of concept that removes all doubt – Nintendo well knows what it is doing, and everyone else is just playing catch-up.

10. Windows 7

Practice, practice, practice. Windows Vista wasn’t a success with gamers. Too many found that Vista ran their favorite games slower than Windows XP did, despite their cutting-edge PCs with more memory, faster multi-core processors, and high-end graphics cards. The consumer group best-suited to run Vista wasn’t impressed. Two service packs later, Microsoft has diligently fixed many of the problems that irked gamers and others, but more was needed. Enter Windows 7.

Expected to be released as early as the end of summer 2009, Windows 7 is mostly Vista with additional resource optimizations, streamlined interface controls, and appealing cosmetic changes. Often billed as Vista minus all features that annoyed users, Windows 7 was widely distributed as a beta during the end of 2008. Windows 7′s optimizations and changes have been well received and generated great press for the product. What’s more, Windows 7 passed the real-world test of ably operating well on notoriously resource stingy Netbook computers.

Given all of the positive word-of-mouth, there’s no reason not to believe gamers will adopt Windows 7 in significant numbers. Another factor to consider are those gamers who have been thinking about finally running a 64-bit operating system with their 64-bit processors. While powerful 64-bit processors have been standard equipment with most dedicated gamers for several years, many of them have been running 32-bit Windows XP with those CPUs.

Uneven device driver support, plus 64-bit Windows steep RAM requirements were a big reason for many gamers sticking with 32-bit. But by the time Windows 7 becomes available, 64-bit driver support will already be much better, and memory prices are at historic lows, so the main barriers to 64-bit adoption are no longer issues.

By the end of 2008 Microsoft estimated that a quarter of the Vista installed base in the U.S. was 64-bit. Since Windows 7 will be the last time a version of the OS will be available that runs natively in 32-bit, it is expected that many computer makers will shift to selling PCs with 64-bit Windows 7 installed. In our view, gamers will likely stay ahead of that curve and take the 64-bit plunge with Windows 7. All of which should help make Windows 7 the gamer platform of choice that Vista was not.

It’s taken two years, but Windows 7 shows Microsoft has gotten it right.

11. Zapak.com

Zapak.com is the largest online casual gaming enterprise in India with more than six million registered gamers, expected to rise to 10 million by the end of 2009. Not bad for a company that got its start in Nov. 2006. By September 2007 Zapak had launched sites in China and Europe. Last October the company let it be known it had plans to take its casual gaming business to Russia, Brazil, and Pakistan – either by forming joint ventures or marketing partnerships. Zapak is so sure of its expansion plans, the company has already developed country-specific games for these markets.

Another sign of Zapak’s aggressiveness is a budget of up to $10 million to invest in content developers in South Korea and the U.S. Overall, Zapak entered 2008 with the intention of spending $100 million on its online gaming business.

According to Rohit Sharma, Zapak’s chief operating officer, countries like Brazil, Russia, India, and China have similarities in consumer behavior and digital trends for PC and internet penetration. So these enterprising Indians are out to lock up as many of these markets as they can.

While most of the major players within the game industry in the West are still digesting how Nintendo turned its business around, the casual service model is spreading across the globe to millions of consumers willing and able to make micro-payments to play online. The speed in which Zapak is moving out of Asia into Eastern Europe and Latin America is astonishing. It’s also evidence of a great sense of the global business opportunity of the online service model. That makes Zapak one of our favorite best of stories of 2008.

DFC Intelligence is pleased to announce we are acting as media sponsors for VentureBeat’s inaugural GamesBeat 2009 Games Conference to be held in San Francisco on March 24th. DFC Intelligence analyst David Cole will also be speaking on the Games of the Future panel. We look forward to seeing you at the event.

DFC Intelligence specializes in tracking trends and providing forecasts for the global video game and interactive entertainment industry.  A sample of reports on the video game and PC game market include:

DFC Dossier The DFC Dossier is published ten times a year and provides subscribers with regular updates and analysis of the latest market trends. If you would like to see a copy of the latest DFC Dossier contact Ozzie Monge at omonge@dfcint.com.

The Online Game Market This 800 page report contains a comprehensive analysis of the online gaming market. Includes current sales trends, market forecast, and in-depth company profiles.

The Market for Portable Video Games This 185 contains complete five-year forecasts by platform, a look at portable game software, portable game online trends, and business models and revenue expectations for game publishers.

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 2012. 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.

Overview of the Video Game and Interactive Entertainment Industry This report is designed to provide an overview of some of the key trends in the video game and interactive entertainment. The focus is on highlights from the forecasts and analysis of trends, game genres and business issues found in DFC reports.

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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