The gaming industry has tended to be cyclical for as long as we can remember ‘ not that it mirrors recessions, but somehow gaming comes and goes in the minds of its major users as they grow or as new ideas take root.
We’ve always assumed someone understood this, someone perhaps at Sony or Microsoft or Nintendo, but no-one has ever given us an explanation that seemed to fit. The explanation is to do with shifting from one age group and from one platform to the next, and when the PC was a stronger platform, the shift to games consoles in the mid-90s, was a massive uplift in revenue for the gaming industry, around the time of the original PlayStation launch. Before that prior industry consoles had produced the same effect, and then PC gaming had crashed its pricing a created havoc.
The gaming community has spent two decades trying to prevent this cyclicality and drive either innovation or pricing changes or fresh content availability at the market, at the right moment, in order to present an evenly changing gaming world, which is predictive in revenues.
But it’s no surprise to us if this cycle is happening all over again, and research group NPD hints that it might be, with figures out that say that 2010 had about a 1% fall in gaming content revenue in the US from 2009. But in order to come up with this statistic which sound like the games industry is in mild decline, it has had to round up every new form of gaming content revenue, suggesting that the sweet spot in gaming is moving once again.
NPD says that the games content market changed dramatically in 2010 with a far wider set of options available including physical product, digital downloads and in-store kiosks and even admits that only by taken this increasing number of ways into account has it allowed the content industry to maintain total consumer spend compared to 2009. It says it expects to see 2011 as a growth year. We’re not so sure.
Well when you have to grab more data from more sources in order to show a minor loss, it looks like you are massaging figures. What would the comparison be if you compared like with like from 2009 to 2010? And remember in 2008 gaming revenues collapsed from a total of $21.4 billion in the US to $19.66 in 2009 which is the year we are comparing it with, a fall of almost $800 million. Now NPD is talking about gaming reaching maybe $15.6 billion in 2010, but clearly defines it very differently this time around, as total consumer spend on gaming content, including new physical video and PC games, used games, game rentals, subscriptions, digital full-game downloads, social network games, downloadable content, and mobile game apps. It conspicuously misses out gaming hardware in that total, which NPD will release in another month or so, but the impression you get is that it’s going to be another down year for US games unless hardware pulls us through. The worrying thing is that NPD usually produces its full gaming revenue report before the end of January, but this year it will be out in early March.
While spending on the content side is dominated by physical content bought from physical stores, this portion of sales was down at $10.1 billion, a 5% fall from last year, itself a down year.
Things are certainly changing. Gaming is shifting to the portable device in droves, and that means to the App Store. So companies like NPD are having to take into account game downloads from App Stores. As a result there are going to be some telling decisions it has to take to evaluate gaming.
Does it include the hardware cost of buying an iPod Touch as part of the gaming market? Does it count all App Store content which is supposed to entertain, as gaming content? Does it count in-App advertising revenues that are inside games, as continued revenue or is that not consumer spend?
It is quite right when NPD says that 2010 is a year of innovation for gaming, especially with the new Kinect gaming accessory from Microsoft, and a new motion controller from Sony. Both should drive up overall gaming especially when we hear that Kinect sold 8 million devices in its first 60 days in the market at what was probably an average retail price of around $150. Even assuming that almost 50% of this goes to the retailer, that’s still a $600 million plus fillip for Microsoft and $1.2 billion in gross revenues for the hardware market in the last quarter from one product alone.
In fact, if the gaming hardware market turns out to be down, not up, during that quarter, it would be nothing short of disastrous, even if consoles and devices are counted like for like with the previous year.
Sometimes we wonder if research services prefer to tell their clients only the good news in a given market, or at least massage the headlines so that they look more like good news than bad. After all most of the customers from such research are gaming companies and they want to hear where they need to go next.
What we would like to ask, is what is the average price paid for a game these days?
In 2000 it was probably $75 for a PlayStation game. Today that has fallen to under half that. But the cost of making them has gone up from perhaps $1 million ten years ago to just under $30 million today.
There are delicate economics in play here. Attach rates for consoles are going down, not up and sit at around 6.5 to 7 games a year, down from 9.5 to 10 games a year five years ago. That means that for each console sold there used to be 10 times $75 spent on games each year ($750 a year), and now they are spending 6.5 times $30 ($200 a year). That’s fine as long as over that period twice as many people have consoles, and so far they do, but will that continue?
As that average game price falls further, we can expect a decimation once games consoles find it hard to go down any further in price (to accelerate their distribution) and as cheaper and cheaper gaming distractions come out on general purpose hardware, which is happening, stimulated by the arrival of App Stores.
Let’s take the business model for something like Angry Birds, a popular handset and iPod game. The game costs $1, and in-game purchases of weapons cost $1 a time, and it has the possibility, though not yet taken up as we understand it, to offer in App advertising.
What’s happening here is that the game itself can become the platform, and that multiple usage models and multiple revenue streams can appear within that platform.
What has this got to do with console gaming? Well right now not very much, NPD and others have to remember to count these revenues steams, and they appear additional, not detrimental to overall gaming revenue.
But the average game price, and therefore the price expectation, is going down, and these casual games are becoming increasingly sophisticated. Whereas once it would take $10 million to produce a game with plenty of levels, Angry Birds (for instance) cost just $100,000 to write, and has virtually guaranteed access to the viral marketing of teenage social networking chatter. It has 210 levels and has sold 50 million copies. If average game price expectation goes down, and this is afforded by new business models, this will undermine console payback. Remember that the R&D on consoles like the PS3 and Xbox 360 are subsidized by game sales, and as they get cheaper, even due to comparison with non-console games, that makes it longer between console generations.
And if young people are not introduced to casual hand held gaming devices like the DS or PSP early on, less of them will drift into console based gaming in the long run.
And if PCs and handsets get ever more powerful graphics capabilities (like those powered by chips from companies like Imagination Technologies, as well as the usual suspects ATI and Nvidia who drive the console graphics business) then the idea of paying at all for a specialist piece of equipment at all to run games, will begin to look slightly dated.
In short, NPD may come out with optimistic gaming hardware and software combined numbers in March which tells the gaming community that everything is going to be fine. But if you think about it, it just isn’t.
Going back to the NPD report, it said that PC games sold at retail was a strong spot, up 3%, and that there were increases in spend on used games, digital downloads and mobile gaming apps, and social networking games.
All of the numbers that NPD offers just show that the traditional boy who buys into the console market, is going away and is instead buying PC games or downloading to his iPod or Android device, as well as using games on social networking sites or on phones, and where consolers survive they are keeping consoles for longer, and going out more to the second hand games market. All of this is bad news for the traditional gaming world, and Kinect could be the last big success, before the next big adjustment crash.
NPD still emphasizes the upside and says that December 2010 was one of the strongest monthly performances the industry has ever had at retail. Long live the King. The King is dead.