Future revenue growth in hardware is expected to slow, after the successful introduction of the "next-generation" XBox360, PS3, and Wii consoles in 2006, 2007 and 2007, respectively. Consoles have an expected lifespan of approximately 5 years, and Sony has indicated it expects the PS3 to remain viable for 10 years. After a burst of sales at their initial adoption, hardware sales tend to slow, and the console manufacturer and software companies settle into long-term revenues from game sales.
"Hard-core" games - people for whom video games is a primary hobby - have traditionally been the focus of the video game industry. To appeal to this demographic, studios create content-rich games that employ the best of technology and typically have higher development costs due to their design and story sophistication. The Xbox, PS3, and computer platforms typically appeal most to the hard-core gamer, and the market for these games is smaller, as it is a demographic
Casual gamers are a quickly growing segment in this market over the last few years, as publishing trends have let smaller developers release their games over the internet. Typically these games are much simpler, and appeal to gamers who want quick entertainment with less immersion. Platforms that appeal to these gamers are typically internet-based flash games, cell phone games, portable device games, as well as the new Nintendo Wii. Given that this market segment is much more "mainstream", its market size potential is very large.
The different consoles target different market segments. Microsoft and Sony's offerings are considered traditional "next-generation" consoles, employing the newest processing and graphical technologies that appeal to "hard-core" gaming enthusiasts. On the other hand, Nintendo's Wii, which from a technical standpoint is less advanced, has appealed to an entirely new customer segment, the casual gamers. The Wii has taken market share from its competitors, selling more units per month than any other console since its release. Despite launching one year after the XBox 360, the Wii has approximately the same install base at the end of 2007, as seen below. Its appeal lies on innovative games that have multiplayer-friendly elements that people can enjoy together in the same room, and an interactive motion-activated controller which is more intuitive than the technical hardware-based appeal of the competing consoles.
|||2010 Units sold to date(MM)|
For more information about this sub-industry's dynamics, please see the Game Consoles Wars: XBox 360 vs. PS3 vs. Wii article.
Major video game publishers include:
The chief responsibility of publishers, other than funding development, is to operate the sales and marketing of a game. Developers effectively hand off a finalized product to a publisher, and the publisher is responsible with the last leg of the transaction to the customer. This also includes some business decisions such as whether to translate the game into other language, and standardizing some technical elements across different development studios.
Risks surrounding publishers tend to deal with the issue of not selling the products that they have financed. For example, the Holiday season accounts for approximately half of the industry's sales due to the pull demand generated by gift-giving. In addition, console hardware manufacturers require royalties for each title published at time of publication. If the publisher is unable to sell the titles, then it has doubly lost from investing in the developer, as well as paying the manufacturer royalties.
|Electronic Arts ($) ||3,129||2,951||3,091|
|Take-Two ($) ||1,201||1,038||982|
|Konami (¥) ||260,691||262,137||280,279|
Between 2005-2007, many publishers have earned smaller margins from operations due to investment required in the new next-generation console launches, which have required larger development teams and longer development cycles, as discussed above.
Developers create the content and underlying technical architecture in video games. Typically a single studio will specialize in a specific genre of games, such as strategy games, or shooter games. For example, Gearbox Software is a developer of first person shooters. In addition, some developers prefer to only develop for specific platforms. Bungie Software originally was a Macintosh-only game developer, until its acquisition by Microsoft (MSFT) in 2000, turning it into Microsoft's in-house XBox-platform developer and the creator of the Halo franchise.
Each development studio employs its own staff of game designers, producers, programmers, sound technicians, artists, and testers. Developers generally fall into 3 types:
Historically, few development studios have been publicly owned. This is partially due to the title to title volatility of the business, which is highly dependent on technical and artistic achievement.
The gaming industry has approached maturation in the late 2000's. As a result, the industry's story is one of growth, consolidation, and platform battles.
Typically, the console hardware makers create the initial "pull" demand, signing video game developers to create games for consumers to play. The games are then produced and distributed by the video game publishers. Each portion of the value chain requires a different competency - the console business is typically one of technical design competency and business talent in negotiating exclusive software titles, while the developing business involves technical and artistic competency, and the publishing business requires sales and marketing expertise. Only if all segments are successful does each segment win. For example, even if a hardware manufacturer (Microsoft) creates a groundbreaking console, and a development studio designs a game with excellent technical and artistic merits, without good marketing neither the hardware manufacturer nor the developer would be considered "winners". Similarly, Sony's PS3 suffers if there is a lack of developer support, regardless of publisher muscle pushing middling products.
In the near term horizon till 2010, without expectations of new console introductions, the primary movers in the video game industry will be the software side players, developers and publishers.
Revenue growth in the video game industry falls into two categories, software and hardware. Typically, new hardware sales drive demand for new software sales, as seen in the below two figures.
After hardware sales top off, software title publishers harvest long-tail sales for the life of the console, typically with decreasing costs as developers become more familiar with the platform and capable with their development tools. Hardware vendors receive long-tail royalties for the titles that are sold, and the cycle begins again with the launch of new hardware, fueling upgrades and software sales.
The increasing sophistication of video games has altered the landscape of the value-chain, with developers requiring increased funding and typical game development time spanning one to three years. As a result, publishers have begun consolidating and purchasing development studios.
There are multiple reasons for this consolidation:
This mutual arrangement has come to dominate the traditional games segment. However, with the advent of casual game, independent development and publishing is once again coming into vogue for titles popularized by online word-of-mouth.
The launch of the Wii by Nintendo (NTDOY) opportunistically captured much of the casual gamer market, highlighting flaws in Sony's and Microsoft's strategy to skim hard-core gamers. In 2008, with the Blu-Ray vs. HD-DVD war approaching an end in Blu-Ray's favor, the PS3 appears advantaged as an all-in one package for the home theater. The XBox 360, meanwhile, is the premier online-gaming system through XBox Live. As stated above, each of the consoles has an underlying technical or marketing appeal that has expanded its market and given it an opportunity to reach customers previously not interested in video games, such as the Wii's appeal to mainstream casual gamers, and the Playstation's ability to play HD content. Much of the momentum that these hardware manufacturers have earned requires continued innovation to bridge new market segments and customers.
Investors interested in the video game industry can invest in either publishers or hardware vendors, as few developers are publicly owned. Each segment faces unique issues related with ownership.
Publishers have turned to gaming franchises, such as Rock Band vs. Guitar Hero for sure sales as a hedge against the risks faced in the development cycle. However, some titles thought sure victories such as "The Sims Online" have bombed, producing lackluster sales that failed to cover initial costs. Hindsight is often 20/20, and there are several reasons why titles such as "Sims Online" have bombed, such as a lack of mainstream market appeal, poor timing, etc, but these factors are part of management's ongoing challenge in forecasting the hits versus the duds.
The increasing complexity of games demands increased development team sizes. The large development costs associated with hiring, maintaining, and paying developers make each title risky. Sophistication demands will only rise with the launch of new technologies and hardware.
Sony (SNE) and Microsoft (MSFT) have very diverse operations and their video game systems only make up a small portion of sales. Game-related sales at Sony (SNE) made up approximately 11.2% of total sales, and "Entertainment and Devices" made up approximately 17% at Microsoft (MSFT) in 2007. Investors desiring only the video gaming risks and opportunities will find it hard to hedge out risks associated with these large companies' other businesses. Nintendo (NTDOY) however, suffers less from this muddying, since it not as large a company as its competitors, and its primary focus is video games.
The PS3 and XBox both have advanced home theater capabilities, playing DVD and other video content. Underlying sales are partially fueled consumer interest in HD content, although studies by the NPD group suggest that most consumers don't know about Blu-ray or whether their console can display advanced graphics. It remains to be seen whether consumers will adopt these consoles as the hub to their home entertainment system, allowing Sony (SNE) and Microsoft (MSFT) to realize their goals of cross-selling products and services to a fully connected home.
When they released their next-generation game systems, Sony and Microsoft were willing to swallow a loss per console in order to gain market share and earn royalties revenues over the life of the equipment. Nintendo, on the other hand, forecast a net profit of $100 per console sold. Over time, losses narrow and turn to gains, due to technical and manufacturing improvement, and margins expand, but it is hard to attract investors to a business which makes a loss on the underlying product sold. Such a business requires the loss leaders to be subsidized by significant volume in revenues, a large gamble given the amount of investment and losses made on each console.
In 2006, Electronic Arts (ERTS), Konami (KNM), and Take-Two Interactive Software (TTWO) had the three largest market shares, with Activision (ATVI) coming in fourth. However, in December 2007, Activision acquired Blizzard, Vivendi's video game division, and surpassed EA as the largest video game company in the world.
Good to find an expert who knows what he's takling about!