Monday, September 26, 2005

The Future of Gaming

There are two absolutely indisputable facts about the future of gaming.

Indisputable Fact #1: Significantly more people are going to play games and own gaming consoles in the future.
Why is #1 indisputable? Well, it’s just math. Let’s assume that the base of gamers generally consists of an age rage from ten to sixty years old. So what you’re doing, each year, is replacing people who reached age sixty (most of whom don’t play games) with people who have reached age ten (most of whom do play games).

So gaming hasn’t reached its full lifecycle in terms of demographics. I believe it’s fair to say (roughly) that anyone under thirty is much less likely to have been exposed to games as a child. We’re probably only twenty years into that fifty year cycle life cycle, and that means that the installed console base should continue to increase for three more decades. Very simply put, there should over twice as many gamers thirty years from now. If you add in an increasing number of women games, it’s easy to see the gamer base tripling over three decades.

That’s a breathtaking realization.

Indisputable Fact #2: Everybody already knows Indisputable Fact #1.
Everybody’s already had their breath taken away. Well, except me, probably.

Name another entertainment medium that isn’t already tapped out demographically.

There’s not one.

Film, television, music—they’re all tapped out. There will be no tripling of the customer base. If anything, they’re fighting declines in their customer base. And they’re all looking at gaming as the last great growth industry.

The big fish are about to enter the small pond.

What does that mean for existing game publishers? Fierce, fierce competition, far beyond anything they’ve seen up to now. That’s good for us as consumers, but the shakeout for gaming companies is going to be brutal. Some of the bigger players will get bought out (EA by Disney, for example), but many are just going to get wiped out.

Here’s a question, though: is the gaming business really easy money? No. In fact, you could easily envision a scenario where gaming companies are like airlines: everyone uses them, they do huge business, and they almost all lose money. Just because everyone wants something, it doesn’t mean that you can make money supplying it to them.

Wait a minute, you say. The consumer base is going to triple. That’s guaranteed money.

Not so fast, my swarthy friend. Yes, the consumer base is getting bigger, but every single other economic factor is going in the wrong direction, and fast.

To begin with, development costs for next-generation consoles are going to be more expensive. Our new friend Michael Pachter of Wedbush Securities estimates the generational increase in development costs as follows:
Playstation: under one million, 6-9 months development time
Playstation 2: $4 million 18-36 months development time
Next-gen: $6-10 million, 24-36 months development time

Those numbers came from his industry report, which he was kind enough to send me. Even at the conservative end of the scale, there’s a projected 50% increase in development costs, and I think that’s fair.

No problem, right? We’ll just increase game prices.

I don’t think so. Sure, the first wave of Xbox 360 titles will sell for $59.95, but there is zero chance that will continue. Maybe it will last for six months, at most, but after that games are going to be $49.95. They’ve been that way for twenty years, more or less, and with the competition between Sony and Microsoft, not to mention the game publishers, does anyone think the industry is going to hold the line at $59.95? It’s just not going to happen.

So, to paraphrase Mel Brooks, with development costs up 50% and game prices steady, somebody needs to go back and sell a shitload of games.

How do you sell more games? Oh, by increasing marketing. That costs more money. But you have to commit that money before the game ships, largely. So when you ship something and it bombs (which happens with a high degree of frequency), you’re eating even more marketing money than before.

You could also add content to your game and make it so fantastically compelling that no one will want to play anything else. Two problems, though. One, that kind of game is going to have a huge budget, and two, if you do succeed, nobody’s buying other games, including yours.

And that, my friends, is the killer when it comes to the gaming industry.

When you buy a movie on DVD, and it’s excellent, you want to see other movies, right? You’re not going to watch that DVD for two hours every day for three months. It’s the same thing with music: you might find an outstanding album, but you’re not going to stop buying other music for months because of it.

Welcome to the gaming business curse. Games provide such a huge amount of content these days, particularly online games, that an increasing number of people play one game exclusively for months at a time. Ouch.

The new generation of consoles is going to be very online friendly, because everyone understands that sustainable and ongoing revenues are potentially far more profitable than “pump and dump,” so to speak. I believe that the number of console gamers who are playing MMORPG’s is going to absolutely soar with the new generation of consoles. Soar. And that’s going to blow some companies up.

Is online gaming my thing? No. Do I understand why so many people love to play MMORPG’s? Sure. There’s always a sense of getting something for my time when I do play an online game. I’m building my character. If the game never ends, then building my character has a sense of permanence that doesn’t really exist in single-player games. That can be very compelling--even compulsive.

Sometimes it’s very difficult to understand the difference between an exception and the future. Blizzard isn’t an exception. They’re the future.

If the console user base is going to expand, the online player base is going to expand as well, and it should actually expand faster. Everyone who plays an online game has been exposed to gaming, by definition, but the inverse is not true.

So if your development costs are up over 50% and your game sales are not, what can you do? Well, here’s the ugly part of the future. Get ready for an onslaught of in-game advertising like you’ve never seen before. At first, it will just be sports games. EA will start adding the authentic billboard signage to every stadium in every single sports game they have, and they’ll pocket a fee from the advertiser for doing so. When that happens, and the industry understands how much EA is making, the floodgates will open. Every first-person shooter in a contemporary setting will have “authentic” advertising within five years.

Sorry about that.

A corollary to all this is that the PC will have a very nice resurgence as a development platform. Not for AAA titles, certainly, but for the hundreds of lower-budget developers who have interesting ideas and can't afford to spend millions developing a game for a next-generation console, the PC will become (once again) a wonderful development platform. And the true bolts out of the blue, the brilliant new talents, will almost all come from PC gaming.

I’ve got more, but I’m beat, so let’s jump cut to the end. What will the business of gaming look like ten years from now? Well, it will be fiercely competitive. Even “short,” tightly-scripted FPS games will have well over thirty hours of content. There will be not one, but three online games with over five million players worldwide. So there will be more people spending more time gaming than ever before, but they will be playing fewer games. Most gaming companies will lose money, just like they do now, but there will always be new companies with deep pockets who want into gaming. The vast majority of them will fail.

And there will be more gamers than ever. We will be having a great time.

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