Digital Distribution: Will Games Face The Music?

Will games follow a similar path?

The chart above, reproduced from Silicon Alley Insider, shows the progression of the music industry through time with different formats, and how digital distribution has taken over. But the sales overall have dropped, which may be a reflection of how piracy affected sales, or perhaps it just says something about the quality of popular music in recent years. Perhaps it reflects the difference between being forced to buy an entire album to get one or two tracks you like, and the ability to just buy those tracks.

Digital distribution of products is in the process of transforming the book publishing industry, as ebook sales continue their meteoric rise and authors discover they may not really need a publisher after all. Digital distribution now accounts for about 25% of EA's revenue, and it's growing rapidly.

The missing factor is just how much this may change game development in the future. THQ has already said they will try releasing a new title for a lower price, seeking to make up the lost profit by selling DLC. I expect this model to catch on for several reasons; it can lower the cost and time for developing titles, and lower the risk, too.

The trend is clear for all sorts of media: Digital distribution is the future. Companies that fail to make the shift fast enough risk being left behind.

PC Gaming 2011 Predictions

Continuing my series of 2001 predictions, I'll look at PC gaming. I define this as a wider field than some might; in this area I include MMOs, boxed retail PC games, downloadable games, Flash games, and F2P games like League of Legends. While the boxed retail PC game has certainly had a difficult few years, people still spend a lot of time playing games on their PCs. The PC game market's biggest threat may be the emergence of the tablet market, as it eats into PC and laptop market share. A tablet may be a better way to game for many people at home; it starts up right away and games are easy to install and acquire. Of course, tablets lack the control possibilities of a PC, so certainly hard-core gamers will still be attached to their cutting-edge hardware. Still, many game makers will want to look closely at the tablet market, if they aren't already.

Anyway, here's some of my predictions for PC Gaming in 2011.

• The Star Wars MMO has a disappointing reception. Oh, they'll sell a bunch right away, but there will be a chorus of complaints about game balance, play style, and the Star Wars universe fidelity. I can predict this without having seen the game because that's the way MMORPGs launch: Game balance is wonky and they prefer to get that right while people are paying for the privilege of testing. Early adopters will complain about it, and complain about what they get to do or can't do, and Star Wars fans will no doubt find things to complain about. The real key is whether the game is compelling enough to attract people despite the flaws, and stick around long enough for the flaws to get fixed. I think it will be, but I don't think this is going to replace WoW. 
• WoW remains subscription priced, but adds more items to be purchased in-game. Speculation will continue about a shift to F2P, but it won't happen this soon. Meanwhile, though, Blizzard will rake in more dough by ramping up the things you can purchase in-game. Plus they'll be making a renewed push to add more gamers and get their subs growing again, which won't have much effect. There are too many other gaming choices competing for players, and that sub price will get to be a heavier burden over time.
• Most new MMOs launch as F2P; the ones that don't struggle. We'll see a number of high-profile entries into the MMO space this year, many of them with subscription pricing.  If these games don't grab and maintain a big audience, as I predict, the subscription model will be pretty much left for dead as far as new games are concerned. Certainly D&D Online's success has inspired other MMO's to follow suit. Game design is an issue, of course, but I think this will be the norm going forward.
• Steam continues to grow and gain market share. This is an easy prediction to make; nothing succeeds like success. They're doing a lot right, and continue to refine what they do. As retail stores contract their shelf space for PC games, Steam will expand to fill the void.
• PC games at retail continue to fade away. The flip side of the last prediction. Have you looked at the retail space devoted to PC games lately? Ugh. Aside form the occasional high-profile title like Call of Duty: The Sequel, there's a wealth of cheesy game shows and assorted low-priced stuff. Not very lucrative for the retailers, I'm sure. The smaller package size has meant less selling goes on in the store; the shelf isn't pulling in customers. GameStop better hope console games stay healthy at retail.
• F2P games become even more popular. A major RPG is announced as F2P. Free-to-play is kicking ass and taking names. I have no inside info on Riot Games and how League of Legends is doing, but I infer from the fact that they're looking to hire dozens of people that it must be doing pretty well. I'm expecting somebody to realize that a Diablo-style RPG based around a F2P business model would make a pile of money. It's what Diablo III should be if they really want to make a bundle.
• Call of Duty does not add a subscription plan. Some analysts have called for this, but it's not gonna happen. At least not right away; it may be part of a future release. But I don't think will see a move to try and migrate a user base over to a pay model when they purchased a game under a different expectation. If Activision really wants to do this, I'd say do it with a new release that you charge less for upfront... maybe even a free release.
• DLC rules. Downloadable content expands even faster and generates a lot of money for companies. On the other hand, users may feel burned if they think they have to pay for DLC in order to compete at a game. Or that someone can pay to get some nifty ability that totally destroys you if you haven't paid. Game design issues will certainly impact marketing and business results here.

It'll be a good year for PC gaming overall, as long as you're not a retail store.

7 Console Gaming Predictions For 2011

In 2011, radiation from 3D TVs will cause gamers to emit a green glow.

The console gaming market is now the "traditional" game market, composed  of software sold in retail stores. Of course, publishers are exploring other business models and types of games, investing in social games, mobile games, freemium games and more. The console gaming market is the bulk of game sales; if you just look at software, it was $10.6 billion in the US this last year (if you add in hardware sales, including accessories, the total is north of $21 billion).

The last couple of years have not been kind to the traditional segment of the business, though. Sales grew an amazing 28% in 2007 to hit a total of $18.85 billion overall ($9.5 billion in software), but the worldwide economic problems of 2008 were bound to have an effect. Game sales in 2008 were up 19% to over $21 billion (up more than 26% in software to over $11 billion), though signs of the slowdown were already showing up in holiday sales. Then 2009  showed up and hit hard with an 8% decline in overall sales to $19.66 billion (software slid to $10.5 billion).

While the year-end figures aren't tallied yet, 2010 looks like a decline again despite a record November that wasn't enough to rescue the year. Total sales will probably end up a few percent below last year (it was down 8% until November, which was enough to make it only 5% lower than last year). What's on tap for 2011?

• Software sales continue to erode. The overall picture doesn't look great for $60 software titles. While some releases will do well, overall I think the sales decline will continue as gamers move to lower-cost alternatives. And more lower-cost alternatives will continue to appear, and they'll be better.
• Console sales stay steady due to price cuts. Much as they will resist it, price cuts will happen by the holidays for all the consoles, though they may be minor. Or they may be hidden by increasing the value of the bundle you get (an extra controller, more software, etc.) Growth in smartphones, tablets, social games, and F2P (free-to-play) will tend to keep people from console purchases unless the price gets more attractive.
• Big hits are rare, and will get rarer. The high sales points get even higher for titles like Black Ops, but fewer titles will achieve orbital status. The publishers with the megahits may do well, but the ones without will be gasping for oxygen. It's going to be a cruel market.
• XBLA and PSN continue to grow sales. Meanwhile, though, those sneaky little download games will continue to gain despite the barriers placed in their way. (I mean, Microsoft Points instead of dollars? Really? Or how about that interface, and all of the non-existent tools for finding the types of games you're interested in...) Heck, even WiiWare will do better, despite Nintendo's almost criminal neglect. It turns out that customers are interested in lower-price titles they can have via download without a trip to a retail store. Who would have thought that?
• Nintendo finally reduces Wii to $149, then to $99 by Christmas. This one is actually more wishful thinking than a prediction. Yes, it would certainly be sensible for Nintendo to do this, but since they've been studiously avoiding sensible moves lately who can say what they will actually do.
• A successor to the Wii is finally announced, but it won't appear until 2012. Although Nintendo may not actually announce this, and information will just leak out, to avoid ruining already devastated Wii sales. By the time it actually appears the market may be so different that no one will care, unless Nintendo embraces the market changes.
• The 3DS and PSP2 appear to good initial sales that quickly decline to disappointing levels. Partly because the price points will be so high initially. Once the fanboys have gotten their units, less fanatical customers will look at the prices and think about buying a smartphone instead. Many will. Developers in particular will be annoyed, because developing for these new handhelds will be significantly more expensive than the old handhelds, yet software sales will be worse. This will lead to a quick fall-off of third-party support.

Overall, I expect the console business for 2011 to be up somewhat, mostly due to Kinect. Move, and price cuts. The software part of the business (at least the traditional retail boxed part) will be flat. Significant growth will continue to be in other areas like mobile, social, DLC and F2P.

Digital Distribution Is Puzzling

The whole concept of digital distribution is strange, confusing and even frightening. That is, if you're Sony. Here's what SCEE head Andrew House said:


“Digital, for me, still has a challenge in that it doesn’t have the equivalent of that. Browsing is a little overwhelming and too confusing, and that’s the challenge that makes me think there’s a strong role for physical media for years to come.”


He also said that retail's been around for thousands of years because it works really well. OK, I get that... but maybe digital distribution hasn't taken over for retail thousands of years ago was because setting up an online store was really difficult prior to the widespread introduction of iron. Or the invention of electricity.


I have to say it seems like that attitude is more than shared by Nintendo. Ooh, digital stuff is scary. Kaz Hirai of Sony said he feels a digital-only future is at least 10 years away. Actually, I'll go further than that, and say that people will always be able to buy stuff in stores. Radio and newspapers are still around, right? (OK, maybe the newspapers may go away soon...) The real question is when does digital distribution become the majority of sales for games. The answer to that is considerably less than ten years; more like one or two depending on how you look at it.


Sony and Nintendo need to find some people who can figure out digital distribution. Microsoft gets it, though they need to improve the Xbox Live shopping experience and finally go all the way with a full range of titles available online. Avoiding digital distribution merely leaves a gaping door open for Apple, Google, Steam, and others. Worried that the retailers might abandon you? You mean those same retailers who are busy selling used games you don't get any revenue from? Smart publishers are looking at subscriptions, DLC, F2P, and all the other new business models that are booming.


It's a new game in town, and you have to play if you want to win. Being stuck in the old business models is a bigger and bigger risk as time goes on.

3 Key Game Industry Trends

Is this how most game industry executives discover trends?

Several news stories breaking this week show signs of intelligent life in the game industry, and point to the new directions the industry is taking.

Gaming Gets Bigger Worldwide. Sure, this has been happening for a while, but since the beginning of electronic gaming the industry has been built around the United States, Japan, and Europe. If you've been watching, South Korea and China have become huge audiences for gaming and have grown some very large companies. which have been buying up US and Japanese companies. Gaming is spreading beyond these regions, as this study illustrates. The Southeast Asian game market will be close to $1 billion this year, and will hit $1.7 billion by 2014. So far, most  big game successes in that area have been home-grown, but World of Warcraft shows that a US game can do pretty well in an Asian market, thank you very much.

Indie Distribution Options Get Better. Indie games have struggled to find an audience, mostly relegated to Flash game aggregators like Kongregate. Now this article shows that options are increasing; EA Partners has signed up three indie developers to bring their titles to Xbox Live Arcade (XBLA), Playstation Network (PSN), and PC. It's a validation of those three games, of course, but also a message to indie developers that there is a wider market available they can reach even without the capital or experience necessary to navigate the process a Microsoft or a Sony will put you through. This also benefits EA, of course, by cutting them in on a revenue stream and helping identify good developers EA might want to acquire at some point in the future.

The Big Publishers Get Smarter. One example of this trend is the above item, where EA shows they are aware of things happening in the business and taking advantage of their strengths. An even better example is this article about comment's THQ's Brian Farrell made at an investor meeting in New York. He's planning to launch one of their AAA upcoming titles at $39.99 instead of $59.99, and hopes to make more money by selling DLC. He sees the important thing as building an audience for the title, which he can then monetize for years. Obviously it's easier to do that by selling the title at a lower price point, especially in a market environment where game sales are lagging. I think we'll see more publishers try this, and go to even greater lengths to build an audience for a title. We'll also see more different ways to monetize game development, through free-to-play and subscription options. I think the $60 price point is looking increasingly unsustainable for most titles, and we'll see fewer of those high-priced units in the future.

These trends offer some hope against the relentless drumbeat of poor sales numbers. There are going to be plenty of changes, though, so keeping ahead of things is even more vital for marketers.

PSP2 Rumor Roundup & Analysis

One possible PSP2 configuration

The rumor mill has been grinding out factoids like crazy lately about the PSP2, so I thought I'd round up all the rumors and season it with some analysis and some inductive reasoning.

This article is a an interesting roundup of one analyst's thinking. He makes a lot of good points about the PSP's history, though he fails to mention they have sold over 55 million units. Not bad at all, just not anywhere near the DS line's 125 million units. The PSP has also been plagued with piracy, which has kept developers away, and the launch of the PSPGo didn't help matters either. (Retailers hated it because they couldn't sell software for it.)

Based on various reports (here, here, and here) we are likely to see the PSP2 shipping next fall. The usual pattern is to show the machine publicly at E3, where you announce the ship date and the price. If you're aggressive about the release, you start showing the machine even earlier, like at the Game Developer's Conference (though you probably hold off mentioning exact specs or pricing). If you want to hit the ground running, you've been seeding key developers with advance hardware units and early dev kits for at least a year ahead of time. Which is just what the rumor mill has been saying; developers have had it in their hot little hands for months.

What also seems to be clear is that the hardware design isn't yet locked down. There are still battery and heat issues to take care of, so the final spec is not yet complete. Here's what seems to be pretty sure, though:

• Higher resolution screen (at least 1" bigger also), so that they can say HD (which leaves them some wiggle room, as there are several resolutions that qualify for that title)
• Dual analog controls
• Physical media (yes, it won't be download-only)
• Backside touch controls
• More powerful graphics/CPU than a 3DS or even an iPhone 4

 It would be a big break with the past if Sony decided to court small developers and independent developers, but given how the iOS market has progressed it would certainly be a smart move on Sony's part. Sony would be really smart if they opened the device up to other applications besides games, and made it a music player and video player, with a slick online store that sold all sorts of media. Don't hold your breath, though.

Price? I'd guess somewhere between $249 and $349 depending on many factors, such as the 3DS price and how it's selling, and exactly what hardware is in the PSP2 and how much Sony wants to profit on the hardware.

I think that Sony has a good shot at a reasonable chunk of market share, IF they really push the downloadable content angle and create something that resembles the iTunes store in its ease of use and breadth of content. Both Sony and Nintendo have to realize the reason Apple is grabbing their market share is not the hardware, it's the business model. I fear neither Sony nor Nintendo will be able to deal with the forces that prevent them from adopting the Apple model, even in part. I hope that they will be able to.

Yup, Traditional Game Sales Are Bad

NPD reports that overall sales (combining videogames, and hardware) for August were down 10% over last year; hardware was down 5% and software was down 14%. These are the worst August sales since 2006. Looking at the year so far, total sales are down 8%, with the handheld software and hardware sector down an amazing 25%. No wonder Nintendo just dropped the price of the DSi and DSi XL by $20, though that seems like an insufficient response to the news.

Of course, these sales figures leave out PC sales (like the 300,000 copies of Starcraft Blizzard sold in August) and DLC, and social games, and mobile games. Two possible reasons come to mind: Either sales are down because people aren't playing games, or they're playing games NPD isn't tracking. I don't think gameplaying is going away.

I see no reason for optimism that traditional videogame sales will turn around. Even if you assume Move and Kinect are hits, and the 3DS kills in March, and all the console makers dropped their prices for Christmas... you're still left with games that cost $60 new. You can still play Halo or Call of Duty online instead of buying a new game. You can buy used games, and the quantity and availability is just getting better. There's plenty of DLC to choose from at prices way less than retail stores, generally. You can play games like League of Legends for free, and many other MMO's. Facebook games are free to play too. Thousands of mobile games are available for nothing or just a few dollars.

The universe has changed and it ain't going back. Sure, there will still be AAA titles with multiyear development cycles and development and marketing costs pushing $100 million (or exceeding it). But that won't be where the majority of the revenue lies, and this will happen in a few years. Time to start charting a new course, or build a new boat, or hop off and go overland for a while. The seas ahead look pretty stormy.

Traditional Console Game Sales Continue Lame

May sales for the traditional game industry were disappointing. While Red Dead Redemption and Super Mario Galaxy 2 sold well, everything else underperformed. Several high-profile games failed to hit 200K in sales, as was expected. It looks like gamers are making the big hits bigger, but they're not spending their money on as wide a variety of titles.

Which makes sense in hard economic times. Consumer spending in general is down, so it's not surprising that gamers are being more careful with their dollars. This is probably also a factor behind the rise in free-to-play games, and lower cost games in general.

If this is the new reality, how should publishers adapt to it? Currently they don't seem to be changing anything, except perhaps hoping that increased marketing budgets might make one of their titles into the lucky few superstars. A more logical effort that can be implemented in a short timeframe might be to produce more DLC for your hit titles, both to encourage sales of the title and to bring in more revenue.

In the longer view, making investments into new growth areas of gaming makes sense, and Electronic Arts has been doing this. Taking some of their marquee titles (like FIFA) into the social gaming arena is a good first step. We'll know real change is happening when we see EA turn Madden into a subscription model game.

For smaller publishers, these May sales are one more indicator that change is continuing to occur in the marketplace. Big publishers keep hoping things will turn around, but the more time that passes without a turnaround, the more likely it is that consumer behavior is changing permanently. Which is only good for companies that recoginze that change and adapt to it.

GameStop Under Fire

So 7-11 is now getting into selling used games. One more reason to think GameStop is going to have a tough time in the future. A company called Game Trading Technologies will be stocking cardboard displays in over 3,000 7-11 locations with games priced at $19.95 or less for a variety of platforms. Yet one more downside for games sold on physical media -- someone can resell it, and the publisher doesn't get any of that resale money. Wow, just think if it worked like that in the book market, nobody would buy new books! Oh, wait...

Of course, if the publishers were selling downloadable content for these titles, then maybe expanding the audience would be a good thing... they'd get a chance to sell the same DLC more than once for a single physical game. Thus turning game resales to their advantage, instead of griping how they don't make anything from those sales. Hmmm...