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From Atari to Xbox

Heather Chaplin was shocked when she arrived home one day nearly five years ago to find her husband, Aaron Ruby, setting up a Playstation 2. Ruby, a PhD student in philosophy at Rutgers, had gotten hooked on Doom. In fact, most of his fellow grad students were hooked, too.

This obsession with video games by those otherwise reading Wittgenstein -- in other words, smart, serious adults -- intrigued Chaplin, a business journalist. "It was a fascinating subject and relatively untapped," says Chaplin, who began researching the industry. "That was 2001, the year that the video-game industry surpassed Hollywood box-office revenues."

That year, the couple flew out to Los Angeles for E3, the game industry's annual convention. "It was like the bastard child of MIT and Las Vegas," says Ruby. "There was such a collection of characters, and right then we knew we had a book."

That book, Smartbomb: The Quest for Art, Entertainment, and Big Bucks (Algonquin Books, 2005), tells the stories of the key figures in the history of video games, and the larger story of a subculture becoming an industry. Chaplin and Ruby spoke with BusinessWeek Online editor Jessie Scanlon about the past and future of this innovative industry.

The subtitle of the book is The Quest for Art, Entertainment, and Big Bucks. When did video games become a big-bucks industry?

Ruby: The Playstation 2 had just come out when we started working on the book, and it was near the launch of the Xbox. Video game sales had already surpassed the box office, yet it still felt like a subculture. [Microsoft's] (MSFT) J Allard and Seamus Blackley were explicit that they weren't going after the mainstream. They were still going after the gamers.

So it still felt like a subculture then?

Ruby: Yes. Back then you'd never see game commercials on network television. Now there are video game ads during primetime.

Chaplin: Remember, though, that Atari (ATAR) was the fastest-growing company in American history at one time. Nolan [Bushnell] had seen these grad students at MIT obsessed with Spacewar, and he wondered how he could market it.

So it's not as simple as a subculture maturing into an industry. It's always been a business and it's grown in stops and starts?

Chaplin: Atari crashed in '83 and the industry was declared dead. The introduction of the Nintendo Entertainment System in '86 single-handedly revived the industry. Every time a new console is introduced it marks a new leap forward for the industry.

Do those technological leaps forward correspond to spurts of creativity in game design?

Chaplin: The Nintendo 64 marked the introduction of Shigeru Miyamoto, whose games were a big departure from anything people had seen. Beyond the console itself, that is what revitalized the industry.

Ruby: The creative use of technology ends up driving the market, and that goes beyond the gaming industry. One of the big drivers of PC sales over the past decade has been games. Same with broadband. Look at Doom and the explosion of first-person shooters. Those games demanded a lot from the hardware. That alone spurred the growth of companies like Nvidia (NVDA). Demand for high-end PCs shot up.

So what has gaming's impact on the hardware market been?

Chaplin: Soon after its release, the Playstation was generating 22% of Sony's (SNE) profits. And by '98, the Playstation was outselling the top five PC makers combined. PC sales had dropped from 20% annual growth to single digits, and there was talk that the PC market was saturated. That's why [Bill] Gates was clear that they had to move away from a PC-centric model. What these guys realized was that the game machine could be the way into the living room.

Ruby: J Allard summed it up well when he said, "For years, Microsoft made its money on the 9 to 5. Now it can go after people's leisure time."

Gaming is clearly making an impact on many industries. Do those industries realize it yet?

Ruby: Outside of entertainment, the first sector to really appreciate gaming was the military. The number of gaming companies that have deals with the military is huge. One example is Full Spector Warrior, a game developed by [USC's] Institute for Creative Technologies as part of a military contract and then repackaged [as a] game.

Chaplin: Almost 10 year ago, Will Wright, of Sims fame, started a corporate division. He designed a simulation of oil refineries for Chevron (CVX), a simulation of the health-care industry for the Merkle Foundation. There's a lot of potential to use games for corporate training, medical training, training first responders. The military was just the first and the most open minded about video games.

There's a lot of talk recently about advergaming. Will games prove to be a successful platform for advertising?

Ruby: There is huge potential. It's not that effective for Chrysler to, say, post a flash driving game on its Web site that uses Chrysler (DCX) cars. But if you create an environment that reinforces certain elements of your brand, that has more potential.

How are video game developers reacting to these opportunities?

Chaplin: There is so much competition in this industry, and the cost of development is high. So small companies are doing dual-purpose programming -- developing products for the military, modifying them for entertainment, modifying again for corporate training.

Ruby: BreakAway Games has developed many military training and war-simulations for the Defense Dept. Now it's working on a game called A Force More Powerful, that teaches players strategies of nonviolent movements. Wild Tangent is another one doing interesting stuff in the realm of advergaming.

How else are game developers trying to minimize risk?

Ruby: The recent Pandemic/Bioware merger is an attempt to begin the process of going around the publishers, and I think we might see more developers banding together and using the weight of their brands to self-publish. The developers are concerned that publishers are stifling creativity, which in turn will have a bad impact on the market.

Will the introduction of next-generation consoles launch a wave of more creative game-making?

Ruby: The console life cycle is roughly five years, and it takes at least three years before developers are able to get the most out of the hardware. Toward the end of the cycle the games start to become top notch. Then they start all over again.

People like Greg Costikyan, founder of the new indie publisher Manifesto Games, talk about a crisis of creativity. Do you think the industry is in crisis?

Chaplin: There are definitely factors creating fear in the industry, which doesn't encourage innovation and creativity. There's the high cost of games, which makes people afraid to take chances. You have two weeks of shelf space during which to become a big seller; if not, the retailers pull you. Hollywood makes its money on ancillary licensing but the game industry is not as sophisticated. And there's no Miramax. There's no business model to create more original fare.

Ruby: People are predicting that PC gaming is going to dwindle over the next 10 years. Once you have to go through Microsoft or Sony just to get a place on their console, it becomes prohibitive to develop those small games. So I have to agree a bit with Greg.

Who are the other voices for creativity?

Ruby: [Xbox co-creator] Seamus Blackley has been a big voice out there reminding people that the thing that got video games to the place they are now is the willingness to be experimental and do these crazy things. He's working at the Creative Artists Agency now and trying to be a big voice for the talent.

Beyond Manifesto, are other companies developing new business models that will encourage innovation?

Ruby: Some have certainly pioneered business models that allowed them to stay independent. For instance, Epic started licensing its game engine, and it became a real cash cow. Companies like Havoc are developing middleware, tools like physics engines that are designed to be easily embedded in any game system. That is a growing business and a potential way to bring costs down, because it means companies don't have to hire people to reinvent the wheel. They can just outsource the development of specific technologies like that.

Chaplin: You don't think of Will Wright as a business innovator, but he's been working on a game called Spore that would allow some game development to be automated. One of the reasons that development budgets are so big is that games are made by bigger and bigger teams.

How does Spore work?

Ruby: Rather than hiring teams of texture artists and 3-d renderers and modelers, you code modules that generate the art. The game is a simulation of everything. You start with a universe, gases condense. You get to the stage that life emerges. You can design and modify your organisms.

When you get to the vertebrate phase, you create the skeletal form of the organism and the game engine generates a model that wraps around the skeleton, and generates the textures that wrap around the model. Instead of describing and painting every possible texture for every possible organism, Spore is can generate the textures itself. People are already saying that this is the thing that will save innovation in games.


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