In a sea of economic woes, the U.S. video game industry is thriving. Every record analysts track seems to have been broken in 2007 as consumers flocked to new systems from Nintendo (NTDOY), Microsoft (MSFT), and Sony (SNE). Overall sales—of hardware as well as games and accessories—ballooned to nearly $18 billion last year, a 43% increase from 2006 according to industry analyst NPD Group.
Even an economic downturn that promises to dampen consumer spending has done little to temper forecasters' expectations. "Sales typically track more to the life cycles of the hardware systems, not macroeconomic trends," says Michael Pachter, an analyst with Wedbush Morgan Securities. Microsoft, Nintendo, and Sony released their newest systems relatively recently (Xbox in 2005, Wii, and PS3 in 2006). In other words, interest and demand remain high. So far this year sales have outpaced 2007 by 28%, notes Anita Frazier, an analyst with NPD.
Gaming Boom Feeds M&A Fever
Many of the major trends that made 2007 a milestone year are likely to be amplified or come into full flower in 2008. On the business side, merger fever is unlikely to abate, says David Perry, a widely respected gaming entrepreneur and former game designer. "We're in the boom part of the cycle," he says. "Games companies have been growing rapidly and are rationalizing acquisitions as a way to continue strengthening themselves."
Indeed, the chaos on Wall Street has done little to hamper a string of megadeals that is actively reshaping the industry landscape. In December, Activision (ATVI) announced an $18.9 billion merger with World of Warcraft owner Vivendi Universal (VIVEF) that will close later this year (BusinessWeek.com, 4/12/07). And, high on a string of acquisitions of its own throughout 2006 and 2007, Electronic Arts (ERTS) is now making a hostile $2.1 billion bid for Take-Two Interactive (TTWO) (BusinessWeek.com, 2/25/08), publisher of the upcoming blockbuster Grand Theft Auto IV.
Perry says he expects this kind of activity to continue as major media companies also invest in gaming outfits. Disney (DIS), for one, has committed $100 million to building 10 virtual game worlds based on its film properties. Likewise, MTV Networks' Nickelodeon Div. announced earlier this month that it would add 1,600 casual games to its various Web sites as part of a $100 million gaming investment. "We could also see some major foreign companies investing in U.S. ventures," Perry adds of Chinese companies eyeing the American gaming market.
Free-to-Play Comes West
Companies operating in this world will likely be searching for new revenue models as well. Jeremy Liew, a general partner of the Menlo Park (Calif.) venture capital firm Lightspeed Venture Partners, says the so-called free-to-play model is finally due to make an impact in the West. Popular throughout Asia, free-to-play titles have little or no up-front costs for gamers, who instead pay subsequent charges for in-game digital goods such as clothes for an avatar or access to special features and levels.
"It's a disruptive trend, and it's beginning right now," says Liew of upcoming efforts in this area from companies such as EA (BusinessWeek.com, 1/22/08) and Id Software, makers of the Quake and Doom series. "The major companies have recognized this is the future, and they are starting this year in order to be successful later."
Designers, meanwhile, are likely to continue experimenting with games that appeal to the influx of new players, from thirtysomething moms to seniors, that has stretched—if not entirely broken—the gamer stereotype of gangly, socially awkward teenage boys. And user-generated content will grow in importance.
What's in a Game?
Last year's blockbuster Halo 3, for instance, put an emphasis on social networking (BusinessWeek.com, 6/24/08) by allowing players to create their own game levels and share them online. "Game designers are really starting to give players the power to customize," says Dan Hsu, executive editor of the 1Up Network of gaming news and reviews sites. Hsu says designers are taking cues from sites such as MySpace (NWS), Flickr (YHOO), and YouTube (GOOG), and that upcoming titles such as Sony's much-anticipated Little Big Planet and EA's Spore (BusinessWeek.com, 2/14/08), both of which provide worlds in which players create levels and characters, will push the boundaries of gaming.
In a similar vein, episodic content is likely to be another major creative focus for game makers, at least according to Leigh Alexander, a freelance writer and author of the popular industry blog Sexyvideogameland.com. "The consoles finally have robust enough download services to support the gradual rollout of new pieces of games," says Alexander of game serializations that are offered online for additional fees. Instead of costing $60 up front, for example, a series of optional episodes with new levels, characters, and events would cost $10 to $20 each. Alexander points to titles such as the hugely popular Mass Effect from BioWare (BusinessWeek.com, 10/29/07), which recently generated favorable buzz for its downloadable additions, as an example of designers testing these waters.
Jesse Divnich, an analyst for the forecasting firm simExchange, says casual games will continue to grow in importance. While in past years the best-selling casual titles were released around the holidays, this year "publishers are releasing strong titles during the off-season, capitalizing on the opportunity [created by increased interest]," says Divnich. As the category expands, forthcoming titles will be more creative. Divnich says Wii Fit, an interactive exercise game from Nintendo, and Boom Blox, designed in part by Hollywood titan Steven Spielberg, are more innovative casual games that will further drive sales.
As game companies continue to bulk up to compete, game designers will be well placed to make the most of the new technologies and the broader base of players. By all accounts, the industry's ongoing transition from the periphery to the center stage of the entertainment world is only likely to continue.
View the BusinessWeek slide show for some of the biggest games in 2008.