Entries from October 2007 ↓

It is so very, very nice to be proven right. I have said repeatedly on here that iPods have huge potential as gaming machines and that one day that potential will be realised.

Well today is the day! Steve Jobs has written a blog entry where he says: “Let me just say it: We want native third party applications on the iPhone, and we plan to have an SDK in developers’ hands in February. We are excited about creating a vibrant third party developer community around the iPhone and enabling hundreds of new applications for our users. With our revolutionary multi-touch interface, powerful hardware and advanced software architecture, we believe we have created the best mobile platform ever for developers.”

This is massive news, one of the biggest stories to hit gaming in ages. These Apple machines are superb portable devices with a great gesture interface. They sell in enormous quantities worldwide. Sony, Nintendo and Microsoft must now review their strategies. Exciting times lay ahead.

Are you as excited as me by this news? What do you think will happen now?

A few years ago, at the height of the PS2 generation, I was at an industry conference in London. The speaker asked the audience for a show of hands as to whether the PS2 to PS3 transition would be as commercially damaging as the PS1 to PS2 transition had been. The vast majority of the room thought it would be as bad, I (obviously!) was one of only a small handful who thought that it wouldn’t be.

Platform transitions can be very difficult times. There is only a small installed base of the new platform so there are not many customers. Your technical staff are struggling to learn the new platform’s architecture (especially if it is a Sony) so the games aren’t that good. The old generation games become a lot cheaper at retail so it is difficult to get revenue out of them. And so on.

The PS1 to PS2 transition was especially difficult for two reasons. Firstly because Sony was the only show in town (except for a bit of PC stuff) so you were nearly totally reliant on a single income stream. Secondly because piracy became massive over a very short period of time, catching the industry unawares and totally cannibalising the PS1 market. These had a terrible commercial effect on the industry and most companies went through very difficult times. Some didn’t survive. So you can understand why the audience at that London conference were so nervous.

It turns out that the PS2 to PS3 transition was a whole lot easier. Mainly because the PS2 market kept working and wasn’t destroyed by piracy like the PS1 market was. Also because Microsoft went early, staggering the transition. And also because there were far more diversified platforms and income streams for the industry to make money out of. MMOs, casual games, telephones etc.

This trend will continue in the next transition to the point where the change will be hardly noticeable. Both Microsoft and Nintendo look set to emulate Sony by running two home platforms each. The old generation platform at a low price point with cheap games as an entry level machine and the new platform as a premier product with prices to match. So we will look at new platforms being introduced by a manufacturer every 5 years or so but those platforms having a manufacturing life of around 10 years, just as the PS1 did, to give us overlapping generations. Also there will be much more stagger between the manufacturers when they introduce their next generation. Nintendo will go a lot earlier than the other two because the Wii will obsolesce earlier. Sony could go second this time just to escape the disaster that is PS3 and they saw how Microsoft gained advantage by going first with the 360. We will see.

So we are looking at a huge and increasing diversity of platforms for the industry to live from. At any given time there will be two each of home consoles from Nintendo, Sony and Microsoft. There is the traditional PC market, MMOs and the recent explosion in casual gaming. Then there is the DS and new handhelds from Nintendo, the next generation PSP needs to be better and Microsoft cannot leave mobile gaming alone for ever. So son of Zune should be interesting. And then there is Apple, each generation of iPod is more game capable. It may be a game of softly, softly but one day Apple will go for the gaming market in a big way. And then there is the potential of social networking, this will involve more and more gaming till it just merges with the games industry. Also the humble telephone will integrate with some, or maybe all, of the above.

And the platform transitions will be looked back on as a historic oddity. The huge danger, however, is always piracy. Once it gets a hold it can destroy the commercial viability of a platform very, very quickly.

So were you wiped out by the PS1 to PS2 transition? How many different platforms provide your income now?

Just a quickie. I have told you a couple of times about this article which every game marketeer should read.

Now here is another must read article. This time for every professional who wants to understand the industry they work in. It is really incisive knowledge.

So do you know of anything else that could be considered to be essential reading?

Around a year ago the analysts were confidently predicting that the Wii would come a distant third in this generation. If you can count it as this generation as it really is GameCube V1.5 . So it is refreshing to see that the Nintendo ethos of entertaining people has proved so many people wrong. Including Nintendo themselves, which has led to them making two mistakes.

Their first mistake was to not make enough Wiis. At retail they are like hen’s teeth everywhere worldwide. And there are still many territories where it has not been released. I don’t know but I would guess that production is now between one and two million units a month and ramping up fast. They could easily sell three million. There are reports of Japanese sales dipping in August and September, but that is almost certainly supply constrained as they shipped stock into north America and Europe.

Their second mistake was to have insufficient numbers of the right kind of game title. The Wii is selling to just about everyone in the population, not just the core gamer of old. This is the reason for it’s amazing success. But it is confusing the games industry who continue to churn out gamer’s games for it. Wii Sport is the perfect Wii game and should be a lesson for everyone. Wii Fit will be massive and will prove that Nintendo know their own platform best. Meanwhile Metroid Prime 3, a superb gamer’s game, continues to underwhelm in the market.

So we are getting mixed messages. Nintendo cannot keep up with demand. Whilst reports say that 67% of Japanese Wii owners haven’t used them recently. So people are starting to talk about a bubble. But this is because they don’t understand. The mass market, who have bought the Wii, are not going to use it every day. Unlike core gamers they have got a life. So they are only going to fit Wii time into their busy lives when something comes along to pique their interest. Economists might call it something like marginal propensity to play.

There is an important lesson here for our industry. We cannot treat the Wii in the same way as we have ever treated any other gaming platform in the past. It is no good taking the existing catalogue and Wiifying it. It is no good even thinking about core gamers and gamer’s games. For the Wii you need to forget about everything that has gone before.

But has this important lesson been taken on board? By and large probably not. There is an immense number of titles under development for the Wii. Probably more than for the PS3 and 360 put together. It is a veritable publisher’s goldrush. And there are going to be a lot of disappointed people when the sales figures come through. However there will be gems that catch the public imagination, games that are entertainment for everyone. And these will make indecent amounts of money. And they will mostly be first party Nintendo games, simply because they understand the nature of their beast.

Nintendo is now making far more profit out of video gaming than any company has ever done before. Unlike their competitors they make a profit on every box that leaves their factory. They are now the third most valuable company in Japan behind Toyota and Mitsubishi UFJ. They are worth over 10 trillion yen ($85 billion) which is twice what the whole of Sony is worth, yet Nintendo have just one eighth of the sales revenue.

There is no danger of a short term Wii bubble but there may still be the potential of a medium term one. As Microsoft and Sony get their acts together. But Nintendo will be safe for some time. There is the sheer mass of new titles and the relative simplicity of the machine gives Nintendo a huge amount of room to price cut. Best of all it is Nintendo, so they will continue to innovate to entertain. The Balance Board, for instance, is a new gesture interface that opens a whole raft of new gaming possibilities.

So will the Wii go on forever? Of course not. Increasingly it’s GameCube V1.5 roots will betray it. As the capabilities of the 360 and the PS3 are realised they will eventually leave the Wii behind. Nintendo know this. So there must be a new, more powerful machine on the way. But this time Nintendo can run a two model policy, like Sony do. The Wii can be cheap and very cheerful as an entry level and third world product and the new machine can be positioned much higher. As technology has moved on it will be above the 360 and PS3 in every way.

So do you think Nintendo are set for a long run at number one or do you think it will all come crashing down?

When you buy a game on an optical disk you are getting millions of microscopic areas on the disk that reflect light differently and so represent the ones and zeros of the digital world. These ones and zeros can also be represented with sound and sent down a telephone line. This is the wonder of digital downloads. Let’s look at some of the advantages:

• Instant distribution of your game to every country in the world.
• No need to manufacture, handle or stock tons of plastic and carboard.
• Bigger profit margin by cutting out all the middlemen.
• You can instantly meet demand, no matter how big.
• No returns from retail.
• Ability to patch bugs on an already sold game.
• Perfect for episodic content.
• Perfect for user generated content.

So it is absolutly brilliant. Why aren’t we doing it more?

• Inertia. The normal resistance to change.
• The platform holders outdated business model doesn’t allow for it.
• Some customers like to have plastic and carboard.
• Piracy. The big cancer that can destroy our industry.
• It is still a bit cumbersome at current interweb speeds.

But the writing is on the wall. Music and video downloads in the UK will reach £163 million this year, a 45.5% increase on last year. Admittedly this is in a £4 billion market. But it is inevitable that the value of downloads will be greater than the value of optical disks within a very few years. The same will happen with games, the advantages are so great and, when they have got used to it for music, the customers will demand it.

There is a very highly successful game developer called Valve. They are responsible for one of the greatest ever games, Half Life. And now The Orange Box compilation. In 2002 they launched a digital game download service for PCs called Steam and made it available to the whole industry, I tried to get Codemasters to adopt it. This has evolved now to include social networking. And it does everything in the advantages list above. Steam is one of the biggest and most important things to have ever happened in gaming. If Microsoft and Google had any sense they would be outbidding each other to pay $billions to buy Steam now. It will generate far more revenue than Facebook ever will.

Well are you all geared up for online distribution of your games, or do you just love the sight of all that plastic and carboard in your warehouse? 

So Electronic Arts (EA) has bought Bioware and Pandemic for $855 million. And venture capitalists Elevation walk away with a big pot full of money.

This seems to make sense. EA are breaking away from their roots of sports games and film franchises to a broader approach across all genres and platforms. This acquisition gives them a good stake in RPGs and action titles. And with 5 releases a year there is a great product stream. EA need to do this to entrench their position at a time when big global media companies are motoring into gaming and when economies of scale make globalisation and industry consolidation a fact.

The other big publishers, Take Two, Activision etc need to take notice if they are to survive.

Elevation exit with a big profit after financing the explosive growth. Now they have a large pot to play with they will be investing again. This is what they do. And that investment has a very good chance of being in the gaming industry, where they can use all the expertise they have built up. Look for Elevation making some big game industry investments soon, which could be good for the industry.

And what is your take on this continuing consolidation?

Two of the world’s biggest economies have been living on borrowed money for years. In Britain and America both the government and private individuals borrow huge amounts of other people money to spend. It is profligate, it creates a false aura of wealth and, self evidently, it cannot go on for ever. It has to end in tears one day and it is beginning to look like people are now starting to face reality. Unlike the great depression it won’t go all pear shaped. Wealth is better distributed globally now and economics are better understood. But it still won’t be pleasant for a lot of people.

Already one of the major engines of the British economy, the City of London, is suffering large job losses. Over inflated house prices are on their way down on both sides of the Atlantic. Retail spending is down as people slowly begin to realise that they are spending money that isn’t theirs. And all these factors are cross linked in the economy. So they drag each other down and, like a rolling snowball, grow. So things are going to get far worse. The mountain of debt makes this inevitable.

Now for the good news. It isn’t going to effect us. Yep, that’s right, the video game industry is immune to all this economic nastiness. (Probably)

Go and visit some deprived social housing with high levels of unemployment and the first thing that you will see is the 40 inch flat screen televisions. Even when they are living on a diet of fried chipped potatoes. You see, the thing is that people give up entertainment last. This was furthered proved in the Great Depression in the early 1930s when Hollywood had some of it’s most successful years. And so it will be with us.

So now you know, if you were thinking of leaving the industry, don’t. If you want to know where to invest, it is obvious. If you were going to expand your game industry company, now is the time. Our global industry currently turns over $33 billion a year, in just two years it will be $47 billion, a 40% increase. And a bad economy isn’t going to stop it.

So are you us to your ears in debt or are you an investor looking to put money into this dynamic, rapidly expanding industry?