Entries from October 2008 ↓

People said that Microsoft would never succeed in Japan with the Xbox 360 because the Japanese only bought their own consumer electronics. These people, obviously have no explanation for the phenomenal success of the iPod and iPhone in Japan. When the Xbox 360 outsold the PS3 for one week they said it was a flash in the pan. I wonder what they are saying now.

Microsoft say that Xbox 360 sales there have gone up fivefold, beating Microsoft’s own projections. So they are shipping even more units to try and stem the shortages. Ironically the 360 in Japan is in the same situation that the Wii has been in with America. In both cases sales are limited only by the number that the manufacturer can actually ship. The Microsoft Xbox 360 outsold the Sony Playstation PS3 for the month of September in Japan and for every week since.

Partly this success is the slow motion train wreck that is the PS3. It is not the leading ownership proposition that the PS1 and PS2 were. Partly it is down to the low retail price of the Xbox 360. Which is down to its elegant, easy to manufacture design and to Microsoft’s deep coffers, both of which Sony cannot match. And partly it is down to the stream of Japanese market titles that Microsoft are releasing. Some of these are Xbox 360 exclusives and some of them are former PS3 exclusives that are now cross platform. If you are a Japanese publisher, Playstation PS3 exclusives no longer make sense.

All the leading game industry analysts said that 2008 would be the year of the PS3, during which it would overtake the Xbox 360 in every market. Surely now it must be starting to look obvious that the Playstation PS3 is going to come third this generation in every market. Including Japan.

Regular readers here will remember the stupidity of the Church of England when Manchester Cathedral was featured in a video game. They completely over reacted and got on their high horse when it was one of the best things to happen to that building in many years.

This time it is Sony’s turn to completely over react. Tapha Niang is a two-year old piece of music by Grammy award-winning Toumani Diabate’s Symmetric Orchestra which is on his MySpace site. British developer Media Molecule used this as part of the sound track of the much anticipated game Little Big Planet. A nice example of gaming spreading culture.

But then someone posted this on the official Sony Playstation forum:

While playing your latest game, “LittleBigPlanet” in the first level of the third world in the game (titled “Swinging Safari”;)), I have noticed something strange in the lyrics of the music track of the level. When I listened carefully, I was surprised to hear some very familiar Arabic words from the Quran…

The words are:

1- In the 18th second: “كل نفس ذائقة الموت” (”kollo nafsin tha’iqatol mawt”, literally: ‘Every soul shall have the taste of death’).

2- Almost immediately after, in the 27th second: “كل من عليها فان” (”kollo man alaiha fan”, literally: ‘All that is on earth will perish’).

I asked many of my friends online and offline and they heard the exact same thing that I heard easily when I played that part of the track. Certain Arabic hardcore gaming forums are already discussing this, so we decided to take action by emailing you before this spreads to mainstream attention.

Shocking stuff. So Sony withdrew the game worldwide and are revising the sound track for a later re release. A massive over reaction and something they didn’t do for the Church of England. Maybe Osama bin Laden is a bit more frightening than Rowan Williams.

Whatever, a huge proportion of the non Islamic world now thinks that there is excessive sensitivity being shown to Muslims here. Soon all female characters in games will be wearing a burqa.

In The Times last week there was an article titled “M&A (Mergers and Acquisitions) deals worth $90billion collapse as volatility makes valuations impossible” which would seem to be bad news for the massive game industry consolidation that we are currently in the middle of. So what is going to happen?

The game industry has been expanding massively over the last three years. This is not just one area that is prospering, the growth is across a number of areas:

• The largest growth area has been in casual gaming. Immersive interactive entertainment that doesn’t require the commitment of hardcore games and which appeals to a very wide demographic.
• There is the biggest ever game console war running between three giant companies, Sony, Nintendo and Microsoft, that are totally committed. Their brains, money and brands are being thrown at maximising sales worldwide.
• Virtual worlds are growing in popularity exponentially. Not just World of Warcraft and Warhammer Online, but also Maple Story, Habo, Runescape and many others, each with millions of users.
• Nintendo have deliberately set about making the appeal of video games universal. This has led to a runaway success where they have not been able to manufacture enough to keep up with demand. Their approach is now being widely imitated across the whole industry, further fuelling growth.
• Online has gone from being peripheral in games to being a fundamental element. Less and less games are stand alone. This has greatly increased the potential of what can be done with gaming, especially on the social side. And unlike, say Facebook, gaming has robust, successful and proven business models.

Amongst all this massive success there has been a continuous stream of M&A activity as the industry consolidates. There are very good reasons for this:

• Global game publishing has huge efficiencies of scale. The business model gets better and better the bigger a publisher is. Risk is reduced and spread. Optimum IP assets can be used. The very best staff paid for. Capital acquired more easily and cheaply. Sales into all possible territories maximised. Overheads spread against a consistent product stream. And more. Smaller companies are therefore at a huge competitive disadvantage.
• The world’s big entertainment media companies have no option but to move into gaming in order to survive. Gaming has the fundemental advantages of interactivity, connectivity and non linearity. The older entertainment media cannot compete and are on the way out. Film, television, books, newspapers and recorded music are all in big trouble. For the moment many of the old media companies have ready access to capital to buy into gaming. As their traditional business models whither away they will no longer have this capital. So this is a finite window of opportunity for them. Soon the tables will be reversed and the big gaming companies will be able to buy up old media companies for their legacy IP.
• Bad management. There are a lot of people in senior decision making positions who got there by accident or good luck as the industry expanded from zero. So many sub optimal management decisions are made. Consolidation tends to boot out the weakest management.
• Innovation and diversification. The game industry has continually fragmented into new areas and genres. This is usually led by smaller firms and start ups. So bigger companies mop up the smaller companies in these new areas to acquire expertise, market share and IP. We are seeing this in music gaming right now.

So will this force for consolidation be negatively impacted by the current economic climate? My guess is that in the short term it will as people adjust to the new realities. But over the next eighteen months or so the consolidation will be far greater than it would have been without the economic downturn. Here’s why:

• Gaming will be largely unaffected by the poor economy. It is very cost effective entertainment for the whole family. I see it winning out over more expensive entertainment such as film. This will make games companies into even bigger takeover targets.
• The economic downturn has reduced the length of the window of opportunity for old entertainment media companies to buy into gaming. Their business performance will drop away even more sharply as gaming continues to rise. If they don’t act soon it will be too late.
• Scarcity and cost of capital will give big companies a bigger competitive advantage over small ones.
• Game stocks and shares have, quite wrongly, gone down in value alongside all other sectors. This means that there are some incredible bargains to be had.
• There are quite a few lame duck video game companies that have worthwhile IP and market share but which don’t work as businesses because of bad management. They could hang on in good economic times but the current situation will find them out. They are ripe for takeover and one of the biggest effects of the economic downturn will be the weeding out of under-performing management.

Since the start of the downturn we have seen Electronic Arts withdraw from its attempt to buy Take Two. This is because there their original offer is now a massive over valuation and they will be able to buy it for far less and with far less resistance being put up. Electronic Arts have the money in the bank for this deal. We have also seen Warners increase their stake in Sci/EIDOS. This is classic and bears out much of what I have said above, soon they will own the whole company.

There are some companies that will be out shopping.  Electronic Arts, Activision/Vivendi and Ubisoft. There are some that will be on the shopping list. Take Two, THQ and Sega for instance.

We live in interesting times.

• Barak Obama is using in game advertising in his campaign for president. It would be nice to think that at long last we have a senior politician that understands games. The reality is that this was almost certainly done by someone on Obama´s staff without the great man himself being aware. It is still an excellent tactical move that will get attention and respect from a large demographic.
• Little Big Planet 95% on Metacritic. Exactly what Sony needs to prevent them being totally engulfed by the Microsoft bulldozer. Whether or not this can be a system seller when there is such a big price difference on respective systems is a different matter.
• The traditional news and entertainment media is in massive trouble due to the huge downturn in advertising. The normal big advertisers have chopped their spend to fit the economic times. But gaming continues to boom and spend even more on advertising. This is a virtuous circle as gaming per se gets a bigger slice of the average consumer´s attention and thus becomes yet more embedded in the mainstream. Ubisoft are the latest to announce their intentions in this area.
• The PC is showing yet more signs of being no longer viable as a gaming platform except for casual and MMO games. Some development studios now calculate that up to half of their customer support calls involve dealing with people who have pirated copies of the game. The thieves have no shame. Not only do they steal the game, they also steal support for the game.
• Michael Pachter states the obvious again: “We believe that the videogame software sector remains highly recession-resistant.” Something this blog has been saying for a long time. It needs to be said because there are still plenty of people in important positions that don´t realise this. But judging by recent news on the TV there are lots of people in important positions who don´t realise the obvious.
• Epic Games design director Cliff Bleszinski says he doesn’t think the industry values visionaries as much as it could. I know how he feels.
• Warhammer online 1.5 million units shipped. 750,000 players register. It is early days yet and we have yet to see how it compares with World of Warcraft for game player´s affection. What is for sure is that this is the first major new player in the Western MMORPG space for some time.
• MMORPG Lord of the Rings Online will get a full-featured social networking site. About time too. Social interaction is one of the main rationales of MMORPGs so maximising such possibilities is essential. As long as you don´t become all social networking and not much game, like Second Life.

I have written on here before about the divide in our society between those who understand games and those that don´t. Those that do are mainly the young and gamers from the Spectrum and Amiga generations up to around 40ish years of age. Those that don´t are for the most part the few young people who have missed out and older people. But it is these older people who wield most of the power and influence in our society.

The power of the old manifests itself in the stupid, misinformed things that politicians like Hillary Clinton and Gordon Brown say about games. It also manifests itself in some totally crass reporting in the news media. The Daily Mail and Fox News deserving special mention for uninformed coverage. This ignorance from politicians and journalists mainly serves to lose them all credibility with most people under 40.

Then there are businessmen. As games become more and more all pervasive they impact on commercial decisions in more and more businesses. And when the decision makers in those businesses don´t understand what they are doing they can harm their business out of ignorance.

This is what seems to have happened with Scrabble. The game is sold in 121 countries in 29 different language versions. One hundred million sets have been sold worldwide, and sets are found in one out of every three American homes. And an unofficial online version called Scrabulous appeared on Facebook which became immensely popular with people playing against opponents from around the world.

So what we had was a great opportunity for the owners of the board game. They could have worked with Scrabulous to leverage the brand into a whole new generation. The marketing and commercial upsides were potentially massive. But instead Hasbro went to court using copyright law and had the Scrabulous application removed from Facebook. This was shooting themselves in the foot.

The rights for Scrabble are owned by Hasbro in the United States and Canada and by Mattel elsewhere. This split ownership means that both companies have been damaged by the actions of one. It also means that they seem unable to come up with an official Facebook global game, which is patently ridiculous.

Mattel have made a version but it is only available outside North America and has been much criticised on Facebook for its quality. It only has about 2,000 registered users compared with the 600,000 for Scrabulous.

So now the Scrabble brand is damaged, as are Mattel and Hasbro. Millions of internet savvy people will have been offended by these actions and that offence will be reflected in their actions. A great opportunity has been converted into a disaster, all because the people making the decisions just didn´t understand what they were doing.

• I am a great fan of Steve Wozniak so it was great too see this interview in The Telegraph where he talks very sensibly about Apple, the iPhone, tech share valuations and much else. Gems of wisdom from a silicon valley superstar.
• Nintendo DSi has region locking, presumably to act as a form of DRM and so reduce piracy. Obviously it will also reduce choice, but this is the sort of damage that pirates bring upon themselves.
• No Sony conference at Tokyo Game Show and Nintendo not even attending, thus leaving the door open for Microsoft to gain a big competitive advantage. Expect the remarkable performance of the Xbox 360 in Japan (a fivefold increase in sales) to get even better.
• Sony not dropping the price of the Playstation PS3 this Christmas. They can’t afford to because they still make a big loss on every machine they make. All they can do is pass on the increased sizes of hard disks and come up with good value bundles by taking a hit on the software. All the industry analysts said that 2008 would be the year of the PS3. It is turning out to be the year of the Xbox 360.
• BioShock PS3 graphics problems. Like most multi-platform games they are struggling to make the PS3 version look as good as the Xbox 360 version. The elegant architecture and powerful GPU of the PS3 360 beats Cell nearly every time.
• Hardware retail price war on consoles in the UK. Excellent news for consumers and for the game industry. We are now at the price point on the Xbox 360 where most console sales happen, Microsoft are backing this with massive and clever TV advertising. Are we headed for a Microsoft Christmas?
• Analyst Michael Pachter “absolutely convinced” Wii HD is under development. He has obviously been reading about the Super Wii on this blog! Seriously, Nintendo would be very remiss not to have such a machine already developed. It is just a matter of when, not if that they release it.
• Nintendo share price halves. Obviously the analysts don’t expect the extraordinary earning power to continue. There are three things here. Firstly the power of the Japanese Yen. Secondly the worldwide global downturn. And thirdly the continuing suspicion that the Wii is a bubble waiting to burst.

I’m off for a week of cave diving. If I can find time and a connected computer I will try and write articles. Otherwise there may be gaps.