Entries from October 2008 ↓

As an essential part of keeping in touch with the realities of the industry I frequently go and have a look round specialist video game stores. And there are always a number of significant trends to keep an eye on in this fast moving industry, such as the demise of PC and PSP games. However the biggest trend over the last couple of years has been the amount of space and emphasis given to secondhand games. They have gone from being just one small rack to being nearly half the store. And I bet they are making more profit for the store owners than the new games.

So what is happening here? Basically any business needs a USP and game stores once had this as they were the only place to buy games. Gradually this has eroded away, firstly with online retailers like Amazon and then with supermarkets, both of whom can beat the specialist on price.

Initially the specialists were cushioned from this price competition. Firstly because the specialist has a bigger range of stock, secondly because he has more knowledge and thirdly because of people’s buying habits. But now video games have become a commodity and those advantages have evaporated. In fact the supermarkets and mail order companies have the better business model now because they can buy in bulk and thus cheaper, they have far lower overheads as a percentage of sales and they can and do use games as loss leaders to generate traffic. It has reached the point where an independent specialist game retailer can buy his stock more cheaply at the local supermarket than he can from his trade distributor.

So specialist retailers needed a new business model that gave them a USP. And secondhand is it. With secondhand they are in an area where online and supermarkets would have difficulty following because of the very large number of buying transactions the retailer has to make. Secondhand runs at a far higher price mark up, which is very nice when new games are selling on price alone and so have decreasing mark ups.

This is very nice for the consumer. When a game first comes out he can go and buy it cheaply at the supermarket or online for mail order delivery. Or he can wait a couple of weeks and buy it even cheaper from his local video game store.

Now, of course, there is the precedent that you can also buy books, CDs and DVDs secondhand. But the scale of this is relatively low and happens on eBay, in flea markets and in back street shops. With games secondhand is big business on the high street. And there is a reason for this. Quite simply games are a lot more expensive to buy than music albums, DVD films or books. This is because they cost more to make for the number of customers. So there is a vastly higher cost per customer in the game industry than in the other main entertainment media.

The big losers in this massive growth in the secondhand market are the video game publishers. A specialist retailer can now sell the same game several times and make a profit on it every time. The publisher, who took the risk and made a massive investment, only gets a profit on the first sale. So from a publisher’s perspective secondhand games have exactly the same effect as piracy. Multiple customers get to play the game but in return the publisher only gets the profit back from one sale. And the customer who buys a secondhand game is making zero contribution to the cost of it being made.

Of course this in intellectually wrong as well as morally wrong. When you buy a game you are not buying the plastic and cardboard, you are buying the right to personally enjoy the IP embedded on it. But most customers don’t see it that way.

But the publishers are going to have the last laugh here. High street game retailers may be making record profits now but they are inevitably doomed. The whole business is in mid transition from delivering content on cardboard and plastic to delivering it online. And online needs no retailers. And there is no secondhand online.

Currently the gold standard for home broadband connections in much of the world is ADSL. This uses existing copper wires and allows a maximum download speed somewhere in the range of 8 to 12 Mbit/s. This is a massive advance on the 56K standard that preceded it and has allowed for widespread downloading of digital entertainment content.

The owners of this digital content have been very slow on the uptake when it comes to exploiting what ADSL can do. This has left the way open for stealing on a grand scale. The biggest glut of theft in the history of mankind as music, film, TV and game content is illicitly transferred around the globe. This has reached the point where many millions of users now expect their digital entertainment content to be free. They just steal at will from the internet and make no contribution to the costs of creating the content. For instance it is quite normal for people to have many thousands of music tracks on their iPods without ever having bought a single one of them.

Of course ADSL downloads are not instant. Downloading a music MP3 track does not take very long. A film or a game is a different matter. However the fact that stolen IP is free has provided a massive incentive for people to be prepared to wait whilst what they are stealing downloads.

But now this is all about to change. The world is rolling out the new home internet standard and it is 100 Mbit/s using optical fibres. This is a lot more than ten times faster because it won’t suffer the speed degradation of ADSL. So it will be possible to watch streaming HD movies whilst still doing other things over the connection. A big jump in capabilities. And so we will experience a big jump in online theft unless the owners of IP finally wake up to what is happening in the world and change their business models.

Whilst the users of downloaded IP are morally wrong because they are thieves, the blame for this happening also lies with the owners of the IP for not protecting it. The music industry, for instance, has totally lost the plot. The game industry is more complex so has come up with a number of working strategies such as using consoles which act as anti piracy dongles and by having games on servers with the player’s computer acting as a client. It will be interesting to see how the industry stands up to the piracy onslaught that 100 Mbit/s will bring.

It is far better to look at 100Mbit/s as an opportunity. A chance to finally get rid of the archaic practice of distributing games physically on plastic and cardboard. A chance to remove the cost of expensive high street shops from the industry. A chance to create server based browser games that are just as graphically accomplished as machine resident games, but far more complex in their interaction. A chance to make money from a wide range of business models.

If you want to know what our 100Mbit/s future is going to look like just go to South Korea, they already have it.

Since it has come to power in 1997 the British Labour government has done a lot of stupid things. Selling our gold reserves off cheaply, massively increasing the tax burden, spending a lot more than they earned, the Private Finance Initiative (PFI), tax credits, mismanaging the national health service, an illegal war in Iraq and Scottish and Welsh devolution for starters. But history may well judge their misunderstanding of the games industry to be their biggest blunder.

For us all to have a living the country must generate wealth. Traditionally this came from manufacturing in Britain. But Labour governments gave organised labour excessive powers which they abused to destroy the manufacturing base. The unions are probably the worst thing to ever happen to Britain and everyone here would now be a lot better off had they not been allowed to run amok. Manufacturing still works in other rich countries like Germany, Japan and Korea, it can be done.

So instead of trying to get manufacturing working the government emphasis was put on financial services to be the engine of our economy. This had a number of very unfortunate side effects, such as distributing wealth very unevenly to a small number of people and to one region of Britain, the area around London. It also made us very vulnerable as we are seeing now with at least 100,000 city jobs to go in the immediate future with the potential for many more to follow.

After the dot com boom and bust the government gave up on technology and information based industries, which was especially crass as these are our future. And no area of technology is more key than gaming.

Uniformed people have very unfortunate perceptions of what video gaming is. Many see it as adolescent boys zapping aliens in their bedroom, or if they are up to date as overweight housewives wobbling precariously on balance boards. What they don’t realise is that gaming has three core, fundamental advantages that will make it one of the world’s biggest industries. These are interactivity, connectivity and non linearity.

Gaming will inevitably grow to be the biggest entertainment media, bigger than film and television combined. But this will pale into insignificance compared with its other roles. For a start gaming will take over education. Completely. We are already seeing troops trained on combat simulators, people going to Baghdad playing MMORPGs to learn how the place works, people enhancing their mental agility with Brain Age, emergency service interactive training and so on. It is creeping on us subtly without anyone noticing, but education is starting to undergo a revolution.

And gaming will enter so many other areas such as management, law enforcement, national defence and so on. The technologies are so all pervasive that gaming will insidiously find itself everywhere. Already most homes have some video gaming device and most people walk round with one in their pocket, which is a massive change in just a few short years.

Some governments understand gaming and its importance to our future. Non more so than the Canadians who are throwing billions of dollars at it. They have now overtaken Britain as the number three development nation in the world behind America and Japan. And the way they are going they may well end up as number one. France, too, has seen the light, but unfortunately after the horse had bolted. They still have two of the world’s big global publishers, Ubisoft and Vivendi.

Yet Britain could easily have been number one. As a nation we have world class tradition in both technology and the creative arts. This is the land of Shakespeare, Turner, Agatha Christie, Damien Hirst and JK Rowling. This is the land of the jet engine, radar, penicillin, liquid crystals and the world wide web. We have the ideal skill base for gaming embedded in our genes and in our culture. And we have Clive Sinclair. His ZX Spectrum computer ensured that a whole generation of schoolboys was computer literate with many thousands of them learning to code right down at native machine level.

And what has happened to this massive British gaming talent? It has to a large extent gone. Emigrating to other more enlightened countries where their skills are in more demand and are better rewarded. There has been a massive brain drain so that most game development teams around the world now have a least one Brit. They are in Tokyo, Shanghai, Paris, Los Angeles and Quebec. They are everywhere. Very many of the people I have worked with are now scattered around the globe.

It isn’t all doom and gloom. British companies like Rock Star, Travellers Tales, Rare and Jagex are amongst the very, very best game developers in the world. They show what British talent can do when it is allowed to. We could and should have many dozens more like them.

Currently the British government is not just not helping the game industry, they are positively harming it. They are giving voice to misguided people like Keith Vaz and his self publicity scheme to attack gaming. They are getting Tanya Byron to investigate a problem when no problem exists. And they are thinking of using the BBFC to stifle the industry. Their stupidity knows no bounds.

What is needed is a Game Council, modelled on the already successful Film Council and Music Council. And this council should be tasked to encourage the game industry in every way they can. And they should be funded. Not with millions of pounds, but with many billions of pounds. There is no way a government could spend money better for our future wealth. And it is nothing compared with what they are currently throwing at the financial sector.

Ever since the 1980s gaming has been afflicted with piracy that prevents the creators of content getting properly and fairly rewarded for their labours. Our answer as an industry has been digital rights management (DRM), of which the game console is the most extreme (and effective) example. Most industry income currently comes from retail sales but a number of other business models are in place including subscriptions, in game advertising and product placement and micropayments for in game items and game features.

The music industry has been afflicted far worse by theft. Firstly because a music track is very small so is quickly and easily transferred and secondly because DRM is difficult to enforce to music across the whole internet. So a whole generation have grown up getting their music for free (stealing). Apple found an answer to getting some money from their MP3 customer base with the simple tactic of making their service incredibly slick. So people were prepared to pay for the service when they could get the same music elsewhere on the internet for free. Microsoft, with Zune, sought to emulate what Apple had done.

Now Nokia have come from left field with an elegant new way of making money from users of downloaded music. They have created a music store with 2,000,000 tracks that is free to use. You can download as much music as you want for a year. The cost of the Comes With Music service for the first year is built into the purchase price of the 5310 XpressMusic phone (already the world’s best selling MP3 phone). Subsequent year’s subscriptions will have to be paid for. But people will. Not because they will see it as paying for music, instead they will see it as paying for a service.

You can see quite clearly here that this is a business model that can be applied to gaming. Payment of a subscription which covers all your gaming requirements. Instead of buying individual games. This is a formula that John Riccitiello has alluded to in the past. Just now we don’t need it for consoles but it would be really sweet for the pirate riddled mess that is PC gaming. Maybe as an evolution of Steam, or possibly as a totally new service. And as broadband bandwidths increase it would be perfect for server based gaming.

• New Nintendo DS, the DSi: It is 12 percent thinner than the DS Lite, due to the absence of a Game Boy cartridge slot. The two screens are bigger, up to 3.25 inches from 3 inches. There are two 0.3-megapixel cameras and an SD card slot. Downloadable games will be available over Wi-Fi, save them to the SD card. There is upgraded sound and MP3 player capability. This is the normal Nintendo evolution of its handhelds, it will be interesting to see if they have done anything about enhancing DRM now that DS games are so widely pirated. The extra capabilities take the DS further towards the universal portable device because eventually they will have no option but to take on iPhone and Zune.
• Wii games to be downloadable from the Shopping Channel onto SD cards. This is possibly just an interim fix until Nintendo get round to making a console with a hard drive. But a 32 Gbyte SD card is not to be sniffed at as a storage device, so maybe Nintendo will stick with solid state backing memory.
• Xbox 360 sales triple. In the UK it is now outselling the PS3 two to one. Microsoft’s strategy of using price this year is going to give them a big win over the PS3 and erode the lead of the Wii. The 360 is such an elegant and simple design that it readily lends itself to ever more efficient manufacture. There is no reason why it should not eventually come down to $149 or even $99 if it suits Microsoft’s grand strategy.
• UK game publishers club ELSPA to continue to fight for the PEGI rating system even if the government choose BAFTA. This is the continuing fallout from the totally unnecessary Byron review which could saddle the industry with unwanted bureaucratic delays and costs when there isn’t a problem to be fixed. The current, odious, British government doesn’t have long to run so obviously ELSPA are hoping that the incoming Conservative government will be less ignorant.
• In the understatement of the year Electronic Arts’ VP of publishing for Europe, Dr Jens Uwe Intat says “I think that Europe is definitely not maturing at all yet.” Of course the market isn’t maturing, we are still at the very beginning of what is going to happen. I hope that the corporate EA vision of the market future is a lot more bullish than this statement.
• Industry pundit Chris Morris, in an interesting piece in Forbes, thinks that hardcore gamers are being nudged aside ”as parents and seniors become more important to publishers”. His vision is slightly different than mine as I see casual and hardcore merging into many shades of grey. But such is the massively growing diversity of the market that both could happen.
•  Doug Lombardi of Valve thinks that game graphics are now as good as they need to be and that the capability is topping out. Once again I disagree. But this time because of the simple certainty of Moore’s law. We can make more powerful silicon so competitive pressure will force us to make that more powerful silicon. We will get to photo realism and we will go beyond photo realism. Gaming will eventually exceed the best video that you can currently see in the cinema. Progress is an inevitable part of the human condition.
• Huge new cash injection into Canadian game development. This time $1.15 billion in Ontario as the province strives to become a dominant force in the industry. You have to admire the single mindedness of the Canadians in grabbing a huge chunk of what is going to be the world’s biggest entertainment and education media. It is sad to compare their vision with the ignorant myopia of the British government who are willfully throwing away a potential powerhouse for our economy. I think history will report the throwing away of our lead in interactive media as one of the biggest failings of this Labour government.

Due to a mixture of government incompetence, financial market greed and consumer stupidity (in that order) we are now suffering a global financial correction. These happen periodically as part of a well established economic cycle but this time it is going to be worse because there was a big bubble in asset values. Current government action seems to be trying to use taxpayers money to prevent the inevitable, thus delaying the necessary correction. They would be far better off letting the weak fall by the wayside thus getting the whole thing over more quickly so we can sooner resume the virtuous side of the cycle.

The value of stocks and shares is supposed to reflect their ability to earn profit with an element for risk factored in. This is rubbish. In the real world stock and share value is determined by only one thing and that is sentiment. It is sentiment that makes people buy and sell and so force the prices up and down.

And this we can clearly see in the current turmoil. The prices of stocks and shares are taking a beating. In some cases this may well be deserved. But in many cases the underlying value of the business and it’s ability to generate profits is unaffected by current turmoil, yet it is still taking a beating purely on sentiment.

Which brings us to the video game industry, most of which is publicly owned and so has it’s capital in stocks and shares that are traded in the world’s stockmarkets. This industry is massively profitable and is growing very strongly and consistently. It is in the middle of a transition from being entertainment for a niche to being the entertainment of choice for the mass market. It is inevitable that gaming will make this transition because it has the massive advantages of interactivity, connectivity and non linearity. Other entertainment media just cannot compete.

And what will happen to gaming during the current turmoil? It will boom. Just as Hollywood boomed during the great depression. People want and need their escape, their entertainment. And gaming is the best entertainment there is (well, apart from a few adult activities!). So gaming stocks and shares should be unaffected and ride out the turmoil.

But something is going wrong. Due to sentiment game shares are taking a beating. Electronics Arts shares were already very cheap due to the cost of recent restructuring and investment, yet they lost 9% (or $1.1 billion) in one day. Don’t these stock exchange people look at the sales charts? Electronic Arts is reaping the fruit of it’s labours and is making massive amounts of money just now, with a lineup through the holiday season that will see them banking a fortune. At the silly price their stock is at now they make a very juicy potential victim for a big predator media company wanting a stake in the games industry. News International, for instance.

And it isn’t just Electronics Arts. Activision Blizzard lost 13.8% ($3 billion) in value in one day and Ubisoft lost 14.4%. This is just sheer stupidity, there is no way this has anything to do with the real values of these companies.

If anything this turmoil should speed up the rate of industry consolidation as companies rush to seek safety in size. Electronic Arts may look like  a potential target but they can make themselves too big for takeover by buying up some of the competition. Take Two, for instance could now be bought for far less than Electronic Arts’ previous bid. And they will be far more willing to accept it. We are headed for exciting times.