Investing in games

The video game industry must be one of the most attractive areas to invest  in right now. The business is booming, growing far faster than anyone predicted, as it makes the transition to being popular entertainment for the masses. And the industry is still at it’s very beginning, it will grow to be bigger than movies and TV combined as it leverages it’s key advantages of interactivity, connectivity and non linearity.

In recent years the industry has fragmented into many genres on many platforms, this trend will continue for some time. Also technology has changed the marketing, sales and distribution model, significantly reducing the entry cost into many areas of game publishing. And there is the constant spectre of piracy, with over half the video games in the world being stolen it is important to invest in areas where at least a majority of customers actually pay for playing the game.

The king of the market, the gold standard, is the subscription MMO. When these work they become massive cash cows generating tens of millions in monthly revenue. But they cost many tens of millions to make, need constant ongoing investment and have a very high probability of failure. The current leader is World of Warcraft which took the market over from Ultima Online and Everquest. One day it’s position will be challenged but it doesn’t look like happening any day soon.

Next comes the free to play MMO, often aimed at younger players. These are even bigger in player numbers than the subscription MMOs and seem to be less risky as businesses. Revenue comes from advertising, premium membership levels and micro payments for in game items. Some of the big players are RuneScape (6 million),Habbo (86 million avatars created, 8 million monthly unique users), Maple Story (nearly 60 million), Dofus (4 million), Ragnarok Online (25 million), Guild Wars (3 million), Club Penguin (4 million) and Webkinz (over 3 million).

Console gaming is easier to understand. Hit driven boxed retail products just like music CDs and film DVDs. The main opportunities are with the Microsoft Xbox 360 and the Sony Playstation PS3 which are both a fair way from peaking in their product cycles. Product quality has now become immensely critical as knowledge travels instantly via the internet. To Metacritic below 8 is increasingly uncommercial, which is a good thing for everyone. Get it right and you too can gross half a billion dollars in one week as GTA IV just has. The total cost of developing and globally marketing a cross platform AAA game can now be in the tens of millions of dollars area. You need big resources so your hits can finance your inevitable misses, one reason the industry is consolidating into a small number of big players.

The console acts as an anti piracy dongle and is the main reason for the success of these platforms. The downside is that the platform holders take a fee out of every game published. These two factors together mean that console games are ridiculously expensive. Something that could eventually come to damage the business model.

The Nintendo Wii is not worth developing for. It is nearer the end of it’s life cycle than the other two consoles and it is mainly first party games published by Nintendo themselves that sell. Third party titles from other publishers are mainly low quality shovelware that have now frightened the consumer off.

The two handheld consoles, the Nintendo DS and Sony PSP are also not worth developing for despite the immense numbers of these that have been sold. Quite simply piracy has ripped the market up. Vastly more people will steal your game than will pay for it.

Casual gaming is huge and probably growing faster than any other area of gaming. The ability to just drop in and spend a little time having fun then log out and get on with the rest of your life is very convenient. Far more appealing to many people than the commitment needed by hardcore games. There are  200+ million people who play online casual games every month. Both downloadable and browser games. Services such as,  Sandlot Games, Big Fish Games, Boonty, PlayFirst, Reflexive, RealArcade, and Trymedia Systems. Games are cheap to develop using Flash but the average quality is still very low, something that will change as the market matures. Revenue can come from advertising, premier membership and micropayments.

Traditional boxed PC retail games that have been with us for decades are just about dead, with most publishers giving up, killed by rampant piracy. Instead there is a new breed of PC game centring on online play and sometimes episodic content. With unique user keys and services like Steam these can be made largely pirate proof. The PC game reinvented.

Mobile phone gaming has been declining in popularity. Largely because the market is doubly fragmented. Too many different platforms and too many different air time providers make it almost impossible as a business model. All this is changing immensely rapidly with gaming on the Apple iPhone and the reinvention of Nokia nGage as a software based gaming platform. These two will certainly overtake casual gaming to become the fastest growing sector of the business and have the potential to grow to become one of the major forms of gaming. This is the most exciting place to be just now.

There are still more valid business areas in gaming. All three platform holders now sell games online. These are smaller and so easier to make then their full price boxed equivalent and the revenue stream is steady over a long period rather than spectacular over a short life. This business can only grow and grow and is well worth investing in, just make sure that you put marketing effort behind your games on these services, you can’t expect good sales otherwise.

Finally there is gaming on the social networking sites such as Facebook and MySpace. This is still small but has massive potential and we have seen the first cult hit with Scrabulous.

So there you have a quick sketch plan of the market. It is a dynamic and exciting place and you can be sure that it won’t be the same twelve months from now.


  1. Not meaning to sound fanboy-ish …but surely the Wii is still worth developing for because it’s in so many homes and there is little quality so anything decent shifts units? If companies put more investment into their games rather than some crap spin-off from a franchise then they should do well.

    As for HDTV, the other two consoles are barely using it either. Those that do tend to have juddering frame-rates and just use 720p or less as “HD”. Also, the new adopters to videogames don’t care too much about console generations.

    The same sentiment goes with the DS. There are just too many people who own one and no competition for it. Piracy just isn’t a major problem for the DS either …the majority of the public just don’t know how to. Even if you could get a special cartridge, they then wouldn’t know where to get the games from to put on it.

  2. Thanks for that BC. I agree with you when we are talking about the situation now.
    However this article is talking about investing in games that often take years to make. So we have to look at what the situation is likely to be like when a game started now hits the street.

  3. Bruce I have to disagree with your comment about the Wii. Whilst it’s technically short of the PS3 & 360 I think it’s lifespan is longer than the end of 2009. By then there will be 70 Million plus worldwide. Those kind of figures dictate that there will not be a quick successor to the Wii, an upgrade probably like the Original GBA to GBA SP, and the DS Fat to DS Lite.

    You are right about the amount of crap that is released for the Wii, but until the games companies stop being lazy and do ports of PS2 and PSP games they are going to be shit. Of my collection od 12 Wii games only 4 of them are 3rd party but they are the good games, and Starwars Lego has probably been played the most of all my games. it is a multi-platform game but has a fair amount of attention given to the Wii version.

  4. Steam is no more pirate proof than boxed games I’m afraid, they’re cracked just as quick and available in the exact same places.

    Steam is winning because the publisher doesn’t have to bother writing or producing a manual, doesn’t have to pay distributors, take a risk on stock or give retailers a cut. Yet still charge the same (or frequently more than) the price you can buy a boxed copy for (Trackmania was £6.99 in game last I checked and £19.99 on steam).

    So greed basically.

  5. Disagree with assessment of the Wii. I doubt that the success of the Wii is related to the adoption rates of the HDTV. The audience for the Wii is a different animal than those who choose a PS3 or Xbox360. Look at the success of the WiiFit. The graphics are crap, but its the accessibility to everyone which is important.

Comments are closed.