Video Game Industry: One of the Most Attractive Areas to Invest

by: Bruce Everiss posted on: May 15, 2008 | about stocks: AAPL / ERTS / GA / MSFT / NCTY / NOK / NTDOY.PK / NTES / SNDA / SNE / WZEN    
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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 its very beginning, it will grow to be bigger than movies and TV combined as it leverages its 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 specter 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 its position will be challenged but it doesn’t look like it is 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 (MSFT) Xbox 360 and the Sony (SNE) 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 (NTDOY.PK) Wii is not worth developing for. It is nearer the end of its 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 Pogo.com, 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 centering 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 (AAPL) and the reinvention of Nokia (NOK) 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 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.

This article has 20 comments! Add yours below...

Bruce Everiss

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This article has 20 comments:

  •  
    Mickah
    May 15 04:05 AM
    Consumers have been frightened off of the Wii? Bruce, what planet are you on? Are you looking at any of the sales charts? Which ones?

    And if it's not worth developing for, someone should tell the developers. Sega have recently come out and said that they made a mistake by backing the PS3 over the Wii, and they won't make the same mistake in the future.
  •  
    wallawallabi
    ngbang
    May 15 06:19 AM
    The iPhone as a gaming platform is positioned to experience explosive growth due to the large numbers of grassroots developers who downloaded the SDK.

    They will be able to easily sell and distribute the games they develop on iTunes.

    The Developers Conference in June will reveal some of the latest efforts.

    I think the general public is largely unaware of the magnitude of the potential implicit in the iPhone as game platform.

    That will soon change.



  •  
    zidan
    May 15 09:15 AM
    This guy is spot on, especially about the comment on not developing for the Wii. You will notice most of the Wii titles that are successful are first part Nintendo titles. The Wii is being purchased in such large numbers for its low price, innovative controller & nintendo brand loyalty, not for its 3rd party game catalog. It has a lower attach rate (games purchased per system sold) than Xbox and PS3. The money is in MMO gaming for the PC and cross-platform Xbox/PS3 games. The trick is trying to find which developer can get gamers to switch from World of Warcraft to the next MMO. Digital downloads are also becoming popular for the PC. Valve has been successful at publishing PC titles through their Steam digital delivery and gaming platform.
  •  
    L.W.Fesmire
    May 15 10:39 PM
    I'm sensing a little bias in this article. The Wii is a great system and the sales have been outstanding! Yeah, the third party support may be a little under par but you know...who's fault is that? If these third party developers would spend a little more time on the games and pay a little more attention to the detail, they too would be showing software sales like that of Nintendo's. I can think of a couple of really great examples of third party software for the Wii. Boom Blox anyone? Okami? I can keep going if I must.... The Wii is definitely not nearer it's life's end like this moron so blatantly put it. I own all 3 systems and quite honestly, I play my Wii more than any of them. The other two systems have their share of great games but they too have more "shovelware" titles than I can count. The numbers for Wii and DS sales says it all....there is no denying that. It's time this "old timer" opened his eyes and started looking at the facts. It's a must if you are going to write articles on a particular subject matter. Take it from a journalist who learned that in journalism 101 about six years ago. Oh and Codemasters is nothing to be proud of. It may have done great over in the UK but I think it pretty much flopped horribly here in the states.
  •  
    User 194334
    May 15 10:47 PM
    > The Nintendo (NTDOY.PK) Wii is not worth developing for. It is
    > nearer the end of its life cycle than the other two consoles

    Seriously, Bruce, what planet are you on?

    Every single statistic says exactly the opposite.

    The Wii continues to sell at manufacturing capacity; the idea that it's "nearer the end of its life cycle" is pure speculation you've decided to state as fact.
  •  
    melante
    May 15 11:24 PM
    My Website
    Bruce, sometimes you say something worth reading, but this time you really had me roll on the floor laughing... how can you say it's not worth developing for the Wii, DS and PSP? True that piracy can be (and is) a problem but it's all to be seen in the perspective of development costs and hence ROI. Developing a title for DS and PSP is quite cheap and people still make a lot of money out of it (otherwise do you think anyone would still publish games for them?).
    Cheers and remember that the Wii is, amongst the big consoles, the one with the biggest user base (by far) and the cheapest one to develop for, which means the system that can offer the biggest profit.
  •  
    Galamoth
    May 16 03:09 AM
    Hey Bruce, did GTAIV kill the Wii like you predicted?
  •  
    adobe
    May 16 03:14 AM
    Hi Bruce, surely you've seen the lastest NPD data, no? So much for GTA destroying the Wii lol. You have no credibility and your predictions are a joke.
  •  
    dr.mario
    May 16 05:01 AM
    The writer of this column has very little financial insight and is clearly underserving of the platform provided to him here by Seekingalpha.

    The Wii is nearer to the end of its lifecycle? Judged by what standard, the artificial evaluation of console performance specs? Look at the sales data. The public is practically screaming in your ear that they don't care at all. But I guess you must be deaf...?

    The king of the market is the MMO? MMOs are a losing business model because they require the game developer to invest resources indefinitely in maintaining the network and the game play experience (via bugfixes, updates, new level expansions, etc.) They tie up the developers forever without there ever being a possibility of providing truly new, exciting content to the player. The mass market (currently being tapped HARD by Nintendo and other intelligent gaming companies) does not care about MMOs. They require too much time investment on both sides of the equation. They are a money-losing proposition for all but world-class developers with nearly infinite financial resources to pour down that hole.

    Take a step back for a second and realize that so many of your ideas are based on a fundamental lack of comprehension of the game market... You have a couple of ideas right, though, which I'll integrate to make one final point.

    Casual gaming is getting huge, precisely because normal people are growing increasingly sick of wasting 60+ hours of their lives in neverending online worlds. Pick up and play games will continue to grow as long as they stay, fun, exciting, and easy to stop and start at any time.

    A Metacritic score of less than 8.0 is basically a death sentence. Information is good, and consumers thrive on it to inform their purchasing decisions. Since a large portion of third-party games on the Wii are indeed shovelware, and since current Wii sellthrough is in the neighborhood of 25 million consoles, this would lead any intelligent and rational commentator to only possible conclusion:

    The first third-party developer to actually make a GREAT game on the Wii will make a killing. Remember Goldeneye on the N64? A game of that caliber is what Wii gamers are waiting for. When it arrives, there will be a figurative explosion in the market. It will sell 10 million copies with ease. The field is ripe for the picking... All it will take is some known or unknown developer to really apply themselves and create something extraordinary. It could even be on WiiWare. It will need to have fantastic controls. It will spread like wildfire when it happens. It is inevitable.

  •  
    RSB
    May 16 06:31 AM
    Since GTA IV failed to hurt the Wii, Bruce has now turned to an all-out irrational attack against the console. His previous predictions all failed, and so does this new "analysis" of a platform he never really understood.

    Bruce, you could at least try to make it seem like you weren't biased against the Wii. These attacks look (and are) ridiculous from someone who claims to see himself as a person who really knows the video games industry.
  •  
    Grampy
    May 16 09:16 AM
    It is sad to see that someone who purports to be dispensing reliable information on which people are to make important financial decisions can be so misinformed and biased. Your ignorance about the Nintendo Wii is shocking. The fact that it set all time sale records despite the release of its competition’s biggest game should tell you that consumers know that the Wii in fact represents the future even if you don’t.
    The misconception that you can’t sell third party software is based on the fact that most developers, possibly relying on unreliable information from someone like you, have tried to use their third string teams to port over games designed for other systems. The Wii is revolutionary and unique and to succeed, games will need to be developed by top notch teams who understand the control system and its special abilities. The Wii version of Guitar Hero III outsold the other platforms in large part because it uses a unique controller negating the issue of control design. But it also clearly demonstrates that the Wii represents a huge and rapidly growing market. To advise developers to ignore it is to tell them to not tap into to the biggest opportunity there is.

    Read Malstrom and you might understand what's actually going on.
  •  
    User 194536
    May 16 10:16 AM
    Good old Bruce. I can always count on him for a laugh every now and then. I have to wonder if he's actually a hardcore Wii fan in disguise. Making obviously biased and ill informed statements, to actually make fun of anyone who believes such things.
  •  
    timmah
    May 16 11:43 AM
    Once again, Bruce is up to writing childish arguments and stating his (blatently wrong) opinion as fact.

    "Wii is nearer the end of it's lifecycle" - This is clearly an opinion and is in no way based on fact or REALITY (something the writer apparently has no grasp of).

    "Wii is not worth developing for" - Only if you don't like money! The PS2 had the most games developed for it because it had the most sales. More consoles = larger consumer base. If you actually believe your own statement than you are living in a fantasy world and have no concept of how economics and business work.

    "Handhelds are not worth developing for" - Um... The DS has a HUGE userbase, is cheap to develop for, and many devs are developing for it AND seeing great profits. Your logic is full of FAIL.

    Once again, you have written one of the most pathetic attempts at analysis I have ever seen. This is pure illogical dribble, clearly tainted by your blind and bitter hatred towards Nintendo's little white box. Your illogical hatred of the Wii is inexplicable and immature, not based in intelligent thought or reality in any way.

    Your previous argument that GTAIV would 'kill' the Wii shows just how backwards your logic is. If you look at real numbers (not the pretend ones in your head), you will see that the Wii managed to outsell the competition in spite of GTA. You will never have any credibility in the gaming community if you continue writing crap like this.

    By all means, continue to live in your fantasy world. Your articles are always good for a laugh.
  •  
    the2bears
    May 16 02:14 PM
    My Website
    This whole article is a link-fest to Bruce's Blog. Each link providing further proof of how little he actually seems to understand this industry.

    According to VGChartz, the DS has sold almost 250 million pieces of software to date. Piracy certainly hasn't stopped companies from making money there.

    This (Bruce's site) is all one big push to get his name "out there". It's naively written "shock" material, written either with the purpose of provoking controversy or accidentally doing the same.

    Bill
  •  
    Mr. Opine
    May 16 05:17 PM
    let's look at a few facts.

    1) if you were to annualize retail sales of the Wii (i.e. take April unit sales and divide by the percentage a typical April makes of the full year) you would see that Wii ran at a 22 million per year rate in April. That compares to 13 million for the Wii in March. The best month previously was the PS 2 in 2002 at about 18 million (infused by GTA 3 at the time). for PS 2 in 2002 at 18 million.

    2) the Wii is still supply-constrained. sales would be even higher if you could find it in stock every day at retail

    3) have you ever watched people play the Wii? it's more fun to watch them, than the screen. The experience defines viral: the enthusiasm spreads every time someone is exposed. I'll bet there are more people waiting to buy a Wii than have already been lucky enough to own it. I don't think that's close to end of life yet

    4) yeah, sure, forget about developing for WIi, DS and PSP. Everybody's got $15-$20 million around to do a game for all the 2-3 million guys who are hard core PS 3/360 players. Um, that market's not showing much growth. Bioshock, mass effect, great games--ran out of sales at about 1 million.

    5) the average Wii title is bought by about 2.2% of all Wii owners to date. This is below PS 3 and 360. It is better, however than the PS 2 after 18 months in market. The data shows that the Wii owner doesn't buy that much less software, but s/he buys a much higher concentration of first party.

    Based on all this, my conclusions are different!
  •  
    Rob C
    May 17 05:16 PM
    So, just taking one of the ridiculous points from this article... it's not worth developing for the DS? It's not worth developing for the second biggest-selling software platform in the UK? Our accountants would suggest otherwise.

    I don't know if the author of this piece is biased, ignorant or just mad, but his view is as skewed as the picture in the background of his photo. I pray that if he works in the industry, it's for one of our competitors...
  •  
    Grampy
    May 17 06:24 PM
    Any so called expert who claimed that the consumer was frightened off the Wii would have an extremely difficult time explaining the NPD numbers that were announced almost immediately after the publication of your ludicrous column. Your understanding of the current video game market is so completely wrong, I think you should seriously consider early retirement.
  •  
    jazz
    May 21 08:48 PM
    My Website
    Funcom.com makers of Age of Conan

    price yesterday 50, and still a good buy!

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  •  
    Rev. S
    Campbell
    May 24 04:01 AM
    My Website
    If you want to see quite how insane the author of this column is, look here:

    worldofstuart.excellen.../
  •  
    J Fildes
    Jun 03 07:12 AM
    I think Bruce might be nearer the end of his life cycle than the wii. How do you discount the biggest selling platform that continues to dominate the market month after month inspite of supposed "Wii Killers" such as GTAIV? Most every attempt to slow Nintendo's sales has failed and I believe will continue to fail as Nintendo's fan base grows and the casual market is continually influcenced. You are ludicrous in your thinking and your investment decisions.
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