|
Global
News
July
22, 2003
Gaming
is fun, and profitable!
UNITED
STATES -- Despite most of the market sectors being down,
video game makers and companies supporting them, seem
to be doing very well. This is due to a few main reasons.
Firstly, the entertainment industry as a whole has done
fairly well. Secondly, people are realising that video
gaming is one of the most cost effective ways to have
fun on a time entertained per dollar basis. Lastly,
as the total available market (TAM) available to video
game producers (VGPs) grows, due to the number of computers
and gaming consoles climbing, these game makers are
seeing their margins climb higher and higher.
For
example, Electronic Arts (EA), one of the world's biggest
VGPs, closed 2002 with earnings 84 percent above the
same quarter, one year earlier. The simple economics
is that the bulk of the cost of sales for video games
is in developing the game in the first place. From there,
the cost to physically produce each game is almost insignificant,
when compared to the sale. Therefore, as unit sales
climb over the next few years, so too will profit margins.
Few other tech companies have as much potential.
Gaming is fun
This is probably the most obvious driver of games, but
its significance is really for the places that make
video games, not the games themselves. During the last
three years, there have been a lot of layoffs in a lot
of different companies. While many accountants will
try to explain how this is good for a company's balance
sheet, most analysts have failed to account for the
psychological affects felt by employees. The greatest
misconception is that layoffs lead to higher productivity.
Actually, this is only an illusion of higher productivity
when you look at 90 percent of the last year's output
produced by 80 percent of last year's workforce. What
this does not take into account is all of those little
things that employees who love their company do to ensure
long-term success.
However,
this is still happening at game-making companies. Employees
there are happy to be a part of the team. Most analysts
that have interviewed employees of game-making and non-game-making
companies over the last several years will agree that
the former category is just a happier bunch of folks.
The problem for many tech companies is that they started
distributing stock options to all employees and assumed
that these would provide sufficient motivation. Now,
with the slump in the market, many tech companies are
also feeling a coinciding slump in motivation, which
lowers productivity, and causes the company to lose
value. However, game companies do not have to worry
about this viscous circle because their motivation is
high, and this, in turn, is probably another reason
why EA has outperformed the market.
Gaming
is addictive
This goes to one of the core reasons why some companies
can actually get away with selling a game for $50 upfront,
and charging a monthly subscription fee as well. While
this is not to say that video games are as addictive
as drugs or cigarettes, there is certainly a level of
addiction present in most games. Psychologists have
theorised that some of the folks that flock to the massive
multiplayer online role-playing games (MMORPGs) are
timid and may have low self-esteem or a poor body image.
In these virtual worlds, it is often easier to make
friends, with far less fear of rejection and the player's
avatar will typically be strong and viral where the
player may not be.
For
some of the first-person shooter (FPS) crowd, there
is an addiction to the adrenaline that gets released
because the game can seem so realistic that heart rates
and perspiration can climb to similar levels seen in
actual combat situations. Some of the real-time strategy
(RTS) fans love to exert control over their virtual
world. Regardless of the genre involved or the player's
motivation, the simple point is that games are beyond
just fun, they are compelling. Some experts feel that
gaming could soon overtake TV viewing for at least some
significant portion of the population and already has
for a small portion of Americans.
Gaming
"generations" are short
In this context, the word 'generations' refers to the
time between one level of video game accomplishment
and the next level in video game evolution. For example,
released in 1995, WarCraft II broke new ground in the
world of RTS games. Then, in 1998, Blizzard Entertainment
released StarCraft. Built on WarCraft II base, it again
set a new standard by allowing more players in a single
game over the Internet and other new features. Almost
right on schedule, Blizzard released WarCraft III in
2002. Clearly, the RTS games from Blizzard have a three-
to four-year generation cycle, with a one-year half
generation for expansion packs.
While
this clearly is not shorter than in some other tech
industries - like PCs and PDAs - the R&D costs are
also much lower than in most other tech industries.
We get the best of both worlds with the short generations
found in the tech industries, and relatively low R&D
costs. Considering these two points, it should come
as no surprise as to why so many VGPs are doing so well.
Gaming technology is the next step in digital evolution.
If you go back to the very first computers, they were
mostly text-based. Then, as the Web became more popular,
we saw colors, then pictures followed by forms of streaming
media like music and movies. Fig. 1 shows the natural
progression.
Gaming
technology is the next level. In fact, it is actually
a quantum leap above streaming movies as it adds an
element that was not present in any of the other forms
of digital content: interaction. When you play games,
your actions influence the results. The better you play,
the better the game goes. This is why gaming technology
will find itself in such a wide spectrum of different
disciplines within only the next few years. Just as
music videos did not kill the radio star, gaming technology
is not likely to completely displace all the other forms
of digital content. However, it will start to take a
larger and larger slice of the pie.
Gaming
-- a form of advertising
While gaming technology is the next step in the evolution
of digital content, it has yet to really be affected
by the one thing present in all the other forms of digital
content: advertising. And, as you can expect, this will
change. For those of us old enough to remember, when
you went to the movies and paid your $2.50 for a matinee,
there were one or two movie trailers. Now, when you
pay your $5.50 for the afternoon showing, you not only
see five or six movie trailers - which, by the way,
are just advertisements for other movies, even if they
are fun to watch - but sometimes, there will actually
be commercials before the movies. Sometimes these are
for charities, but regardless of the sponsoring companies,
they are still ads.
We
flash forward to 2002, and find that Intel and McDonalds
have bought product placements -- The Sims Online. So,
not only are you paying EA for the game in the first
place, you are also paying it a monthly fee, while it
is also getting paid millions of dollars by some very
big name companies. This is the very cusp of a radical
change that we will see in video games in the upcoming
years.
Contact:
In-Stat/MDR
Tel: +1-480-609-4551
www.instat.com
|
