Head of consumer electronics & digital entertainment practice, IDATE
Each year IDATE conducts studies on video games and accompanies enthusiastic project developers who rub shoulders with a market that will make them no concessions. Laurent Michaud, Head of the Consumer Electronics & Digital Entertainment practice at IDATE shares it takes on this in the article below.
It is now nearly 12 years that I have observed the sector with the eyes of a player and economist. We have dealt with all the issues that have made the news: we are going to cover our third home console marketing campaign, in the early 2000s we studied massively multi-player games, the advent of video games on mobile phones, then Occasional Gamer, in-game advertising, the App Store phenomenon, Serious Gaming, cloud gaming, games on smart TV, social gaming... In the background, dematerialisation remains the common denominator for all of them.
Alongside these studies, we have helped nearly forty project carriers by providing expertise regarding the techno-economic feasibility of their games, the industrial positioning of their company, their internationalisation strategy, construction of their business model, design of their outline business strategy...
These 12 years in practice enable me to draw some conclusions on what we are experiencing today as a crisis in the growth of the on-line games sector and a more acute crisis that could become a reality for certain traditional actors (those who develop games on physical media).
Video gaming is in crisis and the companies affected are not the least known: Gameforge, BigPoint, Zynga, but also THQ, Sega, Turbine to name only those... and I am not mentioning the myriad of small companies not really known for the big hit, which were formed to develop games for mobile phones, tablets or on Facebook and which are struggling to obtain a return on quite modest investments in a market where supply is abundant and it is difficult to differentiate oneself.
What are the causes of this crisis, beyond the effects of increased competition? I count four:
1. The video game evolves in phases of growth and decline determined by the life cycle of the hardware. Game consoles register their activity in physical cycles of at least six years. We are currently experiencing a downward cycle, a transition phase between two generations of home consoles characterised by income from the sale of games for these machines down by 12% between 2011 and 2012 and by 20% for the turnover generated by console sales.
2. We observe massive player support for Free2Play on smartphones, tablets, social networks, in games on browsers or MMOs and soon on smart TVs. Controlled inflation of the price of games for home and handheld consoles maintains the income for this segment but basically players demonstrate to us that the model of the future is Free2Play, of which these are some eloquent examples:
- The British studio BossAlien published CSR Racing and quickly recorded a monthly turnover of $12 million,
- According one of its directors, the Norwegian studio Supercell recorded a turnover of $500,000 per day with Clash of Clans,
- When there is no income, there is always the level of "monthly active users" that shows the attractiveness of games carried by the F2P model - 32 million for League of Legend from Riots Games (no profit conversion rates available), 50 million for Farmville 2 (with, according to observers, a conversion rate of around 2%).
- An unprecedented wave of MMO games is passing from a subscription payment model to Free2Play: Aion from NC Soft, Age of Conan from Funcom, Star Wars, The Old Republic from EA, Gotham City Impostors from Warner Interactive, DC Universe from SOE, City of Heroes Freedom from NC Soft…
Not to subscribe to this model supported by a large majority of players may constitute a medium-term risk for publishers.
3. In the on-line games market segment the crisis generates its effect on the first generation of developer-publishers. After a successful first game, these companies have recorded considerable and sometimes dramatic growth as regards their income and size of workforce. They now encounter difficulties with their "second game" which struggles to achieve the support of players who had been seduced by the first. However, the on-line games market segment will continue to record a two-figure growth up until 2016. IDATE estimates that the on-line games market will increase from €15 billion at the end of 2012 to more than 23 at the end of 2016 and will eventually represent a little less than 30% of the global market which could rise to €60 billion. If the market continues to grow at that rate it is value creation that will very largely make up for value loss. This observation underlies reasoning on the, as yet inexhaustible, capacity of the Internet to allow innovative game experiences.
4. In the on-line games environment, the operational risk of a game rests synthetically on four elements: content, business model, technical services, marketing and communications. These four pillars necessary for success rest themselves on new skills: community management, collection, processing and analysis of usage data, business and pricing strategy, industrial intelligence... These tasks are often underestimated by development studios more inclined to create content than conceive its publishing, marketing etc.
Thus, the economic rule "adapt or perish" was never more true than today in the games industry, and never has this rule applied as rapidly as today. Production times for terminals are being reduced on many platforms (mobile phones, tablets, social networking and browsers): as a result, the "time to market" is very short as, at times, is the time that separates the developer from failure.
This statement is difficult to hear: the developer, as Peter Molyneux said so well in a recent interview on Games Industry International, "is not supposed to make games for money. He is also reluctant to talk about monetisation." The games sector is recent and, since the industrialisation of the development market segment in the mid-90s, the job of the studio has been to create a games experience, not to take on board its commercialisation, carry out its marketing or pricing. This role is still regularly seen as falling to the editor. Today you, large and small developers, should know that that era is past and that your job also consists in selling, if not in integrating upstream of the production chain some thoughts relative to the marketing of the game.
A few reasons for bounce-back
If the crisis is real, the video games sector knows how to rebuild its declining segments, renew entertainment experiences, innovate; blaze a trail beyond the beaten track. This character trait offers some grounds for hoping to see the sector rebound in the very short term.
Here are four good reasons for bounce-back:
1. The next generation of home consoles
I am not dealing at length with the arrival of new home consoles that will boost the industry and, in 2015, hardware included, represent 40% of its income.
2. The promise of games on mobile platforms
Neither am I referring in detail to what games represent on mobile platforms, smartphones and tablets that seem particularly well-behaved in terms of market and complementary, even symbiotic, uses. This segment will hold a share of some 15 % of the market up until 2016 as against some 11 % of the income accruing to games on handheld consoles.
I will, on the other hand, insist on my two crazes:
3. The smart TV game
The arrival of the television connection changes the conditions of use for this terminal. Potentially it introduces a level of interactivity that makes it no longer a passive-consumption device. The connection promises enriched experiences regardless of the nature of the content - audiovisual, social, commercial, entertainment or informative.
In this context, the video game could be an accelerator for the market development of interactive applications on smart TV. It will demonstrate its effectiveness by providing a convincing user experience (with an interaction-immersion accessory, voice recognition and motion detection), based on a viable business model.
Games on on-line TV already seem to be taking five directions:
i) The downloading of occasional games on the set-top box from the ISP. In France, Free offers such a service on its Revolution box in partnership with TransGaming:
ii) Games synchronised with live-broadcast audiovisual programmes. Visiware, (through its PlayAlong offer) synchronises the television viewer, who can be a virtual contestant, with more than 800 games and live-broadcast programmes worldwide.
iii) The deployment of an application used by the television manufacturer or by a third party such as Google: EA has just announced, and it went more-or-less unnoticed, that two of these occasional games were available on Samsung's smart TV and controllable by the South Korean company's Galaxy phones. These are Game of Life and Monopoly.
iv) Cloud gaming is a technology that can home-deliver streamed games via the Internet on a connectable TV. The games consoles were also quick in response as Gaikai, one of the most promising cloud gaming service providers was acquired by Sony Computer Entertainment in early July for 380 million USD.
v) Access to games via social networks: Facebook is a platform of omnipresent coverage, found on most connectable devices (tablets, smartphones and computers). It is also available on smart TV and will provide access to the games catalogue that it offers on computer.
These guidelines lead to or induce convergence, better collaboration between the television actors (channels, programme producers), telecommunications and Internet actors (Internet access and service providers), consumer electronics manufacturers and video games actors. It operates at the technological, content and economic level and in any event it opens a new market segment, especially with the arrival of EA.
4. The ubiquitous or continuous game
Today, one can distinguish three types of ubiquity in video games.
- The first is a ubiquity of service: the ranking, challenges, friends' games list etc. are ubiquitous. We find this feature on Game Center or Facebook.
- The second is a ubiquity attached to games. Boostr, developer and publisher of the Urban Rivals game with 25 million players, sets its strategy on ubiquity. This game is available on social networks, tablets, smartphones and on its website. I have single access available, which gives me the possibility of playing indiscriminately on any one of these four single platforms that I pick up according to my wants and the terminal that I have at hand. I also play Football Manager quite a lot, but I open a different game on each platform, which breaks the continuity of the game experience.
- The third is a ubiquity carried by connected objects. This ubiquity took shape in October 2011 under the game name Activision Skylanders. This game is based on action figures equipped with NFC technology and interacting with the home console and the game. These small figures are placed on a pedestal and are recognised and displayed on the screen. They keep in memory the experience gained during the game until the next connection to another console. 30 million figures have been sold to date worldwide.
In conclusion, video gaming is experiencing successive crises, which, in the end, are technological and industrial adjustments related to its strong ability to innovate and recreate: to me these adjustments seem necessary for a sector that, finally, seems soon set to reach economic maturity.
Responsable de la practice Digital Home & Entertainment, IDATE
More information available on ourwebsite.
Head of consumer electronics & digital entertainment, IDATE
What will change for the video game industry
Recently, IDATE has published its in-depth study of Cloud Gaming. The gaming industry has been gradually making the shift to digital over the last decade and cloud gaming is the next step in the process. This study examines the challenges facing the industry-wide and commercial deployment of cloud gaming in terms of technology and services. It also identifies the major industrial challenges across the value chain and the growth engines that will encourage development of this new market segment.
Cloud gaming: Another step forward in the game industry’s shift to digital
For 40 years, the video game sector has been considered a market with two distinct yet interdependent sides:
- the hardware side, which is subject to Moore’s law and governed by a life cycle characterized by the integration of:
- innovative technologies in the video game sector promoting innovation in gameplay,
- features related to video games that can target an audience beyond just gamers,
- service and consumption innovations related to the game sector but also to building user relationships;
- the software side, which is wholly dependent on the equipment side, from design and development to distribution and consumption.
Beginning in the 2000s, online gaming practices and digital distribution began slowly taking over market share. Ten years later, this share continues to grow, today representing more than half of the revenue generated by this sector. Every single market segment in this industry is affected by the digitization of practices and distribution, from home consoles and handheld consoles to smartphones, tablets and connected TVs.
In this context, cloud gaming represents another giant step forward in the game industry’s transition to digital distribution. Sony Computer Entertainment’s purchase of Gaikai demonstrates—and may even strengthen—cloud gaming’s role as a disruptive technology.
Cloud gaming may eventually eradicate (or at least mitigate) this hardware/software division by limiting the impact hardware has on gaming software. In other words, with cloud gaming, video games are likely to become less and less dependent on the device they are being played on. At the same time, we should begin to see more and more game accessories on the market because the accessories are quickly becoming the key element in providing users with the best immersive and interactive gaming experience possible.
With that in mind, IDATE has identified a number of challenges related to cloud gaming’s deployment and commercial success in the video game market. These include technological challenges related to network infrastructure, bandwidth, latency and remote computing and processing; and challenges related to services, their business and pricing models, the need for cross-platform and ubiquitous services, and their user-friendliness, especially on connected TV, where video games seem to have great potential (especially when they are tied in to TV programs).
Finally, IDATE has identified ten market challenges across the value chain. These challenges also represent growth drivers for this new market segment and will affect many players—not just cloud gaming service providers (CGSPs), but also game developers of all genres, AAA and casual game publishers, distributors, physical and digital retailers, console manufacturers, consumer electronics manufacturers, peripheral manufacturers, major Web players, TV channels and telecommunications operators.
Head of consumer electronics & digital entertainment, IDATE
> More information about this study available on our website