• by Michael Shields , May 24, 2004

Explosive growth in the electronic gaming industry--fueled by accelerating technological advances and huge revenue potential--will transform the media, advertising, and entertainment industries while dramatically altering the leisure habits of millions, according to a new research report from Deloitte's Technology, Media & Telecommunications Group.

The new report predicts dramatic shifts in the online gaming world, mostly driven by significantly more powerful hardware that will make games "more immersive, more compelling, and more fun." This super-hardware, along with widespread broadband penetration, will contribute to tremendous advancements in the gaming experience, such as allowing PlayStation 3 (planned for 2006) to be one thousand times faster than its predecessor, PlayStation 2.

Gaming is already a massive business. In the United States, sales of video games and related hardware climbed to $9.4 billion in 2001, surpassing the movie industry by a billion dollars. And games are available nearly everywhere, from consoles and PCs to cell phones and MP3 players. Deloitte expects that the installed base of devices supporting purchased electronic games will rise from 415 million in 2004 to at least 2.6 billion by 2010.

This new gaming world promises to open up a flood of advertising opportunities, according to the report. Because of the heavy costs associated with producing software that can keep up with ever-improving hardware, "Game publishers looking to recoup their spiraling development costs are increasingly receptive to product advertising in games," the report says.

It is still too early to tell what form this new advertising will take--whether gaming will be closer to movies, which accommodate mostly product placements and a few ads, or TV, with frequent interruptions.

"We are not there yet," says Scott Singer, head of Deloitte's Media & Entertainment Corporate Finance Group. "Advertisers, agencies--I don't think they have figured it out yet. I think it's all TBD."

Indeed, thus far, spending on gaming advertising is minor. Deloitte predicts that spending on advertising in console games will climb from just $10 million in 2002 to $45 million in 2007. Similarly, they say that advertising within online games (ad-supported games and 'advergames') will rise to $230 million in 2007, from $75 million in 2002. However advertising develops for this medium, these gamers will clearly become an increasingly attractive target as the group outgrows its traditional young male, tech-geek core. "Everybody seems to think games are for teenage boys," says Singer. "The demographic is getting older."

A recent survey by the Entertainment Software Association has found that the average gamer is actually 29 years old, with 41 percent reporting a household income of more than $50,000. Gamers are also more diverse than perhaps thought: 44 percent of these folks are female, and 26 percent are women 18 or older. These demographics are expected to become even more representative of the mainstream as gaming becomes more pervasive.

"Fifteen or twenty years ago, these people grew up with four or five remote controls sitting in front of them." Singer says. "Then they started using the computer, and got used to that. They were surfing through 30-40 channels; they got used to that. All this stuff is familiar to them."

The growth of online gaming's popularity will have implications in the online world as well. As more and more PC and console gamers go online to play (Microsoft expects one million subscribers to Xbox live by this summer), broadband adoption will swell to 450 million homes by 2010, says Deloitte.

But the biggest effect of gaming may be offline, as various manufacturers battle to become the centerpiece of the modern entertainment home. Deloitte predicts that consoles will win out: "Game consoles remain uniquely positioned to dominate the digital living room." Deloitte also foresees a major increase in mobile games as capacities and download speeds improve. Deloitte researchers have already seen this phenomenon unfold overseas in commuter-heavy markets.