Video Games Are Business Bonanzas For Big Media

Before there was the iPod and the iPhone and Internet addiction, there was the video game. What was once child's play has evolved into a global adult pastime. Today, video games represent one of the most successful, enduring and revitalizing forms of interactive media.

And it gets better. The Wii platform from Nintendo and many versions of "Guitar Hero" from Activision represent the next-level participation games--mainstream and laced with social networking and e-commerce. Formerly passive single-game players are out of their chairs, physically interacting with each other and the big-screen video. The storytelling talent of Jerry Bruckheimer, collaborating with MTV and Viacom (its corporate parent) will lend an exciting dimension to television, film and online content creation. The arrangement is similar to Steven Spielberg's deal to create three original action-adventure games for Electronic Arts--the first makes use of the Wii console. These creative game collaborations could have a major impact on strike-hampered television.



Having gotten a taste of the fast-paced video game market by acquiring Harmonix and its popular "Rock Band" video game, Viacom and its MTV unit said they will invest $500 million in games and interactive entertainment by summer 2009. Viacom upped the ante Wednesday adding Microsoft as a new five-year, $500 million-plus games, advertising and content partner. Walt Disney, which has had the most ambitious ties to video games, is reaping the rewards this holiday season as a result of the fanatical following of 8- to-12-year-olds to its Hannah Montana and "High School Musical" franchises. Disney will more than double the $150 million it's spending on video game development by decade's end, analysts say. Even with all the fuss over Fox Interactive Media, News Corp. is playing catch-up. CBS has had a successful go with the game "Chain Factor" as a real-time way to market and extend its TV show "Numb3rs."

Still, the real attraction for Big Media is the latent opportunity of in-game advertising--and the sky is the limit. Yankee Group, a Boston-based think tank, estimates that global in-game advertising will grow exponentially--from last year's $78 million to nearly $1 billion by decade's end. The typical breakdown of in-game ad revenue-sharing for console games is 65% to the game publishers (who may share their lot with movie studios or sports leagues), 25% to the ad platforms (such as Google's AdShare, Microsoft's Massive, Double Fusion or IGA Worldwide), and 10% to the hardware manufacturers Nintendo, Microsoft and Sony).

Even in its early stages, it is a unique marketing option already attracting mainstream advertisers from all pivotal categories that are willing to pay generous CPMs. Bernstein analysts explain that total minutes of ad impressions used to generate in-game ad revenues are based on the hours played, the number of connected consoles, available ad inventory and its utilization. As a result, CPMs can range from $10 to $30 for an in-game billboard to as much as $70 for an in-game 10-second video view.

More important is the integrated Internet connection afforded by hardware platforms that provide "a direct selling channel from the console maker to the user," which eliminates the retailer and allows for online "micro transactions." The ultimate winners are the game-playing consumers (who pay less for targeted products and services online) and game-related companies (which will be able to charge transaction fees for facilitating the premium connection). Overall, in-game advertising represents a new exciting and potentially lucrative shift in media's fading status quo.

In fact, one of the dynamics to watch is the interface between old media money and the new ground rules of video-game play. For instance, consider "World of Warcraft," a sophisticated role-playing game launched in late 2004 with more than 9 million global subscribers. It will generate more than $1 billion in revenues, and more than $500 million in operating profit in 2007 for Vivendi's Blizzard Entertainment. The global growth potential of "World of Warcraft" and other games like it was the driving force behind the recent $19 billion merger of Vivendi's Blizzard subsidiary and Activision, which has jump-started a scramble to acquire and consolidate gaming companies. (Even with a price tag of about $18 billion, can an acquisition of Electronic Arts be far behind?)

EA and the new Activision Blizzard each will have about $4 billion in sales this year. The army of strategic affiliations Vivendi and Activision both bring to the table (including Viacom, CBS, Sony, and Warner Bros.) give the newly combined player enough firepower to compete on every level with EA. Future U.S. consolidation will involve global investors such as China, with more than 60 million players on home turf.

The market for networked, online, mobile and other enterprising new gaming platforms will be explosive in 2008. While it hinges on new digital interactive technology, gaming is rooted in old-fashioned creativity. The economics of creating and monetizing games now rivals that of many traditional media businesses such as television and film.

With potentially big financial losses and competitive setbacks as a result of the writers' strike--as well as directors and actors to come--gaming platforms may be a logical next creative step as a stepping stone to online video. While global video-game sales are less than half that of film, it is growing revenues at nearly 20% annually to $38 billion this year, according to PricewaterhouseCoopers. More recent analyst estimates say video-game hardware, software and other related sales could be up 50% from 2006. The amount of money spent worldwide on gaming consoles, software and online platforms far outweighs global films, and increasingly stretches across all age groups and genders.

Video games have achieved what music did not: remain connected to consumers by embracing interactivity and staying a step ahead of the technology curve. Nintendo is as impressive a comeback story as the media world provides, spanning from Nintendo to the Wii. It now leads the video-games pack. The Wii phenomenon has re-ignited the entire video-gaming sector.

Maneuvering through the opportunities and challenges of such a fast-changing, consumer-directed market has become as important as designing the next new attraction. As evidenced by the "Guitar Hero" craze, you don't need to stray from reality to create a cult following. There are great lessons in the video-game sector for everyone in media. Lesson one: How to take e-commerce to new levels. Lesson two: create new forms of interactive content that combine the best of traditional and emerging media. Lesson three: cash in. That's anything but child's play.

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