Commentary

Money Spot: Video Games Are Having Banner Year

Video game impresarios have to be pinching themselves every morning just before they pose the question, "What recession?"

Game-playing in all of its emerging digital forms appears to be the one media sector that could be impervious to economic malaise. It has even slowed the meteoric growth of online advertising and caused Google to miss some of its quarterly targets for the first time. As it turns out, video games have become the escapist elixir for hard times that moviegoing and television once were in a passive, analog world.

"In the face of the slowing economy and despite tough year-ago comps, June U.S. video game software revenue growth beat consensus, rising 61% from a year ago," Goldman Sachs analyst Mark Wienkes reports. Unit sales rose 35%, while the average selling price was up 20% year-over-year to $40.34. Market share is nearly evenly split among the major players: Electronic Arts has 18%, while Nintendo and Activision are tied each with 15%.

Other media sectors should take heed. The growth and excitement are driven by innovation, which has become the key competitive weapon among rivals. The leading example is the revitalized success of Nintendo's Wii software, which continues to lead the market with 33% of sales and has dominated the top 10 titles since its release in February 2007.

Wii did for video games what Apple has done for mobile phones: Use technology to reinvent and invigorate the platform at a time when digital consumers are eager to embrace interactivity even as they are grumbling about high-priced gasoline. Getting video game aficionados off the couch and away from their remote controls to actively engage in interactive play is as much the future as touch-screen mobile phones doubling as mini-computers.

Wii has continued to expand its franchise with music and new forms of physical fitness that appeal to first-time players and consumers of all ages. Like Apple, Nintendo has spurred its rivals to action. Activision has re-energized its balance sheet and the youth market with its dance-and-play "Guitar Hero" franchise, which now features real-life bands. EA has fortified its narrowing dominance with "Rock Band," and new competitors like Viacom have joined the fray. Even the groundbreaking "World of Warcraft" is reportedly considering an offline approach to mine its global low-churn 10 million core players.

Continued consolidation, exemplified by the merger of Activision Blizzard and EA's continuing pursuit of Take-Two interactive, will make the preeminent players even more powerful. Little wonder, then, that the video game software is outpacing the growth of prior cycles. Cumulative unit sales are already 43% greater this cycle over previous cycles.

The question analysts are asking themselves is: How long can the magic last?

Although video game publishers recently raised their software forecasts, Wienkes points out they are conservative and likely will outpace their 15%-plus growth targets. In 2007, publishers more than doubled their growth targets by reporting 34% year-over-year revenue gains. Through June 2008, the videogame market has grown 49%, or about double the 24% growth it reported in June 2007.

Greater penetration of game consoles brandishing higher game unit sales are clearly contributing to larger-than-expected software sales and better margins. If Sony and Microsoft have positioned their consoles to be the Trojan Horse of household digital conversion, that will make interactivity mainstream and cut across all other media and entertainment.

"The depth, breadth and length of each new (seven year) cycle is growing through more and broadening game devices, enhanced game play, demographic shifts, international growth, and new revenue opportunities largely owing to online connectivity," Wienkes observes.

In other words, the video game industry is in a digital interactive sweet spot. It can capitalize on the rapid growth in online connectivity with old catalog titles as well as new game creations. It is doing what other media sectors must do to survive: Create and grow new digital revenue streams.

The video game industry's new initiatives work because they understand and embrace many of the growth catalysts of the new digital marketplace: User-generated content, social networking, viral marketing, globalization and value-added engagement. It owes its creative vibrancy to its constituent gaming communities that increasingly utilize development kits that inspire pro-am gaming and publisher upgrades. Video game software publishers don't just monetize their target consumers--they learn from them, and make then an integral part of the creation process.

Industry analysts and zealots were understandably dismayed when the recent annual E3 video game conference rendered no "game changing" software. While diversity of titles and playing experiences is key, the video game software publishers enjoy an easy, cost-effective, enterprising production formula that other media and entertainment players may not be able to immediately emulate.

The co-op and online game play that is increasingly incorporated into all genres to extend the life of new releases and generate new revenue streams are endemic to the video game model and its unique consumer relationship. If there is a downside, it is that video game publishers are trying to best themselves by resorting to troubling levels of gore and violence that desensitizes users, who are often young and immature. At the other end of the spectrum, toddlers are enticed with music and animal-based "snackable" casual games that hook them into becoming life gamers.

Can an industry soaring above all the economic bad news put its giddiness aside long enough to voluntarily self-police and adopt socially responsible behavior at the risk of forfeiting some of its impressive gains? Probably not. Clearly, the one thing the video game software industry could use more of is moral conscience.

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