Business booming; may soon best film biz

If you think vidgames are already a big business, you ain’t seen nothing yet.

Backed by Microsoft’s $500 million in Xbox marketing and a pair of new platforms from Nintendo (Game Boy Advance in June and Gamecube in November), along with continued strong sales from Sony’s PlayStation2 hardware and games, the vidgame industry is embarking on what is expected to be the most successful five-year life cycle in the history of the 20-year-old industry.

“I expect videogames to match or exceed film box office within the next three to five years. It’s unlikely to happen in 2001 or 2002,” says Interactive Digital Software Assn. prexy Doug Lowenstein. “However, the industry’s rate of growth will far outstrip any other entertainment industry, and as our recent economic impact report shows, industry sales, job growth and wages paid have consistently surpassed not only the film industry these last four years, but also the computer hardware makers and other high-tech leaders.”

A recent report commissioned by the IDSA, “Economic Impacts of the Demand for Computer and Video Games,” said that last year the computer and vidgame industry generated jobs for 220,000 people and nearly $9 billion in wages, and federal and state personal income tax revenues, as well as an additional $10.5 billion in economic activity from the sale of software. The IDSA report also showed sales in the game software industry in 2000 grew at a rate of 14.9% per year , more than double the rate of growth of the U.S. economy, far outpacing sales growth in related industries.

While other industries have downsized and cut back as a result of the slow economy, vidgame hardware and software sales, lead by PlayStation2, are up 19% through the first quarter of 2001 compared with the same period last year.

With $6.1 billion in U.S. sales of vidgame hardware, software and accessories for 2000, as tallied by the NPD Videogame Group, industry experts expect the transition from current gaming consoles to next-generation systems to continue through this year.

“I think this year will be a challenge, more from a profit than from a revenue standpoint,” says John Taylor, videogame industry analyst for Arcadia Investment Corp. “The mix of sales is going to experience a shift to hardware, which has low to negative margins for the format owners, and minimal margins for retail.

“At the same time, publishers have escalating development costs but a limited installed base to sell into. As a result, margins up and down the food chain will be under pressure this year, but it is likely to be the low water mark. Next year and the following year should see very impressive growth.”

According to the IDSA, 168 million Americans play videogames, and over 40% are female. The U.S. installed base of PlayStation systems is approximately 27 million units, Nintendo 64 is over 17 million, Dreamcast almost 3 million and PS2 over 1.3 million, according to analysis by the San Francisco-based Intl. Development Group.

IDG predicts PlayStation2 sell-through to reach 5.5 million hardware units and 26.5 million software units this year alone. Xbox and Gamecube could sell an additional 1.6 million hardware units each.

In a recent “Executive Summary” report, IDG predicted that U.S. and European hardware and software revenues respectively, for PlayStation2, Gamecube and Xbox console systems will exceed $13.8 billion and $14.9 billion, and Game Boy Color and Game Boy Advance hardware and software revenues, respectively, will exceed $4.35 billion and $4.28 billion for 2002 and 2003.

“Forester predicts that nearly 70 million households will have next-generation consoles by 2005, making these entertainment units one of the most successful consumer entertainment products ever introduced,” says Lowenstein.

“The old adage goes that each new generation of hardware sells twice the number of the previous system,” says Dan DeMatteo, president and COO of Babbage’s Etc., which has 975 stores in 47 states and Puerto Rico under the names Babbage’s, Software Etc., Gamestop, FuncoLand, SuperSoftware and Planet X. “There’s simply too much money invested in the category, from developers, publishers and console companies, for videogames not to succeed as a mass-market form of entertainment. We’re beyond the mom-and-pop industry.”

In fact, the gaming industry has grown into a global entity with vidgame corporations in Japan (Sony, Nintendo, Sega, Konami, Capcom), France (Vivendi Universal Publishing, Infogrames, Ubi Soft) and the U.S. (Microsoft, Electronic Arts, THQ, Activision). The past few years have seen the industry consolidate, with companies like EA, Infogrames, Microsoft and Ubi Soft acquiring smaller companies.

“The consolidations are shaping our industry into a limited number of major global companies on one side and thousands of much smaller production units on the other side,” says Bruno Bonnell, chairman and CEO of Infogrames. “It’s like an interactive big bang where the global structures are helping the development of the creative units and revealing their talents. This split is similar to the one of the music industry where the majors work with the producer and share more of the profit pie.”

While Sony has a clear lead in the next-gen race with its PlayStation follow-up, hard-core gamers are fogging up their own glasses in anticipation of Microsoft’s first foray into the console market.

“With Xbox, we’re trying to push the boundaries of gaming,” says John O’Rourke, director of sales and marketing for Xbox. “We’re giving the creative community a tool to develop new games and new types of interactive experiences that past platforms didn’t have. Xbox will ship with broadband capabilities and a hard drive, which opens up new opportunities for online gaming.”

Nintendo has had a loyal following of gamers over its 20-year history and this year’s double launch of GBA and Gamecube is expected to be yet another success for the company. Industry experts expect Gamecube eventually to find a 25% market share thanks to strong characters like Pokemon, Zelda and Mario.

“What is exciting about our two platform launches is that, unique to us, the two systems are designed to work together,” says a Nintendo official. “That means in the future we will see entirely new forms of videogame play evolve. Just look at how the world has responded to the new ways of game playing with Pokemon.”

In the end, it’s the games that will ultimately make or break a console.

“Content is king — it’s as true in video games as it is in motion pictures and television,” says EA president of worldwide studios Don Mattrick. “The next generation of consoles is going to be judged by the quality of the available software.”

And Hollywood is taking notice, according to Robert Kotick, co-chairman and CEO of Activision, who’s had a flood of Hollywood types walk through his Santa Monica studio doors in the past year inquiring about the vidgame business.

“Next-gen graphics are approaching a cinematic quality,” says Jeff Lapin, vice chairman, THQ. “You can see companies like Disney Interactive, Universal Interactive Studios, Warner Bros. Interactive and Nickelodeon taking a more active role in videogames.”

“Within the next five years, I wouldn’t be surprised if one or two of the major Hollywood studios bought a game company,” says Kotick. “The synergies are already there.”

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