For leaders in an industry that declined 5% last year and is down 8% so far in ’06, videogame publishers are awfully optimistic about their future.
While execs in most traditional areas of the entertainment biz are openly grappling with slowdowns in the Nielsen ratings, at the homevid counter — and at least until recently, at the box office — their videogame compatriots are uniformly bullish that growth will return by 2007, even though they’re currently suffering through the sharpest decline of any segment of the media biz.
“My suspicion is that over the next 10 years, the worldwide growth rate for games (is) going to be greater than in the prior 10 years, which have been double digit on average,” predicts Activision CEO Bobby Kotick.
The industry is in the midst of a console transition, a time that typically leads to a slowdown in sales as gamers wait to spend their money on next-gen systems like PlayStation 3 and Nintendo Wii. (Microsoft’s Xbox 360 came out in November but is just now becoming widely available at retail.)
Still, publishers have been surprised by just how rough things have been.
Even though they knew sales would be somewhat soft, both Electronic Arts and Activision were surprised by the depth of the trough and therefore had to issue earnings warnings in December and lay off staff. Demonstrating the slowdown is a worldwide phenomenon, Japanese giant Square Enix recently warned its earnings would fall short as well.
Compared with the last console transition, the decline this time around is much sharper. Industryites only wish they were dealing with the mere 1% drop in software sales experienced in 2000 when gamers were waiting for the PlayStation 2, Gamecube and Xbox.
And observers don’t expect things to get better soon. “We believe that sales softness could persist through much of 2006 due to the ongoing console transition,” analysts at SG Cowen & Co. said in a recent research note.
Given the depressing data, it’s inevitable that many are wondering whether the videogame market is starting to mature. Just as virtually every interested household now has a DVD player — one reason for the slow growth for discs — it could be that there simply aren’t as many newbies buying a PlayStation 2 for the first time.
But while they admit things are tough, videogame publishers are prepping for a steep growth curve they see coming in the near future.
“This difficult transition was a little more difficult than anyone expected,” admits Vivendi Universal Games CEO Bruce Hack. “But by definition, it is transitional, and we shouldn’t have current-events myopia.”
Publishers are primarily focused on 2007. By then, all the pieces should be in place on the hardware and software side for the industry to start booming again.
“If we’re not seeing significant growth when the new consoles are out and everybody has launched their next-generation franchises, that’s when you’ll see panic set in,” says Jason Hall, head of Warner Bros. Interactive Entertainment.
Hall and his competitors are spending big money in a bet that won’t happen. Looking to lock in valuable franchises, publishers are spending tens of millions for the long-term rights to such properties as “Lord of the Rings” and “The Simpsons” (EA), DreamWorks Animation films (Activision), Nickelodeon shows (THQ), Pixar films (THQ) and Robert Ludlum’s “Bourne” and “Covert One” novels (VU Games).
They’re also upping budgets for next-gen consoles. Top-tier games are expected to cost between $15 million and $20 million to produce, compared with $10 million to $15 million on existing systems.
Publishers are counting on several trends to help those investments pay off. While the greater graphical capabilities of next-gen systems could get hard-core gamers to start replenishing their library, they’re hoping the online capabilities will get gamers playing longer and entice them to spend more money on things like extra content and subscriptions.
They’re also hoping to recruit new customers. With their ability to play high-definition DVDs and download content from the Internet, the 360 and PS3 could make their way into households that otherwise wouldn’t spend several hundred dollars for a game system alone.
Nintendo’s Wii (previously known as Revolution) will come with a whole new user interface that’s considered friendlier to nongamers. That could bring in casual players who may find themselves intimidated by the 360 or PS3.
Publishers are increasingly focused on such casual players — often women — since they’re making more and more money off them on the portable PSP and DS consoles. Indeed, that’s where much of the innovation in game development is happening.
After seeing original properties like Activision’s “Gun” and Majesco’s “Advent Rising” fail, publishers are extremely cautious when it comes to spending $15 million on an unproven concept.
But spending $1 million for an original idea for handheld devices is a much safer bet — especially when games that would almost certainly not translate to the TV, such as “Nintendogs,” are proving smash hits on the very small screens.
“(TV) consoles will drop as a percentage of the overall market, and we will have the opportunity to reach different demographic segments on these new platforms like handheld and mobile if we leverage the features to make creative, fun products,” Hack observes.
With all of those opportunities lying ahead, most in the game industry are hoping the current slump is less of a slowdown than a costly investment that should pay off soon.
“I think of it like a slingshot,” Hall says. ‘With the last console transition, we had to pull back 100 feet. Now we’re pulling back 200 feet. That drains more resources, but when it shoots, we’re going to go twice as far.”