Mobile Games, Ailing Publishing Model Dominate Day One of D.I.C.E.

Videogame publishers “were great in the ‘80s and ‘90s,” the “golden age of gaming,” when a lot of innovative titles were greenlit and the companies could make a profit by selling 300,000-400,000 copies of a title, said Wedbush analyst Michael Pachter. Once the cost of making games skyrocketed, the “hurdle rate” grew, and now if a publisher doesn’t think it can sell 3 million units of a game it doesn’t make the game, he said. That has stifled innovation in the sector, he said, pointing to the dominance of sequels and lack of original intellectual property, and arguing that this has led to the death of the publishing business model. In recent years, the industry has lost several major publishers, including Acclaim and Midway, he said, predicting there won’t be “any new” major publishers emerging because of the high costs involved. Similarly, he predicted that the huge amount of capital required to publish games will rule out the ability of self-publishing to become successful for most.

Activision Blizzard is thriving due largely to two big game franchises -- Call of Duty and World of Warcraft, Pachter said. Publishers like THQ, meanwhile, “can’t keep up with” Activision Blizzard and Electronic Arts, he said, pointing to THQ’s struggle to survive. THQ decided it couldn’t have a successful business with $800 million in annual revenue, so it decided to slash its game slate to focus on a much smaller number of releases per year. “That’s not good for the industry” because there will be fewer games that can be purchased, and it’s not good for consumers, who will have fewer choices, he said. “All the publishers aren’t going away” and “there will be winners,” he said. Pachter predicted there will eventually only be a very small number of publishers, including Activision Blizzard and EA. He predicted that Best Buy may disappear as well because its business model is broken also, he said.

Publishers don’t stifle innovation, said Jesse Divnich, vice president of game market research company EEDAR, disagreeing with Pachter. He pointed to Guitar Hero as an example of a game series that wouldn’t have become as successful as it was without Activision taking it to consumers. Divnich argued that “maybe the publishers are broken,” not the publishing model.

Pachter said he worries about “the next three years” because no publishers are creating new IP. But Divnich said publishers never release new IP at the end of a console cycle. Pachter, however, said if publishers made good, original games, consumers would buy them. Apple has thrived because it innovates, coming up with original ideas that it believes consumers will want. Divnich said it was too risky for publishers to take that approach or the similar approach that Nintendo took with the Wii.

Divnich and Pachter said Take-Two Interactive was one of the few publishers taking the correct path. Take-Two allows developers like those at its Rockstar division to create good, original games, and consumers keep buying them, Pachter said, predicting power in the industry will shift from publishers to developers. Divnich said Take-Two was the “perfect example of what publishers should be doing.” But he said investors always “punish” Take-Two because it often has to delay game releases.

Growth in mobile gaming hasn’t come at the expense of console games, argued Perrin Kaplan, principal at marketing company Zebra Partners. The quality of console games, meanwhile, continues to outpace that of mobile games in general, she said: “There is so much crap to wade through” when searching for games on a mobile device. Gabriel Leydon, CEO of mobile game company Addmired, said “there’s a lot of garbage” only because mobile gaming is so new. Console game makers are fueling mobile game growth by “abusing” consumers, he said, pointing to the rise of console game pricing and efforts to kill the used game business. He predicted the free-to-play business model will become increasingly popular, calling it “the MP3 of the game industry.” Kaplan said console companies had “a really big opportunity” to make their titles available for mobile devices. Nintendo, which she used to work for, has been especially reluctant to make its games available for smartphones and tablets.

If game makers “don’t understand” what customers want, they “might as well get out of the game,” said Jeff Hemenway, group vice president of games at e-commerce solution provider Digital River. He later told us he believed publishers won’t survive if they don’t forge a direct relationship with their customers by selling games to them online. Packaged games are “going away … I don’t know when -- maybe three to five years from today.” Going direct to consumers allows game makers to talk with customers about their other titles and cross-promote other games, he said. “Almost every publisher would love” for used games to disappear, and “eventually” they will, he said. It’s harder for publishers to communicate with consumers who've bought a used game, he said. The demise of used games could have a major impact on GameStop, the No. 1 seller of used games in the U.S. But Hemenway said GameStop has “done a far better job than any other retailer in terms of reinvesting” in their game business. GameStop is “really trying to embrace the digital age” -- it seems to realize that direct digital distribution is “the future” of the industry, he said.

Digital River offers e-commerce solutions for publishers including Activision, Capcom, EA (Origin), THQ and Ubisoft, Hemenway said. In Q4, Digital River “expanded” its relationship with Activision to include Call of Duty e-commerce in France, Germany, Italy, Spain and the Benelux countries, he said. Digital River had already worked with Activision on Call of Duty e-commerce in the U.S. for more than a year, he said. THQ is “absolutely embracing this model” because the company realizes how key it is for their future, “as do most publishers today,” he said.

"Historically,” Digital River and each client have operated different monetization business models, with different billing systems that varied by title, Hemenway said. “This year, we are pulling all of those together in our platform” so if a customer wants to pay for micro-transactions related to a free-to-play game and also pay the subscription fee for a massively multiplayer online game, that relationship can be managed “within one client account,” he said. “It’s in the works,” and Digital River will make “some announcements from a product perspective sometime this summer,” he said.

D.I.C.E. Summit Notebook

NPD is seeing wildly different game device usage patterns across France, Germany and the U.K. in comparison to the U.S., analyst Anita Frazier said Thursday. Apple iOS and other app devices are collectively the most used game devices among U.S. gamers, but consoles are No. 1 in the U.K., portable videogame devices are No. 1 in France and computers are No. 1 in Germany, she said. In the U.S., portable game hardware usage is now much smaller than app device usage, with close to 50 percent of portable users also playing games on app devices, she said. In the European markets, app device gaming is at the same level as portable gaming, she said. The three European countries together have a population that’s close to 66 percent of the total U.S. population, she said. Gamer incidence -- defined as those who play videogames, own at least one game device and use it to play games -- was higher during Q4 of 2011 in the three European markets than in the U.S., which still maintained the largest number of gamers, she said. When breaking down gamer incidence by age, there was a higher percentage of gamers across ages 13-34 in the three European countries, she said. The U.K. had the highest level of physical and digital purchase incidence, she said. Germany had a nearly equal number of consumers buying games in the physical and digital formats, while the French are mainly physical format purchasers, she said. Free applications made up the majority of downloaded games in Europe and the U.S., she said. The highest amount of social network gaming was done in the U.K. among the four countries, she said.

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The Entertainment Software Rating Board and CTIA are still readying a mobile application rating system, ESRB President Patricia Vance told us Wednesday. The initiative was announced in November (CED Nov 30 p9). The mobile application storefronts of AT&T, Microsoft, Sprint Nextel, T-Mobile USA, U.S. Cellular and Verizon Wireless agreed then to voluntarily support the ratings system as part of their application submission process, Vance said. The CTIA Mobile Application Rating System with ESRB will use the same rating icons that ESRB assigns to video and computer games. At least one of the six carriers will introduce the system in March or April, with the others to follow, she said. “I would expect that all” of them will “be up in the next 12 months,” she said. ESRB started making ratings available for digitally-delivered console games nearly a year ago and that has been working out well, she said. It’s relying on game makers to provide the correct information on a mobile game’s content for ESRB to judge what rating a title should get, but the beauty of a digital system is that the rating can be quickly corrected if warranted, she said.

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Halfbrick is focused on making games for mobile devices, but will continue making titles for Xbox Live Arcade (XBLA) and the PlayStation Network (PSN) where “they make the most sense,” Chief Marketing Officer Phil Larsen told us. The company predicted that digital downloading was going to become “very popular,” he said. Its first XBLA title, in 2010, was Raskulls, which he said has been downloaded about 100,000 times, which “isn’t bad for XBLA.” Its first PSN game, also in 2010, was Age of Zombies, which was also downloaded more than 100,000 times -- a good number for PSN also, he said. That title was later expanded to iOS, in October 2010, where it’s been downloaded about 500,000 times, he said. Halfbrick hasn’t made any games for the Wii or 3DS and doesn’t plan to, but the company will “definitely explore” making digitally-delivered titles for the Wii U, he said. It’s open to making 3DS games if the marketplace indicates it would make sense, Larsen said, calling the device’s autostereoscopic 3D “cool” and something Halfbrick would be open to supporting. It would also be open to developing 3D games for mobile devices, he said, predicting consumers would like to see 3D titles on their smartphones and tablets. Halfbrick’s Jetpack Joyride reached the 13 million download mark since becoming a free-to-play title for iOS devices, it said. Halfbrick will release next month the largest content update for the game to date, it said. The game initially cost 99 cents when it launched in September, but the company decided to “experiment” with free-to-play starting in late December because “free gets a lot more downloads,” Larsen said. Halfbrick hopes to expand the game to other platforms, but hasn’t decided which ones, he said. The company will “probably” try free-to-play with other titles, but has no immediate plans, he said. Its “flagship” game remains Fruit Ninja, which has been downloaded more than 120 million times across platforms including iOS and Android since launching in April 2010, he said. The Android market is “exploding,” Larsen said, but not as many consumers pay to download games for that platform as iOS. There’s “a lot of potential” for Android with free-to-play and freemium business models, he said. Other problems with Android include there being “a lot more clones” and “rip-off” apps and the need to develop titles that will work on multiple devices from different manufacturers when making a game for it, he said. Halfbrick also sees “a lot of potential” with Windows Phone, in part because of the ability to leverage the large Xbox Live gamer base, he said. The company has 55 employees, including about two people at a new office it’s readying in Sydney, he said. Halfbrick is “in the process of hiring” more people to work at the new office, he said.

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Requests for game makers to start creating more socially relevant titles with stronger stories are “bullshit,” David Jaffe, founder of Eat Sleep Play, said Thursday. “If you've got something inside of you that’s so powerful -- like a story you've got to express or a narrative you have to share or a philosophy about man’s place in the universe that you want to get it out to the world, why in the fuck … would you choose the medium that [has] historically continually been the worst medium” to do that? Why not write a movie or write a book instead, the ex-Sony game developer asked. If developers “play to the strengths of the medium,” the industry will “make much better games and we'll make players a lot happier,” he said.