G.o.t.m.o: VI – Impromptu NYU visit

Today I visited NYU Stern for a Media Entertainment Association panel called Business Models within the Video Games Industry and witnessed some interesting tidbits of game industry insight. What follows is a reasonably coherent synopsis based on my notes. Keywords: digital distribution, in-game advertising, valuing IP, and where to invest $5 million in the game industry.

The big topic of the day seemed to be digital distribution and its effect on the traditional retail market. Sure enough game developers and publishers are held in a chokehold by Wal*Mart and Best Buy, so developers and publishers are all trying to avoid competition with large incumbent retailers. Currently, none of it seems too threatening. Robert Stevenson (ATARI) disclosed that Neverwinter Nights 2 sold about 5% of its total online and Edward Urban (Bear Stearns) cited an even lower number: a whopping 1% of Activision’s 2006 content is downloadable. The absence of critical mass “this early on in the console-cycle,” says Urban, is what is preventing some of these things to flourish just yet. Nonetheless, if this does grow into something more significant it may have serious implications for a company like GameStop which depends on the second-hand market for 30% of its operating revenue. The current disparity between the various models presented by Valve (Steam), Atari, and IGN and other pay-per-play ideas suggests that we’re pretty far from unifying this business. Although similar to the model used by “utility software” it will not be until 2009-10 before this is going to be a serious market. It left moderator Wade Tinney wondering if Wal*Mart would become gatekeeper on digital distribution side. Brrrr. [For more on this, read the plight of DVD Empire here.]

Some more tangible numbers came from the discussion on in-game advertising. Although certain requirements would still need to be met, such as the dynamic advertising environment and a rate-card, there seems to be plenty of opportunity. According to Urban half (yes, 50%) of all Activision titles published last year would be viable candidates for in-game advertising. Need for Speed, quoted as being “made for advertising,” counts 180 billboards. While I’m skeptical of the numbers coming from Massive and Double-Fusion, allegedly in-game advertising could bring in $1-$2 per unit, which should go almost entirely to the bottom-line. That sounds like a lot of money. Fortunately Halper tempered the enthusiasm by pointing out that traditional practices such as product placements are incremental, meaning that people have to get to a certain part in the game to see it, rendering it much less predictable. Ultimately, the question comes down to whether or not you’ll be willing to sit through some commercials in order to play your game for free. Seems fair, but the prospect of video games becoming more like TV, as Halper predicted, is still unsettling. Nonetheless, you can see the advantages of his ‘episodic’ games model. Apparently the first couple of episodes ran four hours (yes, he called them ‘pilots’) which proved too long for Kuma’s audience. So they reduced it to only one hour of game play.

Next, the online games market. Everyone agreed that there is no real retail in Korea nor China, at least not anywhere similar to that in the U.S. Not surprisingly, a high broadband penetration pretty much poises a subscription model as the only logical step, followed by a common system of micro-transactions. Urban illustrated that in addition to the lower development costs compared a top tier console game, a game like Fifa Online generated about 1 million micro-transactions (I’m hating the word already) at roughly $7.50 a pop. Not too shabby. But what really struck me was the notion that piracy motivates a centralization of servers.

On the topic of IP there were mostly obvious comments, with the exception of Kuma’s focus on television properties. Seems like the History channel has been selling off its TV shows in attempt to make us see their brand in new ways. Hm. I suppose it’s no surprise considering how many eyeballs it lost to video games that TV would just start selling parts of itself. This makes it easier for the game industry too, as building a new franchise costs a lot of development and marketing dollars, according to Stevenson. In valuing IP, Urban acknowledged that stocks react to IP. In terms of forecasting, the 12 month development schedule multiplied by expected unit sales gives a decent indication for recurrent franchises. For new franchises, however, Urban looks at comparables. Seems easy enough. At least it explains why EA dropped $1.2 billion (according to Urban) to buy the ESPN and NFL licenses when it started to feel the heat from TTWO. Anyway, modelling episodic games after TV properties makes sense on some level. In addition to the ‘pilot’ mentioned earlier, it aligns nicely with TV habits (“You’ve seen the shown the show, now play the game on www…”). Halper also mentioned that by making the game episodes shorter and simplifying game play, this model could pull in more audience share.

Lastly, Tinney lobbed a curve ball asking where in the game industry each of the panelists would invest $5 million. I’ll save you the myopia from some (“I’d invest in my own company” …yawn) and cut to the chase.
Sosnik: Independent development. Because there’s a lot of consolidation going on both on the publishers and developers side, Sosnik expects new opportunities to come from a new dynamic. He referred to console launches (incl. portables) and online distribution as an important driver behind new game design, which would come for a large part from independent development.
Halper: Online distribution. The important long-term question in Halper’s mind is who’s going to control access to consumers? Listing as more likely candidates Wal*Mart, Microsoft, and Comcast. He tentatively pointed at Comcast to be a likely winner.
Stevenson: YouTube of video games. He reasons that the future of video games may follow that of television. In an effort to bring developers together, someone might eventually create a platform to this end. He suggested Google.
Urban: Mobile gaming + outsourcing. Urban is expecting the mobile gaming sector to keep growing at least until 2010, creating opportunities to extend franchises and so on. Also, particularly for start ups, outsourcing will become a large part of the business model. Urban puts the current number around 20% and sees this grow, despite companies’ “hesitation to send their engine abroad” and “an increase in organizational cost.”

During the Q&A, Sosnik made an interesting point regarding eBay’s recent announcement it would shut down RMTs. Sony’s EQ haa its own marketplace, and since people always seem to find a way to trade gold coins and magic items, he expects companies to start their own marketplaces, running parallel to the game.

This more or less sums it up. A recorded version of this panel should also be available on YouTube (where else) under Heavy Melody’s channel.

[update] Here‘s more footage on YT.

Your comment

About Waffler