Money Games: Online, Mobile, China and More
Digi-Capital's Tim Merel on the fundamental shifts in games investment for 2011
Consolidation Curve for Videogames
Major Console Publishers Must Evolve to Survive
We don't agree with some who think that the major console publishers are dinosaurs, but we do believe that major console publishers must evolve to survive. We aren't saying that we expect one of them go belly up in the short term, but that the wind is blowing so hard against them that they have no choice but to change.
In that context, some of Satoru Iwata's observations at GDC 2011 were surprising. The challenges major publishers face continue to have well documented knock-on effects on the console independents, although some of the best still thrive.
Console game investment is accelerating, as average game development costs have grown (Xbox 360, PS3: $15-30 million, Wii: $5-7 million). Strong development project management is crucial, and marketing costs can equal development costs or more.
With retail, distribution and hardware royalties significant at 30-40 per cent of retail turnover, console publishers must generally sell 500,000-1,000,000 units just to break even (ex-overheads). I used to work with Ben Feder (retired as CEO of Take-Two in 2010) on the digital side of News Corporation in the US years ago, and when we caught up in New York last year he had just "sucked the oxygen out of the room" with the launch of Red Dead Redemption.
What I understood him to mean was that the console market today is a true blockbuster market, where the marketing scale around major launches leaves space for just one major product at a time. Given the Q4/Christmas sales bias in the console games market, that really restricts commercial opportunity even before you take into account the online/mobile games shift among consumers.
Console Games Are Hit-Driven, With Investment No Guarantee of Success
- A: Red Steel
- B: Crackdown
- C: Lost Planet
- D: Assassin's Creed
- E: Stranglehold
- F: Halo 3
- G: Final Fantasy IX
- H: Call of Duty: Modern Warfare 2
- I: Shenmue
- J: Grand Theft Auto IV
Franchises Selling Tens of Millions of Units Are Lower Risk
y-axis denotes units sales (millions)
However it is worth remembering that videogames rival Hollywood, with a total of $77 billion videogames (hardware $22 billion, software $55 billion) vs $85 billion film global revenue in 2009. So even though the console sector contracted last year, at up to $60 per game sold vs $10-20 per cinema ticket/DVD, it is easy to see that it remains a cash generative business.
We believe console games will remain flat to down this year, with growth hoped for from the next console hardware cycle in 2014-2016 (if it happens). Historically hardware cycles have driven the industry.