Recession or Transition?

On paper, 2009 was a tough year for the games industry. Looking at the raw figures now emerging from North America, Japan and Europe, the usual story of winners and losers is supplanted by a tale of general decline. It's by no means a dramatic setback - in many territories, 2009 is comfortably the second biggest year on record for industry turnover, surpassed only by 2008. However, it's a psychological blow to an industry which has enjoyed decades of largely uninterrupted growth, and which had crossed its fingers and hoped to weather the present economic storm without taking any serious damage.

Yet the apparent decline in the industry's fortunes raises other questions. We have all spent years either preaching about, or listening to sermons about, the rising importance of new markets and new business models. The games industry is more diverse than ever before, encompassing mobile phone developers and publishers, firms making a handsome living out of games on social networking sites, subscription revenue from MMOs and other such games, and even a wide variety of new distribution methods and revenue streams for old-style boxed games.

So where, in our assessment of 2009, are those companies? Naysayers roll their eyes and mock the idea that the games industry could grow through a recession this severe, but they base their figures entirely on sales of monolithic, boxed, physical products. Few of the world's number-crunching bodies factor any revenue from digital distribution sales into their figures - let alone more complex revenue like DLC, subscriptions, advertising sales or microtransactions.

Herein lies the rub. We simply don't know how much money the industry made last year. We know that boxed game sales declined slightly - partially due to lowering price points, which have knocked some of the value out of the market (a trend which needs to continue, somewhat painful though it may be in the short term), partially due to macroeconomic conditions and even, to some degree, due to a ludicrously weak Christmas line-up which saw many publishers pushing top products into 2010 to avoid releasing too close to Modern Warfare 2.

What we don't know, however, is what happened to all of the industry's other revenue. It's probably safe to say that many of those burgeoning sectors actually grew. On consoles, valuable, desirable DLC is becoming much more commonplace, while both PS3 and Xbox 360 had a fantastic year from the perspective of Arcade / PSN releases. Music games, too, drive ever-larger volumes of track sales through their respective online services as their installed bases continue to grow (it's quite telling that Rock Band has been sold out at many major retailers across the UK over the Christmas and New Year period).

Meanwhile, the market for Facebook games has exploded, resulting in extraordinary valuations for some of the top companies involved, and surprisingly handsome revenue streams. The iPhone recently topped three billion apps downloaded, a huge proportion of them games; new companies and old alike are making fortunes on this platform, and other smartphone platforms are now opening up to games. In the subscription space, World of Warcraft powered ahead, as usual, but new products launched and found their niches, or continued to enjoy steady growth in the shadow of Blizzard's colossus.

All of that is even before we begin to consider what happened to "full price" game distribution. On the PC, Steam was utterly ubiquitous this year, capping off the year with a series of sales which drove massive hype for the service and almost certainly generated vast revenues, taking advantage of the limitless back catalogue stock of an online distribution service. Other services, too, enjoyed a healthy 2009 - while on the 360, Microsoft launched a Games on Demand service selling fully featured retail games digitally (albeit at controversially high price points, which has probably limited growth severely), a move which Sony also made with its PSP titles and even with selected PS3 games.

In other words, if you were a gamer, 2009 was a year in which a smaller percentage than ever of your videogames spend went through the tills of retailers. Even as online retailers continued to squeeze high street stores, and supermarkets weighed in to put the squeeze on both, the reality was that gamers had more ways than ever before to spend their money.

Paying too much attention to retail figures in our assessment of the health of the market is a risky business, as a result. More than ever before, there are many companies in the games ecosystem who have never manufactured or sold a physical product, and whose entire existence is ignored by NPD, GfK and all of the other data collection firms. Giant firms like EA are starting to see big percentages of their revenue coming in from online-only transactions, and this, equally, is not included in the figures we pore over.

This isn't a "flaw" with the data firms, as such - they exist to track the retail market - but it's a major flaw in the thinking of any industry analyst or commentator who accepts NPD or GfK figures at face value and declares 2009 to be a year of decline without a single caveat. The reality is that we cannot know that.

Certainly, boxed sales declined, probably only temporarily - but were they cannibalised by emerging markets? I know that speaking personally, I probably spent less on boxed games last year because I had vastly more entertainment content available to me through digital channels. This is an anecdote, not data, but I doubt that I'm the only consumer on Earth who experienced this. There's a real possibility that the games market as a whole actually grew in 2009, but the boxed games market - which we can measure - was perhaps even nibbled around the edges by emerging business models - which we cannot, as yet. This would be a clear sign of an industry in the early stages of a transition much more dramatic than any hardware generation transition could ever be.

What this means, in real terms, is that publishers and developers alike should not be so quick to blame recession for any present woes. Admittedly, blaming recession for making cuts that you'd planned to make anyway is a centuries-old tradition, and one which has been in full swing during the present economic downturn, so that's unlikely to stop any time soon. However, companies need to look more closely at what has actually happened to their revenues in the past 12 months. Have your consumers really started watching their wallets more carefully and buying fewer games? Or have they all discovered that those idle leisure moments can happily, cheaply be filled from Xbox Live Arcade, Steam, an MMO subscription, a package of DLC for a three-month-old game, a jaunt to Facebook for a bit of Farmville - or even a quick download from the iPhone App Store?

Moreover, if the latter is the case, what are you going to do about it in 2010? If, as I suspect, the recession has disguised the beginnings of a fundamental shift in game consumer behaviour, then the answer to that question seems likely to be one which determines the fate of many games companies in the coming years.