Michael Schmalz@mpschmalz

November 17, 2011

Challenges and Opportunities in the Videogame Industry, a

Console Developers Diary

My Goals for this Presentation

• Examine the business of making large budget videogame, past

present and future.

• Review the environment in the game industry and some of the

decisions that we have made these past few years in response

• Discuss the current state of the game industry. What are the

pressures and how is it evolving in response.

• Examine issues around large budget content creation,

innovation and creativity

• Review some trends we can expect to see in the upcoming

years in the high end videogame marketplace.

Six Generations of Consoles& Razor & Blades Marketing

Source: The Economist

Game Economics – Retail Console Games

Development cost of a console game $15-$20 million.

Retail Cost $60 per unit (full price)

Less…

Retail Cost $8

Platform Fee $8

Less CoGS $5

Marketing and other fees $9

Net Revenue $30

Publisher (75%) – $22.50

Developer (25%) - $7.50

Game Economics- Console DLC

Downloadable Content on XBLA, PSN and PC portals.

Development Cost – variable but say $3-4 million

Marketing Costs - ?

Cost $10.00Fees $0Net Sales $10.00Platform Fee 30% $3.00Developer revenue $7.00

Economics of Used Console Games

• Consumer buys new game $60.00/unit• Consumer Sells new game back to retailer $35.00/unit• Retail Sells used game $55.00/unit• Retailer profit $20.00/unit• Publisher revenue $0/unit• Developer revenue $0/unit• Final Cost to consumer $25.00/unit

Timeline 2003-2004

• Console software sales surpass the PC for the first time

• Consoles (Xbox, PS2) are now the #1 platform for interactive entertainment.

• Console development costs $3M-$6M

• Break even point 300,000 unit sales• Console industry is

healthy/profitable/expanding• Industry is making about 400-500

games a year in North America• Digital Extremes begins exploring

different financing options

Timeline 2004-2005

• Next Generation Consoles announced and introduced

• Development costs $15M (min.)

• Team size triples• Crisis ensues for skilled

developers• Break even point required

>1M units.• How many games hit that

mark?

Timeline 2006-2007

• Console sales for Xbox360/PS3 very slow

due to high introduction costs

• Next Gen game are pretty awesome,

though

• PS3 is still losing +$100 unit at introduction

• Hiring skilled developers still very tough

• Videogame Industry continues to grow in

sales and in workforce

• Electronic Art Stock Price $60/share

Timeline 2008-Present

• Global financial crisis• Overall sales still holding or increasing in most genres – Video game

industry dubbed as recession-proof.• Many projects cancelled, studios closed, publishers downsized• Analysts finally realize the game industry has not figured out how to make

money in this console generation• Labor market softens, industry sheds or repurposes 20% of its workforce• EA stock price drops to $15/share and has stayed flat.• Social media and casual games become key growth areas and major

unknowns• New business models emerge: subscription, free to play, micro

transactions, cloud computing solutions.

Current Challenges

• Struggle against piracy• The pressure of the rental and

resale market• New devices and platforms.

Tablets, smart phones, mobile devices, set top boxes…

• Confusion in the digital marketplace. 300K apps in the Apple Apps store.

• How do you choose? Or more importantly, how do you invest in this marketplace and know great content will not be lost in the noise?

• Branded content rules, risk aversion discourages innovation in new content IP.

Crisis of Content

• The internet will continue to grow beyond most of our ability to

imagine in the next 20 years

• Most of the discussion currently is about 1) the platform or 2) the

delivery portals (which part of the internet are you going to?)

• These are global fights with companies like Apple, Google, RIM,

Microsoft (investment models exist)

• Very little attention currently being paid to the “Content Creators”

• North American investors are not prepared to either understand

this marketplace or invest in it.

Revising the Long Tail and Videogames and Content

• How are we going to receive new content in the digital age – what will it look like

• Go back to 2006• Long tail theory is about economics of abundance in the digital age.• Managing large digital inventories, music, TV, movies exploiting the

efficiencies and connectivity of the internet.• “Long tails exist everywhere”• Satisfying latent demand for existing content• But should you invest in the long tail? Anita Elberse a Harvard Researcher

asked the right question.

Cross Media Content

• The migration of intellectual property across different media

• This is the application of the long tail

• Think of this media trend in music, motion pictures

• Even today, I hear investors advise developers “develop for all platforms”

• Music has grown by selling its content across media – LP, cassette, 8 track, CD, Internet.

• Impacts diversity and creativity

Now, Its also the migration of traditional brands and IP over social and digital networks.

Transmedia Content

• Concept first coined by Henry Jenkins.• The use of multiple, complementary media to tell a story• Has the potential to create greater diversity in story telling and media

experience• Game consoles provide a format for immersive experiences- at home,

large screen, several hours• Mobile devices provide a format for “quick distractions”- anyway you go,

short duration, small screens.• Computers, laptops, tablets all bring different platform characteristics• “transmedia has the potential to make characters more compelling and

create distinctive understanding and affect”

New Business Models

• We desperately need new business models!

• From Wired – The future of (digital media) business is $0.00-

Freeware and “free to play”

• Software as a service or a subscription – World of Warcraft, now

proposing Call of Duty Elite

• Episodic games, smaller scoped game, different price points all via the

internet.

• Monetizing audiences (social media). What is the value of a tweet

when you have 1 million followers?

• Advertising – Google (targeted, non intrusive)

What can we Expect in console videogames?

• Heavy Monetization of existing hardware, software and content and the resulting crisis in content and creative constraints.

• New consoles will have to come soon.

• Increasing polarization between top tier and budget console games

• Increase in transmedia story telling.

• Intellectual Property leakage will continue to have significant impact on the way videogames are created, consumed and deployed.

Thank you for listening!

• Questions?