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The Death of the Console, a book proposal – part 2 of 4

By on December 18, 2009

This is the SECOND part of the first chapter of a book proposal I sent out earlier this year (You may want to read the first part first). No publisher offered an advance against it, mainly because they felt it was too niche.

I liked it, and I wanted to publish it before it got too out of date. So here is. If you like it, please comment, retweet or share it on Facebook (or forward it to any publisher friends that you have)

 

Fitzwilliam was established as a Cambridge college in 1966, although it had been a non-collegiate body since 1869. Located in the north-west of the city, and away from the heart of the university, it doesn’t conform to the standard image of a Cambridge College. Its buildings are more multi-storey car park than mediaeval quadrangle.

The college’s motto is Ex antiquis et novissimis optima, Latin for “the best of old and new”. And Fitzwilliam alumnus Andrew Gower has exemplified that motto as he ignored the received wisdom of the games industry to create the phenomenon that is RuneScape.

In 1998, Gower was a computer science undergraduate at Fitzwilliam. A fan of Dungeons & Dragons since the age of seven, he initially played some of the text-based Multi-User Dungeon (MUD) games available at the University. [9] He started developing his own game, first as a text-based game and then by adding graphics. He had one key requirement: he wanted to be able to play when he was at college, and also when he was at his parent’s house in Nottingham.

To achieve his goal, he shied away from the complex, graphics-intensive, large programs that traditional games companies made and opted to develop RuneScape in Java, a relatively simple programming language optimised for web applications. The graphics would be rendered in an Internet browser, which had many advantages: It did not require an expensive proprietary console; it could be played on a standard Internet browser from any computer with an Internet connection; there were no downloads, no installations and; initially at least, it was totally free.

The game began as a hobby. Gower started from scratch several times and eventually released a beta version of the game in January 2001. By the end of the year, over 1 million people had registered to play the game.[10] (The company subsequently shifted its policy on “registered users” to only count people who had played the game in the last two weeks.) Gower formed a new company, Jagex, to commercialise his game.

Initially funded by advertising, the company ran into trouble when the dot com bubble burst. As the advertising dried up, Gower found he could no longer afford to run the servers for his players. He decided to offer a subscription service. Gamers could still play for free, but they could choose to pay the low figure of around $5 per month for exclusive content and quests. He calculated that if 5,000 people subscribed, he could afford to keep running the business. Two thousand people subscribed in the first hour. It took less than a week to reach his target.

By October 2005, when Insight Venture Partners invested $30 million in Jagex valuing the company at over $100 million, the company had 500,000 paying subscribers, and 3.5 million registered users.[11] 18 months later, the company passed the 1 million subscriber mark.[12] RuneScape, with its lo-fi graphics, flexible subscription system and low prices, generates more revenue than almost any other massively multiplayer online game in the world behind only World of Warcraft and Club Penguin.[13]

Unlike World of Warcraft, which required an upfront investment of tens of millions of dollars by publisher Vivendi, RuneScape was built organically and profitably. Yet it is a low-tech game, using simple graphics that are a pale reflection of the games that are available on a PC or console. So far, the poor quality of the graphics seems to be showing no sign of dissuading gamers from signing up.

* * *

The success of the Wii and Runescape are initial signs that consumer desire for expensive, technologically advanced consoles is waning. Perhaps more accurately, as the market of gamers expands into new demographics – female, younger, older – the nature of the games they want to play will have to evolve. And this will threaten the business model that has been the cornerstone of the console business since the Great Video Game Crash of 1983.

Although there were many contributory factors to the crash, one cause was the glut of mediocre games that flooded the market, leading to consumer disillusionment and massive overstocks of titles that sold poorly. Nintendo President Hiroshi Yamauchi, overseeing the launch of the Nintendo Entertainment System (NES) in the US and Europe in 1985, was determined to avoid this happening to his console and he implemented a system that has defined the market ever since.

Yamauchi protected his console with a security chip that locked out unauthorised cartridges.[14] In order to make a game for the NES, a publisher had to seek Nintendo’s approval for the game and pay Nintendo to manufacturer the cartridges in advance. Nintendo was a massive beneficiary of this deal: it was the final arbiter of quality; it knew exactly what games were going to be published for the NES; and it got paid upfront for the manufacturer of the cartridge. If the game did not sell as much as the publisher predicted, the publisher was left with all the risk: Nintendo had already been paid.

Sega, Sony and Microsoft all adopted this security model and over time developed it into a variant of the razor blade business model originally invented by King Gillette. In place of giving away razors and selling the blades, console manufacturers subsidise the hardware to lock gamers into a particular console and recouping the losses by charging publishers up to £7 as a manufacturing and licensing royalty for each game sold.[15]

It quickly became evident that consumers would only buy consoles that had high quality software available for it. The hardware manufacturers realised that it would be a near-impossible task to finance, develop, market and distribute sufficient AAA (pronounced Triple-A) games to persuade gamers to buy an Xbox or a PlayStation without help from external publishers (known as “third party publishers” or “third parties”). So they have built close working relationships with third parties, companies that have become household names to gamers such as Electronic Arts, Activision and Eidos.

The publishers are responsible for the majority of titles available on the consoles. They commission games or develop them in-house, they provide the finance and then undertake the critical sales, marketing and distribution functions. For any console manufacturer, it is vital to get these third parties on board. So when a new console is announced, the manufacturers promise massive marketing support, make high predictions of user take-up and even offer cash inducements to make certain games platform-exclusive. For example, Microsoft paid Rockstar Games $50 million to make the downloadable content for Grand Theft Auto IV an Xbox 360 exclusive.[16]

As each new generation of hardware comes around, publishers have to determine which platforms are likely to win, and allocate development resources to the likely winners. These decisions have to be taken some time in advance since game development, especially on a new platform, takes between eighteen months and two years. And making a wrong judgement can be costly. John Riccitiello, Chief Executive of Electronic Arts, admitted that EA backed “the wrong horse” by betting on the PlayStation 3 and the Xbox 360 rather than the Wii.[17] This was not a minor mistake: Electronic Arts net income fell from $236 million in their 2006 financial year to $76 million in 2007, partially as a result of this misjudgement.[18]

The relationship between console manufacturers and third party publishers is symbiotic and occasionally fractious. It involves a delicate balancing act for the console manufacturers in keeping the publishers financially incentivised to develop for their consoles while also extracting sufficient revenue from them to subsidise the loss-leading hardware. And it is further complicated by the fact that at least two of the console manufacturers are playing a far bigger game.


Read the rest of the chapter 1, 2, 3, 4


[9] Behind RuneScape’s 1 million subscriber success, GamaSutra (http://www.gamasutra.com/php-bin/news_index.php?story=13769)

[10] Jagex Corporate website (http://www.jagex.com/corporate/About/history.ws)

[11] Jagex Press Release, 25 October 2005 (http://www.redorbit.com/news/technology/283376/jagex_ltd_secures_investment_from_insight_venture_partners/)

[12] IP Profile: RuneScape, Develop (http://www.developmag.com/interviews/200/IP-profile-RuneScape)

[13] Subscription MMOGs: Life beyond World of Warcraft, Screen Digest (http://www.screendigest.com/reports/09subscriptionmmogs/pdf/09SubscriptionMMOGs-pdf/view.html)

[14] The Ultimate History of Video Games, Steven L. Kent (Three Rivers Press, 2001) p308

[15] Games Publishing, Gamesinvestor.com (http://www.gamesinvestor.com/Research/Business_models/Publishing/publishing.htm)

[16] Take Two Investor Conference Call, Q&A, Quarter ended April 30 2007 (http://seekingalpha.com/article/38017-take-two-f2q07-qtr-end-4-30-07-earnings-call-transcript)

[17] John Riccitiello, Electronic Arts 2006 Annual Stockholders Meeting, July 26 2007

[18] Electronic Arts 10K 2007, http ://investor.ea.com/secfiling.cfm?filingID=950134-07-12528)

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: thecurveonline.com
  • Phaethon

    I really think this is a very good and informative outlook on games history and future. I would note that although there is a trend of users valuing gameplay over technology (like you used the example of Runescape and the Wii) that there are still those who desire to pay the premium for high performance and graphically advanced games. Still, they're spread apart. One group want the premium for $300-400, whereas the other is willing spend upwards of thousands of dollars (PC gamers).

    Still, it's interesting just how many people will watch Youtube more than they view their expensive bigscreen TVs. I don't think that the demand for low graphics, high fun games will outmatch our desire to see games take on the definitive entertainment form. Although I will play the crap out of Peggle on my iPod Touch I will still shell out a ridiculous amount of money for Crysis 2. And then there will always be the occassionaly Halo, GTA or Modern Warfare to remind us just how much staying power consoles have.