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The future of the games industry? It’s in three parts

By on October 13, 2010

I spend a lot of time talking to people about my view on the future of the games industry. I keep talking about a blog post that I must write to explain how I think the industry is going to coalesce around three totally different businesses. This is that blog post.

Blockbuster studios – or the big get bigger

The future of the blockbuster game is bright. Every piece of evidence I see suggests that big games are getting bigger (see the endless stream of “biggest first week sales ever” from breathless games PRs.)

These games are sucking up budgets, investor attention, gamer time and media column inches.

The problem is that there are ever fewer of them.

Modern Warfare 2 cost $50 million to make. It costs a further $150 million to manufacture, distribute and market at launch. Very few companies can afford to take $2o0 million bets, still less to build the portfolio of games that are the only defence against the hit driven nature of blockbuster games.

Meanwhile, gamers are abandoning the mid-tier games. Those games are just not doing the units to justify the gamble, and are falling by the wayside.

The closest analogy I can get to is the death of the B-movie: when television came along, making audiovisual content available in the home, shlocky, sub-par movies couldn’t draw the crowds. Blockbuster movies survived, even thrived. B-movies collapsed under pressure from soap operas on the television.

For the games industry, Red Dead Redemption is the blockbuster movie; Farmville is the soap opera. Games on Facebook, iPhone, PSN, XBLA and the web are drawing user’s time and money. Only the very biggest titles will survive.

This change rewards the huge companies and penalises the medium-sized. Activision will be a dominant player in the blockbuster space. Probably EA too. Disney and Warner. There aren’t very many more spaces left on the global stage (generally all media business consolidate to 5-7 major players). Ubisoft? Take Two? Square Enix? THQ? Zenimax?

if you are not good at making blockbusters – and don’t have the financial strength to back at least half a dozen of them every year – you are going to get squeezed out. You will need every game to be a hit, not just enough of the games in your portfolio. You won’t be able to afford to back the ones you really believe in with marketing and distribution budgets that are 4x the development cost. You will always be one game away from bankruptcy.

It won’t be pretty.

Persistent online games, or the television of gaming

My farm (glows with pride)

The second category of winners will be large persistent worlds.

And no, I don’t mean World of Warcraft (although they do fit the category).

I mean Zynga and Playfish, I mean Bigpoint and Gameforge. I mean Mind Candy and Jagex. I mean ngMoco and Booyah.

These are all companies who have created a whole new approach to gaming. They don’t focus on launches or release dates. The launch is the start of ongoing development cycle, fine-tuned by customer feedback driven by direct data showing what users like and dislike.

Before you throw your hands up in disgust at this prospect, stop. There is no reason these games have to be crap.

(Personally, I think many of them are great already, but I realise many core gamers don’t).

We are currently at a very early stage in the development of these businesses. It’s like you are at the beginning of the emergence of television and all that’s been invented is soap operas and daytime television. The immersive stories and entertainment that make up the best of television was not invented over night – and nor will the social games industry.

So the second category of winners will be companies who know how to launch cheaply (but then spend lots of money on improving the game over its lifetime), to attract and retain audiences, to offer them compelling reasons to come back regularly and spend money.

And they won’t be subscription client-based MMOs.

3. Anyone who wants to make a game

The future for game makers is very, very bright. New technologies like Unity make coding easier. Distribution channels like the web, XBLIG, Steam, the App Store and the Android Market mean that it is easier than ever before to publish a game.

That’s not to say it’s easy. Just that a publisher is no longer a requirement.

That throws the door wide open for anyone with creativity, discipline and determination to make money from making games.

Small businesses, ranging from a single jack-of-all-trades to, maybe, 50 people, will be able to build strong sustainable businesses in this new world.

They won’t make blockbuster games. They won’t be the next Zynga.

But they might make the next Joe Danger or Darwinia, an Angry Birds or a Travian. These will be content creators, taking control of their own destiny and making a decent living (although perhaps not their fortunes) making games they want to make, and enough of us want to play.

That wasn’t possible in the days of dominant publishers.

Of course, every successful game from this third-way takes away from the money and time available for blockbuster games and persistent online games. Which makes the success of these “indies” one of the biggest challenges to the power of an Activision or a Zynga.

In the end, the games industry will polarise into these three segments (can you polarise into three?):

  • Blockbuster games
  • Persistent social games
  • Independent games

I no longer believe that the era of the blockbuster game is over; I believe that “film”-style games will live in harmony with “television-“style games and “independent” games.

But I do believe that the shakeout as we get there will be ugly.

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
  • http://twitter.com/Ian_Wilson_ Ian Wilson

    Nicholas, I would agree with you that there is a shake out about to happen (already happening?) but see the focus of that shake out as costs associated with developing big games, which, when compared to social games, is in large part the cost of developing sufficient high quality content for those games.

    The assumption in this post is that is an element that does not change, but does this not also present an opportunity for studios who wish to avoid a slow death to focus on ways to drastically reduce content creation costs through outsourcing or by using procedurally generated content? Bringing costs into line and using social type marketing could be the model for the “third way”.

  • Nick McCrea

    I’d agree with that almost wholeheartedly, with some minor caveats:

    – I think the surviving major AAA publishers will achieve the scale that allows them to survive the occasional blockbuster bomb, though the majority of their output must win big. The major movie studios left today can survive the occasional lackluster release (Warner Bros survived Pluto Nash, for instance. More’s the pity).

    - Not sure where this analysis leaves the console-based family gaming trend, Wii Fit, whatever Kinect hits come along, party games, Sing Star and the like? I suppose they fit most neatly into the ‘television of gaming’ role, though they’re not online persistant games.

    - There’s probably room for another class of ‘super independents’ who don’t fit neatly into this model. I’m of thinking Valve and Bungie specifically. Valve obviously have a special place as the gatekeepers of the foremost PC digital distribution platform, which I can’t see disappearing anytime soon. Bungie are a one-franchise pony, but are emblematic of a certain kind of wild-card super-developer I think we’ll see crop up from time to time. Usually these studios will be acquired, obviously.

  • http://twitter.com/StruManchu Struan Robertson

    That’s a good point but to me that relates more to the bigger publishers and developers increasing their profit margins rather than something that affects the general argument of games moving towards the blockbuster/TV model.

    In the case of games, where you can’t generally raise the entry bar and lock down a specific market the way you can if you’re, say Walmart, the only way you can increase value in your business is by streamlining process. Outsourcing is a great way of doing this but I don’t see it saving the mid-sized studios trying to create the blockbusters.

  • http://www.gamesbrief.com Nicholas Lovell

    I’m sure I agree with you, Ian. The development costs are a tiny fraction of the cost of launching a blockbuster game.
    Modern Warfare cost over $200 million to launch, including development, production, distribution, marketing and the Sony/Microsoft royalty.
    If you halved the development budget, it would cost $175 million. That’s not enough to make a dent.
    I acknowledge that not all games are as big as Modern Warfare 2, but if you plan to launch with one million units in shops, that’s $7 million to Sony and Microsoft before you do anything else.
    In short, the problem with blockbusters is that they have to be fully developed, marketed and distributed BEFORE launch. Persistent games can spend <10% of that budget before launch, and if they don’t cut the mustard, they are killed.

  • http://www.gamesbrief.com Nicholas Lovell

    I agree with your points.
    - AAA publishers will surived some bombs. It’s the midsizes that will be in trouble (what would happen to Take Two if GTA V tanked, for example).
    - Erm, good question. Actually, Singstar and Rock Band are basically social games – low initial production costs (albeit expensive launch marketing), then virtual goods/microtransactions in the sale of tracks. So maybe they will mutate into “TV games on the console”

    - Re Bungie/Valve they mainly use publishers to take the risk (not exclusively, but still). The number of studios who successful 100% self-invest in and publish a single game will be very low. More likely is that they will be very successful, outsourced, premium developers, working exclusively for one of 5-7 publishers.

  • http://tomchatfield.blogspot.com Tom Chatfield

    I see an interesting partial analogy here with books, of all things, here: the most vigorous areas are the very top and the bottom—blockbusters, and nimble indie hits. Of course, the games market is growing its audience hugely, so far from a perfect parallel.

    But I wonder about a category you don’t touch on—quasi-gaming—by which I mean that borderline area of “fun” or “gamed” experiences outside of a traditional gaming setting—including, yes, education, training, marketing, awareness-raising, location-based social services, and all that—lots of games industry skills going to inform developments in those areas, and perhaps pollinate back ideas into the mainstream industry, even if a lot of what’s going on in this area is currently pretty dire…

  • http://game-linchpin.com Simeon Pashley

    From experience on the blockbuster side there comes a point where the amount you spend on a game becomes irrelevant as you have to go big or go home. There’s a tipping point where you’ve spent so much money that you either write it off or you’ve just got to finish it regardless and market the game to death to stand any chance of recouping your costs.
    I’ve seen a number investments in businesses I’ve worked in write off of up to £20m because there sales projections were so low that no amount of marketing was going to get them their money back.

    There’s obviously very few businesses that can adopt this model.

    In a similar way, there’s a correlation between quality and sales and that minimum quality threshold is rising all of the time. So, if you’re not realistically aiming for 85% or above meta-critics then you’re unlikely to get enough sales to break-even. If you’re tracking slightly shy of that quality level then it’s almost always investing until you get to that point.

    Moving on, I wouldn’t call Farmville a “large persistent worlds” simply because the world is your farm, not a large world.

    While it’s true that everyone can try to make games, it is *very* hard to break out of the chaotic world at the bottom end of ‘community’ games where there are thousands of poor quality half-finished games. Sadly, these pools are being largely ignored by players as all of the games there are perceived to be of the same quality. The difference seems to be marketing and being savvy enough to embrace the world beyond just making the game.
    There aren’t many people who understand this key point and what quality games are but those that do will shine.

    I’d disagree with your point ” every successful game from this third-way takes away from the money and time available for blockbuster games and persistent online games” and similar points made elsewhere.
    If you understand your audience you understand that these aren’t mutually exclusive, people don’t spend time and money on one game type *or* the other, they don’t typically have a fixed time & money budget that they spend via the different platforms. The people spending money on Facebook points aren’t typically now *not* buying console games, in general it’s much more likely that they didn’t buy console games anyway.

    I think there’s an emerging gap in project sizes between those made by 10-15 small teams and the 80+ epic teams, the projects made by those inbetween seem to be too big to be seen as ‘indie’ and too small to be seen as ‘AAA’. I’ve covered a fair few of these points on my blog such as: Polarising Size Of Developers – http://game-linchpin.com/2010/06/polarising-size-developers.html

    Maybe I’m getting old but these all seems to echo of the late 80s / early 90s where the games industry was predominantly owned by indie developers and self-publishing titles. It migrated to a position where the growing studios needed to reach a larger and larger audience to keep their businesses going and they brought in what was to become publishers. To some extent they got greedy and imploded, there are few exceptions to this and the most sensible of the lot was Team 17 who still exist today in what appears to be a similar form to how it was all those years ago and is now going back to self-publishing and shunning larger publishers.

    I believe that if you’re going to start your own studio making your own games and self-publishing them that you really should have done it 2yrs ago but it’s not too late but it soon will be as the current batch grow.

  • http://www.gamesbrief.com Nicholas Lovell

    I agree, but I don’t think they alter my structure. Most will fit in the “indie” category, taking time and dollars from “real” games. Some will be in persistent, a very few might be blockbusters.

    In other words, I think they will exist, but financially, are likely to fit into one of these three categories.

  • http://www.gamesbrief.com Nicholas Lovell

    Glad you’re still reading, Simeon.

    I think Farmville is a large, persistent world. It’s all about the comma placement. Semantics aside, it’s persistent, and lots of people play it with a modicum of sociability. If I had to bet, I would place money on more good businesses existing in the model than the World of Warcraft model.

    I do disagree with you on the “time and money from consoles” argument. Not because most players overlap; like you, I think that many players on Facebook and iPhone never owned a console.

    But if a hardcore gamer buys just *one* fewer game a year because he’s playing Angry Birds too much, or a mother decides against a Wii because she’s got Facebook or I choose to play iPhone games over the next Dragon Age, the games companies lose out.

    And this is terrible because the fixed costs of a game are so high. It only takes a few hundred thousand people not to buy a game for it to move from very profitable to heavily loss-making.

    The AAA blockbuster will not be killed by a mass migration to the new models: only a small shift will be enough to cause major headaches and possible bankruptcies

  • Anonymous

    Nick:

    This is rather uncanny… this Wednesday coming I’m posting an analysis of the new shape of the games industry which is eerily akin to what you present here. I wrote it on Tuesday, which has to have been when you were writing this.

    In my piece, I divide the marketplace into the Blockbuster Market, the Specialist Market and the Diversions Market, but the underlying observations between us are very close. I encourage you to check it out next week (if you don’t already get the ihobo.com content via rss or some similar means).

    Here’s the link, but remember it won’t go live until Wednesday 20th October:
    http://blog.ihobo.com/2010/10/blockbusters-diversions-the-new-digital-games-market.html

    All the best!

    Chris.

  • http://www.gamesbrief.com Nicholas Lovell

    Great minds, Chris. Great minds.

  • Allan

    Regarding the “Blockbuster studios” – I’m not so sure about “the big get bigger”

    My take would be that there’s a divergence among majors that’s seeing 3 different sectors emerge within that, each with their own core strength – major games studios where the game *is* the IP (Activision, EA, Ubisoft, Namco, Square), media extensions exploiting the value of owned IP (Warner, Disney) and medium scale purists (Take 2, Zenimax/Bethesda, Capcom)

    I’d expect to see consolidation – I’m not sure on where Sega or THQ exist on a long term basis for example – but I think it will lead to a raft of “mass market” players and a second independent tier that take up the “indie” space occupied by Miramax or HBO (ignoring their ultimate ownership, which may undermine my entire point)

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