As we have talked about before, the video game industry is somewhat recession-proof and is one of the sectors that is still growing positively for 2009. Dean Takahashi for VentureBeat has written a nice piece about the top 12 trends in the video game industry. Here is the full article but below is our summary:
1. Game startup financings have slowed from last year. This should not come as a surprise in this recession, especially with March video game sales slowing. For 2009 year-to-date, game startup funding is around $126 Million for 25 companies. By comparison, in 2008 we saw $937 Million funding for 112 companies, up from $613 Million raised by 62 companies in 2007.
2. The broader game industry continues to expand, command more respect, and draw outsiders. According to PWC, the global game market will grow from $42 Billion in 2007 to $68 Billion in 2012. DFC Intelligence reports that online games will grow from $3 Billion in 2005 to $12 Billion in 2011. These statistics, along with the success of Activision Blizzard (ATVI)’s success in World of Warcraft, has opened the door to VC investment into these hit-based companies that either do well with a franchise title or completely burn out based on bad management and/or the release of a flop. The sole reason beyond the attractive business model and market trends is just that games are ever-expanding in all directions from technology, distribution, delivery, and content.
3. Competition is heating up and driving prices toward zero. This could pose as a long term issue, but the recession has really driven companies to think about free gameplay. Where does the revenue come in? A lot have adopted the Asian model free-to-play, but then build on top of that system a virtual currency and virtual goods economy to reap the benefits of gamer addiction and just irrational behavior.
4. Advertising in games has taken a hit. VCs believe the in-game ad market has “jumped the shark,” meaning it has already passed the peak of the “shark fin” and people who are going to benefit from this industry have already invested. While in-game ads may be suffering, other ad-based game businesses can still grow. Video-based wrapper ads are growing so much for Wild Tangent that the company posted 65%growth in its ad-based revenues in the first quarter.
5. Virtual goods are benefiting from the weakness in ads. We wrote about how profitable and scalabe virtual goods are through examples such as ChangYou, Facebook, Tencent and Zynga. This is indeed a growing and almost preferred business growth model in online gaming today.
6. Don’t believe too much of the hype about Chinese game companies taking over. As talked about several times, the Asian free-to-play model is the up-and-coming models that will revolutionize the game industry. From Shanda (SNDA) to Perfect World (PWRD), virtual goods provide high margins and also low costs (virtually zero!), but the reality is this: The revenues for Shanda are still only about 1/8 of Electronic Arts’ (ERTS). ChangYou (CYOU) raised $200 Million in one of the few IPOs in 2009, but the top 8 Chinese gaming companies still add up to only 2x that of Electronic Arts’ (ERTS) revenues. The Chinese companies are not yet in a position to come into the US market for a full take over, but the wave could happen sometime in the future.
7. Social gaming is spreading beyond the borders of game platforms. There are about 5,000 social games on Facebook and the reason that is so is the power of viral marketing. It is more fun to play games with your friends than along, period.
8. Creative destruction rules the game job environment. Despite all the cool game companies that have been born, ultimately the sales of console games and hardware will still remain king in the industry. Since mid 2008, roughly 12% of the gaming industry has been laid off. In the meantime, new jobs are created in gaming so you see a healthy creative destruction cycle taking place in this sector.
9. Apple and Nintendo are at war. Apple (AAPL) and Nintendo (NTOCY) have both approached gaming very differently. Apple is using an open platform to allow people, much like with Facebook platform, to develop any games they want. Apple clearly offers its consumers more choice in games, but iPhone developers may have a terrible time getting noticed on the iPhone and keeping hits alive for more than a couple of weeks. Nintendo deliberately limits its own games on its platforms and closely regulates what games can be published for the Wii and the DS. The two very different approaches of regulating and deregulating its developer community will one day clash.
10. Gesture-based control systems will spread industry wide. Nintendo with its Wii gesture-based gaming system has brought on a wave of innovation in this area from competitors Sony (SNE) and Microsoft (MSFT). Many other startup companies are developing chips and technologies associated with the success of this trend, and it is one that will be huge in the future.
11. Backfill strategies may work. Most people try to avoid the gaming giants like Electronic Arts; however one strategy of “backfilling” could work by trying to find within a gaming niche the still-unaddressed gamers.
12. Digital distribution is gathering steam. With over 4,000 stores nationwide, GameStop is the de facto retail distribution channel. But the costs of going retail is huge and there are technologies that plan to do this electronically. One is Valve’s Steam service, which distributes games direct to users over the Internet, and a GDC revelation of OnLive, which dispenses with the downloading. The perfect analogy here is the battle of BlockBuster (BBI) and NetFlix (NFLX) with the former doing retail and the latter making it more of a 2.0 distribution methodology. Well we all know who did better in this showdown.
Wealth Alchemist
