“There are two businesses that can survive a recession,” Silvio tells his mafia boss Tony in a classic episode of The Sopranos, “entertainment and our business.”
Casual game companies tend to agree, proclaiming that as part of entertainment, they will survive this global recession. Some actually think casual games will thrive. They could not be more delusional. Like every single sector in our economy, the global recession of 2009 will change everything in casual games.
Here is the glass half full argument:
Sure, the economy is bad, but when the chips are down, people spend more money on entertainment in order to escape from reality. Hollywood experienced a golden age of growth during the Great Depression and so will games. In its short 30-year history, the games industry has proven itself recession-proof and in the worst case scenario, casual games are well positioned because they are relatively cheaper (free to $20) compared to movies or core video games (which cost up to $60 without peripherals).
This optimistic argument holds up in normal recessions. Unfortunately, this is your grandfather’s recession, literally. We have not faced a global economic and financial correction like this since 1929. Rather than bore or depress you with details (turn on the TV or read a newspaper for that), I’ll focus on the three ways that the recession is going to directly impact the casual games industry.
The first way is the most obvious one: people with less money do not buy as many games. Right now, people are losing their homes, their live savings, their jobs, which in the United States of America, also means their health insurance. People who cannot afford dinner and a movie are not trading down their entertainment dollars to buy less expensive casual games. They are more focused on feeding their families and keeping a roof over their heads. It does not matter how valuable an escape casual games are. When you are in debt to your eyeballs, your entertainment budget is $0.
The second way the recession will impact casual games is it will be a lot more difficult for developers to make money on free online games. You would think that a fall in consumer spending means a boom for free online games (e.g., Facebook games, casual MMOs, free Web games) but that is wrong. Free games are primarily funded with online advertising. Unfortunately, a drop in consumer spending is being accompanied by a free-fall in ad budgets. It’s estimated that in 2009, online ad budgets will decrease by 40%, dropping the price per ad even lower. Coupled with the fact that ad rates are already at insane lows (an average $.05 – $1 CPM) because there is a glut of unsold advertising inventory on the market, there is no way that advertising can subsidize free online games.
Finally, frozen capital markets means that a lot of promising casual games will never see the light of day. The other major way that free casual games can be monetized is through micro-transactions. The jury is still out whether this will work or not, but for many casual game companies, it’s a moot point. They will be out of business before they can find out. Venture capital firms have invested $400 million in casual online worlds and social games in the past 12 months. The problem is that this money was raised to create the games and very expensive infrastructure, not to launch them. The majority of these companies now need to raise an additional round of financing to launch at the very moment that capital markets are frozen. The chances of them succeeding are slim to nil (and slim just left the building).
The combination of these three factors places the casual games industry into the eye of a perfect storm, the effect of which will have a huge impact on the industry. Like all market corrections (in this case, one of historical proportions), there will be winners and losers.
Here are my predictions for how the recession of 2009 will impact how casual games are made and played in the coming year:
1. Lower download prices: The $20 price point for casual games is dead. Long live the $10 price point or less. Big Fish Games (BFG) has lead the way with their Club pricing model which has resulted in a downward trend in pricing and increased market share for BFG at the expense of its rivals. All casual game portals with half a brain are following suit. In the past few months, we have seen new discount club-like models launched by iWin, GameHouse, iPlay, and PlayFirst. Expect everyone to follow, and expect prices for casual games to drop to $4.99 per title. As I mentioned, $20 is simply too much for a consumer to spend on a game in tough times. $5 per game is a little easier for someone hungry to stomach.
2. Lower quantity of games (and maybe lower quality): In order to survive at $5 per game, developers either have to sell 3 to 4 times as many games as before, cut their development cost, or get out of the business altogether. There are exceptions: Big Fish Games just raised the bar with Mystery Case Files: Return to Ravenhearst, and they are making money back in a big way. There are other games I am getting sneak peeks of that rock. But for the majority of game developers, spending a lot of money on development and innovation is not an option. The result may be a lot more “2’s” and “3’s” on Gamezebo in the coming year.
3. Survival of the fittest for developers: The problem for game developers is that there are not many good options to make money in casual games. On the download side, developers are being squeezed on both price points and margins. You cannot make any money on free Web games because online ad budgets are plummeting. The iPhone looked like a good idea but because there are so many game apps being released right now, price points for games on the iPhone have fallen in one month from $5 – $10 to $.99 to free (it’s the tragedy of the Commons)! There is still money to be made for talented game developers in casual games, just not as much as before. Only the strongest shall survive.
4. Consolidation and opportunity for companies with cash: For any casual games company that is (a) profitable (b) possesses huge reserves of cash (c) or both, 2009 represents the best of times. It’s a perfect time for companies rich with cash to purchase game developers on the cheap. Expect companies like Big Fish Games, Real Networks, Zynga, and the like to be on a spending spree . . . and to not spend that much money to get what they want.
5. Disaster for companies without cash: Any casual game company that has raised public funding but is not profitable will probably be out of business within the next year. This includes the majority of casual MMO and social game companies. Call it bad timing or a bursting of a bubble, capital markets are frozen and they are not thawing anytime soon. There will be exceptions and I don’t predict that all casual MMO’s will go out of business. I truly believe that the micro-transaction business model is perfect for this economic climate (if you can’t buy a new dress in real life, buy the virtual version for $1 online). But for a lot of companies, the attractiveness for the micro-transaction model will end up being too little, too late.
The greatest irony about this recession and casual games is that for the past year, all I have been hearing is hype surrounding social games, virtual worlds, and free Web games and talk about how downloads is dead. It turns out, though, that the casual game sector with the best chance to survive and thrive during this recession is downloads. There is an existing market, a growing user base, stable companies with cash-flow, and an evolving pricing structure.
The Recession of 2009 will bring a tsunami of change to casual games. Any casual game company that does not now acknowledge this and change course may end up swimming with the fishes.