Bursting the Game Bubble Rumor

The fear of another technology bubble is washing over the gaming industry like a bad case of the flu, tainting important decisions about everything from investments to innovations. Many see the current wave of financial news from Facebook, Zynga and PopCap Games and draw comparisons with the great Internet boom and its subsequent collapse. Trepidation has nearly paralyzed some game studios as they worry about starting production on new titles. Analysts have also begun to question the valuations of recent investments in the gaming market, while some gaming companies feel pressured to sell before the bubble bursts.

But will it?

Market Outlook

A gaming market crash might complete Oliver Stone’s Wall Street trilogy, but I highly doubt we’ll see a gaming market crash—or Wall Street 3, for that matter— anytime soon. We are witnessing rapid growth in the technology industry due in large part to gaming, but don’t be too quick to call it an industry bubble. A bubble, by definition is a glossy coating that encases nothing but air. In other words, bubbles are empty.

Take, for instance, the infamous Internet 1.0 days between 1996 and 2000, when companies were raising millions in capital on promises alone and when trading with unverified IPOs led the tech industry. The dot-com crash of 2000 was a direct result of the glossy coating of the Internet that encased nothing but insolvent companies.

More than a decade later the tech industry is once again experiencing a new evolution that has attracted the masses and the money. Zynga has become one of the fastest-growing technology companies in history, and it now rivals some of the largest game studios in the world, including Electronic Arts and Activision Blizzard. Zynga, a four-year-old social gaming company, is currently valued at $10 billion on $2 billion in revenues with exploding growth.

Electronic Arts, threatened by the competition from new entrants in the games market, acquired casual game studio PopCap Games for $750 million, plus up to $550 million earn-out following the release of Zynga’s IPO intentions. While Zynga and PopCap Games are valued at ten times their revenue, both are growing at huge rates given the new landscape of the gaming industry, and both are profitable. That’s a far cry from the kinds of fundamentals we saw in the dot-com crash.

Today’s tech industry, which encapsulates the gaming market, looks very different in comparison. The current market has several sustainable businesses including game studios showing real revenues and real earnings. Sure, scattered throughout the industry are a few companies like Zynga, Twitter and Facebook that have valuations ten to twenty time higher than revenues, but these companies are the exception and not the industry standard.

This isn’t a bubble, in other words—it’s capitalism at work. And this mega-shift in the gaming industry is both powerful and pervasive. The current market brings game studios more choice, more opportunity, and with that, more competition than ever before. I believe this is the best time to be in the gaming industry— especially if you’re a casual games developer— because it is now your time to level up.

Unleashing Game Development

For far too long, console makers dominated the gaming industry with a stronghold on game development. Developers were obligated to take the risk to create games that cost tens of millions of dollars to produce. Small shops couldn’t even compete in the console market without additional financial backing. We mostly heard about large game studios that produced and published blockbuster franchises like Halo, Madden NFL and Super Mario Brothers. Casual and PC games were considered inferior in terms of innovation, market share, and mind share, and indie developers were just unemployed game designers.

That has all changed. The gaming industry has gone through a major transformation fueled by a rapid expansion of social networks and the proliferation of connected mobile devices like smart phones and tablets. Competitive pressures from new entrants, like Zynga, and new innovations, such as mobile and social, have disrupted the console market— for the better.

Today, the console market is no longer driving the gaming industry as it once did. More consumers are now choosing to come online via PCs or mobile phones to purchase and play their favorite games. In fact, global revenue from micro-transactions is expected to be as large as revenue in the console market by 2013 according to ThinkEquity.

These advances in the industry have unleashed game studios from the console market. Developers and publishers now have the freedom to create the games they want, tap into new revenue streams, and make financially sound decisions about development, distribution and pricing.

Not all gaming companies will approach these newfound liberties wisely, of course. But those companies that make smart business decisions in the current games market will become more profitable, and as a consequence, they will have financial opportunities to explore new innovations they may have not had before. Such studios will drive the future of this industry, and they will bring forth new gaming experiences that will surpass the game-play available on five-year old consoles.

Now Everyone Plays—Even Your Mom

Video games no longer have to carry a $60 price tag and require a console. This has helped the gaming industry expand beyond the core demographic—males between the ages of 13 and 35 years old—to reach the masses. Now you might not play the same games as your mom, but there’s no question that gaming has become mainstream entertainment. In fact, Electronic Software Association (ESA) reported that 42 percent of all gamers are women, and women over 18 years of age are one of the industry’s fastest growing demographics.

This growth is attributed to casual games that are free-to-play, created for the masses, and offer social experiences. And we’re just getting started. There are more than 300 million people playing these games with their friends on Facebook, and Google+ has jumped into the game too.

The casual games market is not only experiencing a remarkable up-tick in adoption rates, but there’s also significant growth in consumer spending. About 31 percent of the overall online gamer population has used real money to buy virtual goods according to a new study by Visa’s PlaySpan and VG Market Study. And the report indicates that women are three times more willing to make these purchases than men.

At the same time, the growth in the casual market doesn’t reflect the entire industry: The console market, for instance, has actually dipped to its lowest point in five years. According to the research firm NPD, retail sales for video games in the U.S. reached their lowest point in July 2011 since October 2006. Overall, new retail sales for hardware, software, and accessories totaled $707 million for the console gaming market, a decline of 26 percent year-over-year.

Once recognized for driving innovation and blockbuster games, the console market is now saturated with five-year-old hardware and expired game franchises. It seems clear that a vast majority of consumers who have played game discs are fatigued from over-playing and over-paying for last-generation experiences. I wouldn’t be too surprised if many of these gamers are beginning to play their mom’s video games, in fact.

The Next Generation of Gaming

As they always seem to do, consumers are itching for the next generation of gaming experiences. It’s been about five years since Nintendo, Microsoft and Sony launched any new game systems, and future releases seem very distant. Developers are limited by the experiences tied to current generation consoles, but they know that next-gen consoles could mean higher game production cost. Profiting from these titles is also high risk, since next-gen consoles would need to scale—so developers may be reluctant to produce next-gen console games. And no games mean next-gen consoles can’t scale, and so the dilemma begins.

This doesn’t mean that the console market is dead. In fact, a large percentage of households have at least one current generation system, which means developers are more likely to recoup the cost to produce console games based on scale. It’s not innovative, but it is available.

There’s also another option. I believe the true next-generation of gaming centers will be on free-to-play gaming experiences accessible on social and mobile networks. Facebook just recently launched a suite of new features designed specifically to increase the social, sharing and engagement aspects for games. It seems that no other category of content gets the same degree of customized attention from the world’s largest social network. Google’s content focus at the launch of Google+ is equally telling. Once the social communication basics were in place, games were the first order of business.

The fact that two of the world’s largest aggregators of online users continue to put their weight behind games experiences is strong evidence that very real, fundamental trends are driving growth in the games sector. Studios will no longer depend solely on the console market, and those that produce a robust portfolio of free-to-play games will be able to successfully capitalize on this mega-shift sweeping over the industry.

So as we look to the future of gaming, I think Gordon Gekko said it best in the 2010 movie release of Wall Street: Money Never Sleeps: “It’s not about the money. It’s about the game.”

Matthew Hulett is senior vice president of GameHouse, overseeing global operations for RealNetworks’ digital games business. Mr. Hulett joined Real as Chief Revenue Officer for the games division in 2009 and assumed the top post of the division in July, 2010.

Originally published by Casual Connect Magazine. http://casualconnect.org/magazine-archive/

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