Video Game Industry: One of the Most Attractive Areas to Invest

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by: Bruce Everiss

The video game industry must be one of the most attractive areas to invest in right now. The business is booming, growing far faster than anyone predicted, as it makes the transition to being popular entertainment for the masses. And the industry is still at its very beginning, it will grow to be bigger than movies and TV combined as it leverages its key advantages of interactivity, connectivity and non linearity.

In recent years the industry has fragmented into many genres on many platforms, this trend will continue for some time. Also, technology has changed the marketing, sales and distribution model, significantly reducing the entry cost into many areas of game publishing. And there is the constant specter of piracy, with over half the video games in the world being stolen it is important to invest in areas where at least a majority of customers actually pay for playing the game.

The king of the market, the gold standard, is the subscription MMO. When these work they become massive cash cows generating tens of millions in monthly revenue. But they cost many tens of millions to make, need constant ongoing investment and have a very high probability of failure. The current leader is World of Warcraft which took the market over from Ultima Online and Everquest. One day its position will be challenged but it doesn’t look like it is happening any day soon.

Next comes the free to play MMO, often aimed at younger players. These are even bigger in player numbers than the subscription MMOs and seem to be less risky as businesses. Revenue comes from advertising, premium membership levels and micro payments for in game items. Some of the big players are RuneScape (6 million),Habbo (86 million avatars created, 8 million monthly unique users), Maple Story (nearly 60 million), Dofus (4 million), Ragnarok Online (25 million), Guild Wars (3 million), Club Penguin (4 million) and Webkinz (over 3 million).

Console gaming is easier to understand. Hit driven boxed retail products just like music CDs and film DVDs. The main opportunities are with the Microsoft (NASDAQ:MSFT) Xbox 360 and the Sony (NYSE:SNE) Playstation PS3, which are both a fair way from peaking in their product cycles. Product quality has now become immensely critical as knowledge travels instantly via the internet. To Metacritic below 8 is increasingly uncommercial, which is a good thing for everyone. Get it right and you too can gross half a billion dollars in one week as GTA IV just has. The total cost of developing and globally marketing a cross platform AAA game can now be in the tens of millions of dollars area. You need big resources so your hits can finance your inevitable misses, one reason the industry is consolidating into a small number of big players.

The console acts as an anti piracy dongle and is the main reason for the success of these platforms. The downside is that the platform holders take a fee out of every game published. These two factors together mean that console games are ridiculously expensive. Something that could eventually come to damage the business model.

The Nintendo (OTCPK:NTDOY) Wii is not worth developing for. It is nearer the end of its life cycle than the other two consoles and it is mainly first party games published by Nintendo themselves that sell. Third party titles from other publishers are mainly low quality shovelware that have now frightened the consumer off.

The two handheld consoles, the Nintendo DS and Sony PSP are also not worth developing for despite the immense numbers of these that have been sold. Quite simply, piracy has ripped the market up. Vastly more people will steal your game than will pay for it.

Casual gaming is huge and probably growing faster than any other area of gaming. The ability to just drop in and spend a little time having fun then log out and get on with the rest of your life is very convenient. Far more appealing to many people than the commitment needed by hardcore games.

There are 200+ million people who play online casual games every month. Both downloadable and browser games. Services such as Pogo.com, Sandlot Games, Big Fish Games, Boonty, PlayFirst, Reflexive, RealArcade, and Trymedia Systems. Games are cheap to develop using Flash but the average quality is still very low, something that will change as the market matures. Revenue can come from advertising, premier membership and micropayments.

Traditional boxed PC retail games that have been with us for decades are just about dead, with most publishers giving up, killed by rampant piracy. Instead, there is a new breed of PC game centering on online play and sometimes episodic content. With unique user keys and services like Steam these can be made largely pirate proof. The PC game reinvented.

Mobile phone gaming has been declining in popularity, largely because the market is doubly fragmented. Too many different platforms and too many different air time providers make it almost impossible as a business model. All this is changing immensely rapidly with gaming on the Apple iPhone (NASDAQ:AAPL) and the reinvention of Nokia (NYSE:NOK) nGage as a software based gaming platform. These two will certainly overtake casual gaming to become the fastest growing sector of the business and have the potential to grow to become one of the major forms of gaming. This is the most exciting place to be just now.

There are still more valid business areas in gaming. All three platform holders now sell games online. These are smaller and easier to make then their full price boxed equivalent and the revenue stream is steady over a long period rather than spectacular over a short life. This business can only grow and grow and is well worth investing in, just make sure that you put marketing effort behind your games on these services, you can’t expect good sales otherwise.

Finally there is gaming on the social networking sites such as Facebook and MySpace. This is still small but has massive potential and we have seen the first cult hit with Scrabulous.

So there you have a quick sketch plan of the market. It is a dynamic and exciting place and you can be sure that it won’t be the same twelve months from now.