Matt Richtel's article makes the argument that despite the fact that US sales were up nineteen percent in 2008, and even though the video game market continues to expand significantly, attracting a larger, more mainstream audience, that many of the biggest names in gaming such as Electronic Arts, Take Two Interactive and THQ are still losing money.
The article singles out soaring production costs as one of the biggest problems stating that game studios can't sell enough games or charge enough for them, to cover the cost of producing most titles. Drawing a parallel with Hollywood, Richtel suggests that video game studios have to hope for a blockbuster.
Now over on NeoGAF, the story got picked up and dissected with more critical fervour and moral outrage than you would witness on your average episode of Media Watch, taking the article to task on a number of fronts, namely that it's not possible to make generalisations about break-even sales figures for individual games, when budgets from one title to another can vary so greatly. The New York Times journo was also rebuked for failing to correctly identify Reggie Fils-Aime with his correct title. Fils-Aime, Nintendo of America President, was demoted by The Times to the lowly position of Chief Marketing Officer. Woops.
The biggest gripe however was directed at the article's assertion that publishers of games needed to sell a million copies of a game to make a profit. It was a contention that later appeared to be incorrect, with the New York Times running a clarification to the story, claiming that Nintendo had since modified the earlier statement and had meant that publishers can make a profit selling fewer than a million copies. Reggie Fils-Aime reiterated that same point in a phone interview with Wired later in the week.
Meanwhile over at NeoGAF, debate raged over what exactly is the 'magic break-even sales figure' for current generation titles. Like most debates about the 'length of a piece of string' this debate had no definitive answer, but lots of varied opinions and some unfavourable comments on the New York Times.
All the News That's Fit to Print.
The New York Times is a significant American daily newspaper with a daily circulation over one million, behind only USA Today and The Wall Street Journal. No other paper has won as many Pulitzer Prizes as the New York Times. Ninety-eight of them in total. So many, that one suspects you'd find them littered around the office used as paper weights and doorstops. In 2008 the paper took out Pulitzer Prizes for investigative reporting and explanatory reporting. Matt Richtel is clearly not going to win a Pulitzer for this particular article, but to be fair, the story did make a number of valid points.
The article states that the cost of making games has more than doubled from $10 million to a typical $25 million. Putting numbers aside (that's not a debate I want to get bogged down in) it seems reasonable to assert that the cost of making games for the current generation of consoles has increased.
Richtel also points out that, while the video games industry was still in its infancy, it was pulling its audience from other entertainment mediums, pulling people away from their TV shows or movies. Today however, because the games industry is so broad, so diverse, and so competitive, there is a degree of cannibalisation going on. People can get their gaming fix in so many different ways, and across so many different platforms. That competition, according to the article, is keeping games prices low.
The bottom line is that increased costs and increased competition are combining to put great pressures on the games industry. Great sales numbers are useless if you're not making any profit; the old joke about 'losing on every item but making it up on volume' is exactly that - a joke - and not a viable business model. That major publishers and game studios are in the red following a year of strong growth should also ring alarm bells. If companies are posting such poor performance during a year of strong sales, how will the industry fare over the next twelve to eighteen months as the world rides out the global recession?
Mike McGarvey, a former chief executive with Eidos was quoted by The Times as saying, "The model as it exists is dying", a statement that may have carried more weight if not for the fact that Mike is now onboard the 'OnLive' camp - that's right - he's the man touting a new and improved delivery model. Cuban President Raúl Castro would have been only slightly less convincing, telling us the days of capitalism were numbered!
The sky's not falling - the clouds were always that low.
It wasn't all 'Chicken Little' hysteria from The New York Times, with Richtel detailing a number of ways game companies are facing the challenge of rising production costs; namely, offshore production, in-game advertising, and building games around existing familiar IP, an approach currently being exploited by Disney Interactive. The article also had some advice from the ubiquitous industry analyst from the 'School of the Bleeding Obvious' who helpfully suggested that if the PS3 or Xbox 360 user base were larger then more games would be sold.
So is the sky falling or is the weather just turning a little on the grey side for the foreseeable future?
You probably shouldn't take any comfort in the sheer size of the industry. If the current economic turmoil has shown us nothing else, it is that no company, no matter its size, or strength, or its market capitalisation, is immune from the economic turmoil. 'Safe as a bank' doesn't hold as much water as it used to, with banks collapsing like Australia's Twenty20 middle order. In the US, General Motors and Chrysler are on life support. US President Obama has acknowledged the economic importance of the auto industry saying, "It is a pillar of our economy that has held up the dreams of millions of our people". However, despite its economic importance, even President Obama has stated publicly this week that bankruptcy may be the only viable solution.
As unimaginable as it may be, if the US government would let one, or even two of the big three automakers fail, then you probably have to concede that the government is unlikely to step in with tax payer money to keep your favourite game developer afloat if they start to get a bit wobbly.
The Wrap isn't much chop in the predictions department. Back in May 2006, in this very column, I swore that UMD Video still had a pulse, when in fact it was really just pre-death twitching. In my defence, it wasn't so much a prediction as it was wishful thinking on my part.
If you want to take a bet each way, then can I suggest if you haven't already done so, head out to your local retail hall of worship and purchase all three current generation consoles, and, heeding the sage advice of the 'industry analyst', purchase as many games as you can afford. Try to be discerning, though. You don't want to be the one responsible for a mediocre title achieving profitable sales numbers.
While the industry's size and scope may be one of its biggest weaknesses, it is also its biggest strength. If the sky does fall, the odds are that there will still be great game studios and publishers left standing.
The New York Times article suggests that game studios have to take a leaf out of the Hollywood playbook and hope and pray for a blockbuster. While it' true that all the major film studios are aiming to hit each and every movie out of the box office ball park, the Hollywood studios don't actually rely solely on box office receipts for economic viability. The truth is, when marketing is added into the production costs, many films make a loss at the box office. Where Hollywood makes its money is the 'back end'. Box office takings are just one of three revenue streams, DVD sales and television licensing are the other two, both of which generate greater revenue and greater profitability. Box office glory is where the bragging rights are, but DVD sales and TV licensing is where the money is.
Of course the video games industry doesn't have a back end. Up front sales together with DLC sales provide the sole revenue stream, and while there are great profits to be made in the used game business, outside the retail sector, the video games industry sees none of that revenue.
Perhaps the game studios need to, like Hollywood, create new revenue streams. Creating original intellectual property and then exploring profitable opportunities to license that IP in different markets. After all; as the video game industry becomes more mainstream, and as its reach becomes even larger, the opportunity to sell Resistance 2 lunch boxes or Little Big Planet soft toys becomes even greater.
Until next weekend, that’s The Wrap.
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