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Gaming in Transition and Revolution, Part 2

By Matt Ployhar

In my last blog, I talked about some of the biggest factors impacting the gaming ecosystems today. In part one, I discussed the impacts of mobile form factors; this time, I’ll discuss the biggest implications occurring in the formats and business models.

So, in no particular order, here are some of the biggest format and business-model evolutions I see taking place in the video game industry.

Piracy/DRM: This has had several causes and effects. Consider China for a moment. Ninety-nine percent of Chinese PC gaming revenues are estimated to be derived from nonretail sources (source: 2010 PCGA Horizon’s Report). Coincidence?

The fact of the matter is there are only a few business models and formats that can survive piracy. The result has been staggering for PC gaming, which has accelerated towards the free-to-play (F2P), freemium, micro-transactions-based, and online-game format business models. I have to wonder if a formerly emerging or maturing market like China has the disposable income rates to sustain $60 price points. That’s a chunk of change for any emerging or developed nation.


Digital Distribution: When you look at the impact of iTunes on the music industry, Netflix on the movie industry, and Steam on the games industry, it seems pretty straightforward where it’s all going for physical digital media formats. Digital downloads that go directly to a drive offer some amazing benefits that are hard to beat (e.g., the lack of a spinning optical drive saves on battery life for a laptop, digital downloads are typically faster, etc.). We’re still scraping the surface for digital distribution. When it matures even further, I think we get that much closer to a “Buy once, play on any of your devices” type of scenario.

Online, Free-to-play, Freemium, Cloud and Web Gaming: Want to know what I love most about this grouping? It’s simple: I should be able to access my games in any of these scenarios from any device. Also, in most cases, these formats are also pirate- and DRM-proof -- or at least resistant. The sooner games ISVs embrace the above, the better off they’ll be. They’re all far superior to having to press a disc, wrap it in packaging, ship it halfway around the world, put it on a shelf and then hope for the best.

Cost: There’s the cost of making the game and then the cost to the consumer. Let’s first address the cost of making a game: In the traditional games market, for a game shipping on a PC or one of the various consoles, a game’s cost typically starts at a minimum of $5 million to $10 million.

On the other end of the spectrum, we have a few guys sitting in home offices and cranking out games that cost anywhere from $10 to $100,000 for things like a smartphone or the Web. These tend to be very high-margin, high-volume games when they’re successful. However, this market seems a bit flooded right now and it’s difficult to get noticed. So if the game costs $1, $60 or anything in between, the real issue boils down to value and price sensitivity to the consumer.

On the consumer side: Economically, things are still a bit in the doldrums and this climate will likely continue to make consumers very price-sensitive. This issue of cost outstripping a consumer’s ability to pay or afford something is likely exacerbated in emerging economies.

At the end of the day, though, I want a game to offer the most bang for my buck. A game that is able to hit multiple platforms simultaneously and is less proprietary can be far more appealing and flexible. If, for any reason, the added costs associated with locking up content for proprietary platforms significantly lowers margins.

Example of Proprietary Risk to an ISV: Put too many eggs in one proprietary basket and you’re exponentially increasing your risk. I saw this when going through my database of contacts. Several game companies have indeed gone out of business by making games too exclusively for one proprietary games platform. They could have easily expanded their market share penetration by not being proprietary. For younger or midrange companies, they typically only have one or two shots to get it right. After that they either go defunct or become an acquisition target.

Copyright (c) 2011 Studio One Networks. All rights reserved.

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