“The Continued Growth of Gaming”

I just sat in on the “Continued Growth of Gaming” panel at the MBA Media and Entertainment Conference in New York. Moderator: Cyrus Beagley (Engagement Manager, McKinsey Entertainment Practice). Speakers on the panel: Greg Costikyan (Founder, Manifesto Games), Chris Di Cesare (Director of Marketing, Xbox), Nique Fajors (VP of Brand Management, Atari), Frederic Markus (President, eRelevant Games), Joseph Varet (Sr. Director of Biz Dev & Strategy, MTV Networks). I managed to catch most of what was said, except in the case of Greg Costikyan, who speaks two to three times faster than most normal human beings.

Cyrus: In 2002, US game hardware & software sales surpassed movie sales. Console games still account for the vast majority of video game software revenues, and the majority of those games are franchise-driven. 17 of top 20 titles in the past year were based on ongoing franchises. (DJE: The rumor that just wouldn’t die. US game hardware and software sales did not exceed movie sales. They exceeded box office receipts. If you include DVD sales — and indeed, DVD player sales [since Cyrus included game hardware], movies still made significantly more money than games.)

Cyrus: How are franchises evolving? What are the trends in the market?

Chris: To make a successful game based on a media franchise (like Spiderman, Star Wars, etc), you have to take advantage of the richness of the franchise. Knights of the Old Republic actually added to the Star Wars universe — it didn’t simply try to retell the same old story. Goldeneye was a great shooter that innovated within the James Bond franchise. You want to make a compelling game, not get painted into a corner by the IP.

Greg: Games are inherently a mechanic-driven medium. Movies are a story-driven medium. You have to look at the game from the perspective of the mechanics first, otherwise the game won’t work.

Frederic: Development teams have strong minds and strong egos. You have to make sure that they like the franchise they’ll be working on, and that can be difficult with a “less edgy” IP like Finding Nemo. Conflicts between movie producers and game developers can cause real problems, too. You need to be vigilant about that.

Cyrus: How does MTV view its role in the games industry?

Joseph: Games are clearly an important medium to our audiences. We’re putting our promotional power behind games that might not otherwise get significant media attention. Innovative games like Guitar Hero — games for a more mainstream audience (as opposed to hardcore audience) that wouldn’t normally get attention. That’s where MTV can help.

Greg: I think that makes a lot of sense. There was a time when all of Hollywood decided it could do games better than the game companies. And of course they failed miserably. Media companies are never going to replace EA, but they can leverage their networks to bring attention to interesting work.

Chris: The cost to develop a game continues to grow. As a publisher, you look at concepts and pitches and try to figure out what to green-light. You have to do an ROI analysis. Games now cost $20M to develop. You have to sell a million units to break even. So you look at a developer’s track record, the performance history of the genre, etc. You just can’t be revoluationary because of this — you can only be evolutionary. This is a huge challenge for Microsoft as well as the rest of the industry.

Greg: If we’re going to break free of this trap, we have to find another way to distribute games, which is what my company is all about. I also really appreciate Xbox Live Arcade for this very reason.

Joseph: The real opportunities are more outside of the hardcore market. Nintendo has had a lot of success with that with Nintendogs. At MTV Games, we’re not working on $10-$20M titles; we’re making games for the mainstream market, which doesn’t necessarily care about having such detailed and immersive graphics. We’re making next-gen games, but we don’t need to get caught into the big-budget trap.

Frederic: You have the nerd side of things, and you have the “people who are more in touch with reality” side of things. When your projects take two or three years to complete, you are never going to be culturally relevant. Developers aren’t familiar with 15 year olds. They don’t know why they dress they way they do, listen to the music they listen to, etc. There is almost no R&D in the game industry. Only Nintendo and EA do R&D. and guess what, they are the two top publishers. I totally agree with the MTV model. You don’t need years to prototype. There are tons of tools that you can use to quickly prototype a game. Make it quickly and validate it. I think its sad that there is so great a gap between the “game guys” and the “culturally-relevant people”. You can go around and try to find VCs who will be willing to invest in $1M or $2M games.

Joseph: Some of the most successful developers out there are making $5M or $10M off games with $1M budgets or less. It’s a good model.

Greg: One problem with VCs is that they are generally unwilling to invest in something as risky as a game developer (and the likely returns aren’t all that great, relatively speaking). I worked with a guy a few years ago who wanted to start a fund for game development It didn’t happen because he couldn’t raise the necessary capital, but I would be surprised if something like this doesn’t exist in a few years. Even EA could benefit from leveraging other people’s funds.

Chris: Project Gotham Racing was a great $10 – $20M game. But Geometry Wars was developed for just tens of thousands of dollars, and it’s selling like crazy!

Audience member: What can an MBA bring to this industry?

Nique: I look at the business, and as big and exciting as it is, it’s incredibly unsophisticated in terms of incentives, organizational processes, etc. Lots of companies are really poorly organized. Second: your orientation towards data (though you can go too far in this regard, and that’s something you need to watch out for).

Joseph: If you want to be a CEO someday, you should start out as a producer or assistant producer on a game team, working on a major console game. Those are huge, 100-person teams now. I have a few friends who got their MBAs, became associate producers, and now they run whole teams. I think that’s the best way to get great experience and reach the “C” level at a major publisher. In my opinion, anything else is somewhat of a dead end.

Chris: As a marketer, I kind of disagree. All our top guys except J Allard (Robbie Bach, etc) came out of marketing. I think it’s important to work well with develoeprs so you understand the business, but I think a lot of what marketers bring to the equation is an understanding of the consumer. Sometimes developers gets so obsessed with what *they* want to play that they forget to make what the mass audience wants to play.

Audience member: What do you think about the casual game space, mobile phone games, etc?

Greg: Casual and mobile games are very different things. The games share similarities, but the business models are extremely different. The problem is that the casual space has become boring as well; casual games are all variants of the same three games. But if I was going to start a new studio today, that’s absolutely the direction I would go. The costs of development are low, development time is months instead of years…

Frederic: The problem with the casual game market is that the public judges you instantly. If they don’t like your game within 30 seconds of trying it, they won’t pay for it. The arcade market died for this reason: it’s hard to make a game that people will constantly pay money for. It’s really hard to do casual product. 99% of the games on Xbox Live are going to fail.

Joseph: Casual games are a tiny market compared to the console game market.

Greg: Downloadable games are currently a $200M market. add in advertising and other related revenues and it goes up to $600M.

Chris: Casual games are arguably the most played games out there. The average casual game player is a 37 year old woman. You’re comparing apples and oranges when you compare console games to casual games.

Audience member: We’re increasingly seeing product placement and dynamic advertising in games. How is that affecting the industry? Is it a good thing?

Nique: It’s definitely a good thing from a publisher’s perspective. There are different aproaches to the business. Activision published a rate card that explicitely specified what it costs to participate in their games. You have to be able to explain how an advertisement in your games compares to an advertisement in anything else (i.e. magazines, TV, etc). As a gamer, I would rather see something that is real-world than a make believe thing, but I’m probably biased.

Chris: I think it’s good for the publisher and consumer if it makes the game more realistic, like ads in a stadium in a sports game. As with product placement in movies, you just have to be very careful that it isn’t blatant and in your face.

Greg: I think there is way too much VC money chasing this particularly chimera. Dynamic advertising only makes sense in 20% of games — no coke machines in the dungeon, thank you. And right now, only PCs and the Xbox 360 offer a viable platform for dynamic advertising. I just don’t see it. There is something there, but I don’t see how it will turn into the multibillion dollar business everyone is talking about.

Joesph: The real ad money is in cross-platform sells. At MTV, we control all the in-game ad inventory for every game we participate in. So, not only can we sell in-game placements, we sell creative on other platforms, and that suddenly becomes more interesting to major advertisers. Otherwise you just attract smaller “lab money”.

Audience member: How about MMOGs like World of Warcraft?

Frederic: I think there’s room for one, and that spot’s taken. Same with casual games: there’s room for one — Bejewelled — and that’s taken. I can’t build a spreadsheet and executive summary that can only mention one game as example of major success. And if WoW was really culturally relevant, there would be 30 or 40 million people playing it, not a few million.

Joesph: There’s another model for casual MMOGs that you see alot in Asia. Revenues are driven by micropayments for items, clothes, and that sort of thing. I’m not sure that will work outside of Asia, though.

Chris: MMOs, by their nature, cater to a hardcore market. The audiences they attract practically live in these worlds! Games like the Sims Online have been unable to attract a mass audience. It’s a challenge.

Joseph: There’s so much over-investment in MMOs. They can’t possibly all attract subscribers.

Audience member: My questions are for Chris. How far off till we see a portable gaming device from Microsoft? And, if you had to redo the 360 launch, what would you do differently?

Chris: We’re looking at the portable market. We want to be sure we can bring something unique to that space. The Xbox is attractive to us because it’s a great entry into the living room. The digital living room represents a whole host of new opportunities for Microsoft. Portable devices are a natural extension of that, but they aren’t considered quite so strategically important.

In terms of the 360 launch, the real challenge is that when you launch a new console, you’re really constrained in terms of production. It’s really hard to meet demand, and we’re still not there yet. We tried to do a global launch — the first ever publisher to try. We were short on supply in all three major markets. Next time around, we’ll think very carefully about whether a global launch is the right way to go.

(DJE: An interesting panel, to be sure. Plenty to agree and disagree with. Since I’m in a hurry, I’ll just say: How can you possibly claim that the market only supports one very successful casual game, and Bejewelled is it??? Even the most cynical market observers agree that there are at least three or four extremely popular casual game “themes” out there. Has this man never played Tetris? And I’m not even sure where to begin with the, err, memorable comment about nerds and reality…)