Saturday, May 27, 2006

Video games, oligopoly, and innovation As we have discussed before, the electronic game software industry has grown from a side interest to a major entertainment industry with revenues of over $10 billion a year. That makes it bigger than the theatrical releases of movies and means it will soon surpass the sales of music on CD and films on DVD. You might think that such a fast growing industry, getting increasingly sophisticated hardware feauturing excellent video and audio and lightning speed, would be full of innovation. Not so, according to a recent Slate.com article by Luke O'Brien, entitled "Why there are no indie video games and why that's bad for gamers." (5/26/06). The author sees the game-makers stuck in a cycle of repeating themselves with louder and faster versions of the same basic games. Part of the problem, he believes, is the oligopoly of the game publishers. A handful of publishers, such as Electronic Arts, Ubisoft, and Astivision and now dominate the industry. Independent game makers either get bought out and tamed or driven to bankruptcy. "The most successful indies get bought by the industry giants, where they often become casualties of consolidation." Given the current costs of marketing and distribution along with the enormous costs in programming, buying rights, and even hiring known actors for videos and voice-overs, the game publishing oligopoly is becoming even more risk-averse than the major movie studios. As O'Brien states "the average Playstation 2 game cost about $8 million),After all, he argues, it's possible for an Indie movie like Saw or Fahrenheit 9/11 to get made on a small budget and bring in big bucks. These days, independent game releases, the article states, just don't have a chance. The large amounts of money at risk mean that the blockbuster mentality is even bigger in the video game industry than at the movies. Small developers are forced to sell their games through the big publishers, but they take the development risk. Several industry types told me that an indie studio will typically get a $5 million advance on 15 percent royalties. If the game has a wholesale price of $30, the developer must sell more than a million units to get out of hock. In other words, the game has to be a blockbuster, something on the order of Tomb Raider or Splinter Cell. The cost of the average PlayStation 3 game is expected to rise to $15 million-$20 million, plus another $10 million or so for marketing. That means indie developers, who already go bust with great regularity, will have even less wiggle room. The problem with this situation is the death of innovation. When independent game studios could develop games on their own, they came out with lots of new concepts Now the risk-averse studios want already proven winners, since there is so much m0oney riding on them. Take, for example, industry leader Electronic Arts. As O'Brian notes that company "had a nasty case of sequelitis last year. I've looked at nearly 50 games that EA released last year, and I've yet to find one that isn't a rehash like NBA Live 06 or a movie tie-in like Batman Begins." O'Brien sees video gaming at a crossroads. At its worst it a pastime for nerds. At its bets, it could be a serious entertainment industry with appeal to both sexes and all age groups. As the oligopolies tighten the market, the more likely that the industry will stop developing past remakes of what already exists. 4:18:54 PM

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