As video game players’ tastes shift toward smartphones and tablets, more and more of the money spent on console games goes to a small number of blockbusters

September 29, 2013

Shrinking List of Video Games Is Dominated by Blockbusters


Big video game makers, like their cousins in books and music, have scrambled in recent years to adapt to the digital technologies buffeting their business. Tens of millions of people now play games on smartphones and tablets, usually for a sliver of the cost of playing on a game console. But one part of the games business is thriving as never before: the blockbuster.The biggest console and PC games — usually those games that are part of an established franchise and have the slickest production values — are posting spectacular sales figures. This month, the latest in the gritty urban adventure series Grand Theft Auto took only three days on store shelves to reach $1 billion in sales, faster than any video game ever, its publisher said.

“The winners have gotten massive,” said Doug Creutz, an analyst Cowen & Company, a stock research firm.

The richest games are getting richer partly because the industry makes fewer games over all, concentrating players’ spending. Publishers are also squeezing out a little more money per game sold by selling add-on content and other digital goodies. And the legions of players eager to do battle with one another online create a sort of virtuous cycle, as players are attracted to the titles with the biggest pool of opponents.

Now, the most popular games, like Call of Duty, Halo and Assassin’s Creed, or top sports games, like the FIFA soccer series, have the biggest development budgets and fan bases and are getting a bigger portion of sales. The top 20 games in 2012 accounted for 41 percent of total American game sales in stores, nearly double what they did a decade earlier, according to the NPD Group, a market research company.

“At a time when people are bemoaning the fate of the interactive entertainment business, if you pursue a strategy of giving consumers the highest-quality titles in the business, they will come out for what you have to sell,” Strauss Zelnick, chief executive of Take-Two Interactive Software, the company that publishes Grand Theft Auto, said in an interview.

The lower output of publishers makes the stakes higher. In 2012, only half as many new games were released in American stores as in 2008, NPD said. Electronic Arts, the publisher of the Madden football series and other sports favorites, sold 67 different titles in stores in the fiscal year ending March 2009. In its last fiscal year, it sold 13. Because fewer games are released, game makers must get more sales out of those games that do reach store shelves.

“Every publicly traded publisher will talk about a ‘bigger, better, fewer’ strategy,” said Edward Williams, an analyst at BMO Capital Markets.

But a blockbuster strategy comes with big risks. Games meant to be console blockbusters generally require tens of millions of dollars to build the graphics and gameplay that smartphones and tablets cannot yet match. Grand Theft Auto V, for example, features a sprawling game universe even more immersive for many players than big movies are for theatergoers.

Those costs require millions in sales — and create big losses if sales are weak.

The development costs on Grand Theft Auto V were likely to have been more than $100 million, and its marketing $50 million more, said Evan Wilson, an analyst at Pacific Crest Securities. He estimated that a typical console game would break even at about four million units, while that figure would have been one million a decade or so ago.

Game makers have tried to compensate for the higher costs by getting more out of consumers with each game. Like many big publishers, Electronic Arts sells its marquee titles, including the FIFA soccer games, at the standard price of $60 each. The company also lets gamers enhance the game by spending money online to compose fantasy teams of their favorite soccer superstars. For its last fiscal year, E.A. said such digital revenue from FIFA was more than $200 million, up 94 percent from a year before.

The growth of multiplayer gaming, in which players converge online to compete against one another, makes big games bigger through the benefit of what economists call the network effect, analysts and game executives say. This is the tendency for people to jump on the bandwagon of various services — whether Facebook or Craigslist — because that is where everyone else is.

Analysts say people buy Call of Duty not only because it is a consistently high-quality game, but also because their friends and others are playing it on the Internet. Mr. Creutz of Cowen and Company says he believes that is a dynamic not present with movies, even blockbusters like “Avatar.”

“You don’t have that online networking effect” with movies, he said. “My enjoyment of ‘Avatar’ is really independent of everyone else’s enjoyment of ‘Avatar.’ ”

Still, the movie industry, which is also largely dependent on blockbusters, has managed to keep box office sales stable compared with the video game industry, which is suffering an overall decline in retail sales. Last year, video games generated $7.09 billion in retail sales, 39 percent less than their peak in 2008, NPD estimates.

Restoring growth in the video game industry is difficult partly because players are spending more time with cheaper and free games. Revenue from the various methods of selling games online, like a $3 version of Angry Birds for the iPad or the $1 required to buy extra lives in the otherwise free game Candy Crush Saga, is by most accounts not yet big enough to reverse the slide in overall sales.

New consoles from Microsoft and Sony will be released in the coming months, and that could temporarily stem the tide of lower sales. The current generation of hardware has been around a while, with Sony’s PlayStation 3 at seven years and Microsoft’s Xbox 360 at eight. Game sales traditionally slow the longer a system is out, and revive when a new one is introduced.

The new systems will test whether console game sales have been permanently dented by the shifting ways that consumers play games, making it even more important that the blockbuster franchises showcase the consoles’ capabilities to potential buyers.

Last week, E.A. released what is likely to be one of this year’s biggest hits, FIFA 14, the latest edition of the soccer game that has become a smashing success around the world. By the end of March, E.A. said, it had sold 14.5 million copies of FIFA 13, its previous version, about 30 percent more than FIFA 12 had sold the year before.

David Rutter, the executive producer of E.A.’s FIFA game, said that in recent years the struggling economy had made gamers more discriminating about what they buy. As a result, critical plaudits — often a reflection of how much investment a publisher has put into a game — have become more important to sales.

The players’ discriminating nature also means that many of them flock to game franchises they have enjoyed before — perpetuating the cycle of blockbusters.

“Consumers get excited about a particular experience and remain loyal to it,” said Mr. Zelnick of Take-Two. “When you have a commanding market share, you maintain a commanding market share.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: