Brian Grey Blog

A friend shot me an email this morning with the NY Times piece about current challenges facing the Video Gaming industry, and as I read the article I couldn’t help but feel like I was reading an article that may have been written in the late 90′s — about the Music industry.

Seems like the big boys in the Video Game industry have boxed themselves in to a hits driven business model where the production costs have created an almost untenable hurdle to long term growth and profitability.  Forget the console developers for a second and just look at the publishers — EA, Activision, 2K, and the like all have to spend in the multi-millions of dollars per new title just to produce a game that then has to be marketed for millions more in an effort to sell more than a million copies — the magic number for reaching at least break-even these days.

Wow, that’s quite a bit of risk for these studios to be taking on a title by title basis.  Especially compared to the rapid fire development cycle that continues to emerge in creating games for emerging platforms like the iPhone or the good old fashioned PC-based Internet.

Is it fair to compare say EA to a record label?  Maybe.  But the gaming companies may have a bit of daylight to run towards when compared to the dismal path that the music folks have been forced down for the last several years.

If you think of the Internet as “the console” and you think of game publishing as a never ending “consumer product development” exercise, there exists what might be a highly scalable business model for gaming companies.  The new publishing and business models being formed by guys like Social Gaming Network, Playfish and Zynga — and by extension Facebook — feel like the future of gaming.

On one hand these Internet based publishers can develop and iterate on game titles much more rapidly and in a financially more efficiently manner than the big studios who are stuck building high production value hits on the next versions of super charged hardware like the XBox, Wii and Playstation.  This transformation makes game development feel a lot more like the agile product development evolution that has come to web publishing.  Might this mean the skill sets of game studio producers will merge with those of Web site product managers?  Seems like this may already be happening.

Coming out of this product evolution lies the promise of a potentially more scalable business model.  One that can tap in to multiple revenue streams — not just a reliance on selling plastic wrapped units at retail for north of $60 a pop.  Games are now being built to attract audiences — particularly given the social and viral aspects that Internet games (whether they are played on the PC or a mobile device) facilitate.  Audiences are more flexible monetization platforms once they attain sufficient reach and “targetable” dimensions.  Revenue streams in the form of sponsorships, standard media, lead generation and virtual goods can all be applied to a gaming experience that exists online across both the PC/Mac and smart phone universe.

And the  business model doesn’t have the built-in end-of-life that exists in today’s video game publishing world when the next wave of consoles rolls out, rendering the latest software version obsolete.  A Web based product and business model for gaming can evolve it’s product, audience and revenue opportunities in a cumulative manner — and can do so in terms of incremental marginal costs as opposed to the significant fixed cost step ups that exist in the traditional console driven ecosystem.

So while the gaming business seems to be facing a similar transformation that the music business begin to contemplate over a decade ago, it appears as though there may actually be a profitable path by which game companies can migrate their business.  Though it may be a different set of companies that arrive at the new game business paradigm ten years from now than the brands we know and love today?

I just got hammered again by my nephew in Madden. Not sure why I pretend to think that I could keep up with him and his mastery of the 100+ permutations of controller buttons and plays that a guy like me who was brought up on Intellivision and Atari is used to?

EA has been in the news the last couple days. They reported earnings this week, and despite a quarterly loss, they raised guidance for the holiday quarter and their full fiscal. That said, the stock price has been roughly halved in the past year, and that is what raises questions about their future.

The WSJ had an interesting blurb speculating that now is the time (or in the not-too-distant future) for Disney to make a run at the company. The ESPN – EA Sports relationship and how that combo might be played out in the context of leagues and advertisers is an interesting dynamic for sure.

What I don’t hear a lot of though, is how EA migrates from their packaged goods business and tether to the console, to become a gaming platform for the masses across all platforms. EA Sports is not as prevalent as it could be online and on mobile. I know there is an extension online through services tied to the console like XBox Live, but they don’t seem to be a marketing or promotional emphasis. Seems like this is EA’s future, yet like a lot of companies wedded to a huge cash cow revenue stream (see Kodak), it’s easier said than done to migrate to the digital future.

What’s more, EA has a few scars from making some sizable investments in this arena the last ‘bubble’ time around, so you gotta believe that’s in the back of their mind as they think about how to manage a transition like this?

I guess for the time being I should be happy, it means my nephew’s beatings on Madden are limited to when we happen to be together in the same room in front of his TV set and XBox 360.

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