Sunday, July 26, 2009

High-Interaction Video Games Hurt Revenue

Last week’s earnings reports seem to confirm the decline of traditional video games. Amazon blamed its weak North American revenue mainly on a lack of interest in new video game releases. Amazon’s sales in many categories were up, but the dropoff in video games was big enough to counter its other gains in North America.

But at least Amazon had a growing business to talk about. Microsoft’s revenue was down 18 percent across the board, the biggest decline in its history. Its entertainment division was especially hard hit, as sales of video game equipment and games were down sharply, though music and music players were even worse. Microsoft blamed the economy, and plans to cut 5,000 jobs in the next year. Also blaming the economy was eBay, which again reported declining revenue and web traffic as what is left of its auction business continues to fade from people’s minds, while its retail integrator strategy, which was supposed to replace auctions on the site, has yet to come into focus. EBay used to be the go-to place for video games, but its higher fees, compounded by higher shipping costs, have made selling difficult across all its media categories. A cursory look at the video game category today shows lots of listings but few bargains and a slow pace of sales. Video game publishers are faring even worse, with sales down 31 percent across the industry.

Why are video games doing so badly? There are lots of problems you can point to, starting with declining personal income that cuts into discretionary purchases such as games first. There was a huge copy protection scandal last fall. That scandal affected only a single game, limiting its effective life to just a few months, but it has significantly impaired consumers’ trust in the industry as a whole, much as the Sony BMG spyware scandal took its toll on the entire music CD business, not just Sony BMG, a few years ago. The industry complains about an absence of exciting new releases, but that is really just another way of saying that consumers aren’t excited by anything new that game publishers are offering.

People are still spending plenty of time on video games, but most of the attention is going into just a few games: Wii Fit, Rock Band, and Guitar Hero. And the fact that this list is so short tells you that the video game business has changed.

The traditional video games of the past decade are based on high speed, rich video, and creative scenarios. A video game enthusiast would buy a new video game at least once a month to keep things interesting. But the current list of the three most popular games is the same as it was 14 months ago. That tells you that these games hold people’s attention in a new way.

The new games offer less of what people have come to expect from video games. The video content is minimalistic, the story trite and repetitive. The games never go so fast as to make your head spin. But the games offer something traditional video games don’t have — a high level of interaction.

Traditional video games use a very low level of interaction that never rises much above point and click. Instead of rich interaction, the games use high speed to challenge the player, but then require rich content to relieve the tedium of the repetitive game actions. It is a very hard way to develop a game. The new games have a much higher level of interaction, so the high speed and distracting content aren’t so critical. And the games maintain their interest, apparently, for at least 10 times as long.

And for the industry, that’s the rub. Part of the business plan in traditional video games was that players would buy new games frequently as the old games became too predictable. If people can continue to play the same game for a whole year or more, it is harder to sell them new games. It looks like the number of game titles the market will bear has fallen off by half and could fall farther.

This is happening at the same time that the cost of developing new scenario-action video games was becoming prohibitive anyway. If costs are going up and revenue is falling, the whole industry will have to move away from that approach.

To die-hard gamers, the timing must seem ironic. The high-performance game consoles of the last two years were supposed to usher in a golden era of video game action. Finally, the hardware would keep up with the pace of game action. Instead, the whole genre is falling flat, and the new video games are actually slower — much slower. But maybe this is not an irony, nor a coincidence. Perhaps after a few months of high-speed video game challenges, people came to the conclusion that there is more to playing games than going as fast as you can.