Is It Game Over For Retail Game Sellers?

If the latest numbers from The NPD Group are to be believed, the Gaming industry may just be clinging to its last “life”.  According to NPD, year over year retail revenue dropped 34% to $750.6 M.  This represents the worst performance in the industry since 2004.  The lone bright spot, NPD predicts that digital and other revenue contributed another $350 – $400 M.  It’s actually no surprise to anyone following the industry that digital is growing so quickly.  Last year, for the first time ever, digital and other sources actually grew faster and delivered more revenue than traditional retail models.

There are several compelling reasons that digital is an attractive option for both the consumer as well as the publisher.  Although it would seem obvious, Gaming is going through the same conversion from physical to digital that both the music and video industries experienced.  Consumers intuitively recognize the convenience of digital delivery, while the publishers have been smart to develop business models that allow them to capture a larger share of the value they create.  In a traditional retail model the publisher splits the value they create with their retail partners.  If the publisher can deliver the content directly to the consumer, they capture a larger share of the revenue.  Not to mention that digital bits are cheaper to produce than physical copies and consumers appreciate the immediateness of the purchase.

This doesn’t mean that all publishers have to do is slap a storefront together and start printing dollars.  Consumers have had plenty of time to experience iTunes and Amazon.  They now demand significantly more value for their digital dollar and retail for Gaming will need to adapt.  We can see this already with the success of Steam.  It is more than just a digital storefront. It also provides a powerful recommendation engine, player matching services, and social features to connect like-minded gamers.  Plus, the recommendation service is significantly less obnoxious than the local game store clerk.

Several publishers have become ingenious in their use of digital content, incorporating it directly into their games.  Making the game itself the storefront.  Although I know there is some controversy here, games that have done it well have really added to the experience rather than detracted from it.  This also seems like a great way to generate some revenue from pirated games, since the only path to the digital content is through a legal storefront.

The digital experience for a consumer is highly driven by perception.  4 out of 5 consumers will abandon a video stream if it buffers only once, that was a hard lesson to learn for the video industry and could have destroyed OTT.  The same is true in digital game delivery.  Consumers don’t want to wait and a poor experience there will drive them back into retail, or worse, not to purchase.  That’s why it’s important to build digital storefronts that focus on performance, like Steam and Origin.

All in all, I think the gaming industry has several lives left in turning around their revenue problems.  I look forward to hearing your thoughts about the digital trends in Gaming and if you happen to be at GDC in March, stop by the Level 3 booth and catch me in person.

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The Level 3 Editor manages content for Level 3's Beyond Bandwidth blog.

2 thoughts on “Is It Game Over For Retail Game Sellers?

  1. There are also several compelling reasons that digital is *not* and attractive option to consumers, and my beef with the gaming industry is that these same reasons persist after half a decade of ramp-up. Specifically:

    – DRM – I buy my games, but an overly draconian DRM system makes theft more attractive, even if I have to send the developers a live check for the game amount. What I’m looking for is some kind of assurance that if Steam goes out of business tomorrow my games will be playable. Not just in single-player, and not just on the same OS/computer I have them on now. I still play games from the 1990s; this is important to me.
    – Footprint – Steam is notorious for running an application in the background for no apparent reason. Power users will disable it after booting, but we shouldn’t have to, and novices won’t know how.
    – Performance on downloads – It’s pretty simple to go online and find angry gamers ranting about not being able to play a game for 3-4 days after buying it because of download problems. The reliability isn’t there yet.
    – Trust – I have no idea what the verification apps are doing or reporting. This is a trust issue, and I don’t think it’s unreasonable to wonder what I’m opening myself up to by allowing these programs to run. What do they access? What do they report? How do I know they’re secure? For all I know they have the ability to search my hard drive and, under malicious control, pull all spreadsheets down to the central server farm.

    I’m all for dumping optical media. It’s a pain and the cloud is less likely to fail me after moving, decluttering, or a fire. But digital media distribution companies need to address these points.

    For what it’s worth, I’d happily accept a DRM solution that expired after 5-10 years (based on titles). I don’t know what game makers expect to make from a 2002 game this year, but if I had to guess, I’d say it’d be worth the theft risk 10 years from now to gain customers today.

    • You hit the nail on the head here and people are slowly starting to see the problems I have been worried about since the digital revolution of Steam / Xbox Live Marketplace / Playstation Store.

      Only today I was reading about someone getting upset that their digital comics they bought on the PSP do not work on the PS Vita. Even if they still work today on the PSP its just a matter of time before the service is fully withdrawn so that you cannot even access your old purchased content if you need to replace your PSP or memory card and re-download. Anything that relies on third-party servers has an unknown expiry date on it.

      Its bad enough that we have no guarantee that games downloaded on PS3/Xbox 360 will work on the next generation of those consoles, but what is to say we will still be able to play those games on the consoles they were designed for in a few years?

      Its likely they will drop support at some point and with patches being such a big part of gaming now, even the retail games could stop working because your save file is tied to the latest patch which you will no longer be able to download. At the least the PS3 remembers all the patches you downloaded and lets you backup the HDD but the Xbox however you can’t back them up and it only remembers a limited number of patches before dropping the oldest to download the patch for the latest game. So if Xbox Live stops working on Xbox 360 you could end up only being able to play the last 10 or so games you played, not cool.

      Even while the service is current there are questionable actions going on. For example Sony removed a PSP game from the store recently because an exploit was released to run homebrew on the Vita in the PSP emulator using it. Its been completely removed from the service so people who already bought it cannot download it either, is that even legal? You have effectively stolen that game from anyone who purchased it but needs to download it again.

      And even ignoring all those glaring issues, the infrastructure still sucks. I am fed up of downloading 1GB+ files from PSN/Xbox Live at 3-5Mbit when my broadband can do 37Mbit. How can I possibly take digital distribution seriously if games are getting bigger, I am upgrading my broadband but the downloads speeds are not improving?

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