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.