Don't be glum after what some analysts considered a tepid holiday sales season. According to a series of reports both recently released and forthcoming, the game industry is poised for even more growth in the next four to five years as most researchers see the hobby proliferating outside of its current core demographics, growing new niches in the handheld and mobile arenas and bringing retail venues closer to the neighborhoods where people shop.

"The good news is there is still plenty of room for growth," says David Cole, president of DFC Intelligence ( http://www.dfcint.com ). Cole says that U.S. household penetration for video game systems has not increased markedly in the last decade, from 34 million in 1994 to 45 million today, with a quarter of those homes still using last-generation systems. Much of the growth thus far still comes from the existing gamer base, which leaves a substantial market of U.S. consumers waiting to be won over.

Juniper Research ( http://www.juniperresearch.com ) concurs in a very bullish report, "Next Generation Console Games," which projects $35 billion in cumulative next-gen hardware sales by 2008, far outstripping the performance of the current generation. Analyst Keri Allen contends that the added multimedia functionality of both handhelds and larger consoles (wireless and broadband connectivity especially) is going to help grow the franchise of game play to a wider audience. "This functionality will help consoles to finally become a mainstream entertainment medium, and put the stereotypical image of the 'computer gaming geek' to rest," says Allen. The broadening audience and more prevalent multi-console use by core gamers will "allow for much higher revenue streams across all sectors of the industry."

Cole, who is about to release "The Business of Computer and Video Games" in the coming days, feels that while hardware penetration rates may not have risen sharply, there is much broader use of these consoles within the home and that the units are now being played by multiple members of the family. All of this points to more multi-console homes and higher tie rates for each machine as a wider selection of software comes into the home. The next generation of hardware may be a battle for the hearts and minds of the entire family, not just the fan boy. "The system targeted to the broadest demographic may be the most attractive to the growing number of households with multiple users," says Cole.

Handheld platforms could become a major area of growth, says Allen, who expects $28 billion in cumulative handheld sales by 2008. "While Nintendo will most certainly lose its monopoly, we believe it will stay strong as the market for handheld gaming will grow as in many cases different handhelds are aimed at different demographics. She expects the Sony PSP to be a major force and the Tapwave Zodiac to satisfy a small but viable niche. An interesting wild card is the Korean GamePark unit, which is all the buzz in Southeast Asia and could create a major splash if it gets released in the West.

Online is Boom Time

Allen believes that connectivity is going to be one of the catalysts for broadening the base. "Online gaming will almost certainly be huge," she says, predicting 28 million online gamers by 2008. Downloading of new games and levels for existing titles will be commonplace by then. She recommends keeping a close eye on 2005, a key year for connectivity as the wireless PSP and connected consoles of the next generation start to roll out. 2006 will be when the online industry will begin to see "a huge surge of interest," predicts Allen.

One by-product of both increased connectivity and a broader gaming audience may be shifts in game design. In interviewing game industry executives, Juniper found mixed feelings about the market ramifications of shorter and episodic game play. Some argue that providing longer game play of 20 and 40 hours per title distinguishes the value proposition of gaming. No doubt, longer game play also helps rationalize the higher pricing of games relative to other entertainment media, but other executives believe the marathon game experience is outdated for the current market. Shorter and episodic games are likely to emerge, and connectivity will enable game experiences that come in chapters, much like film series. Allen suggests that downloading could encourage highly modular game design and consumption, so that players might even choose pieces of games, much like the music industry now selling individual tracks rather than albums on line.

The New Complexity

As gaming moves onto the next level of technical sophistication, it is going to cost us and require new disciplines and marketing strategies. Cole says that the average game development cost is approaching $5 million and he estimates this requires sales of 500,000 copies for such titles to reach break even. "Unfortunately, only 5% of SKUs will reach that level in the U.S.," he predicts, and so cultivating foreign markets is going to become critical to the success of most game companies. South Korea, Taiwan, Singapore, China, Australia and Eastern Europe are key emerging markets for the U.S. games industry if it can compete with some of the indigenous game economies that have already grown in some of these places.

The increased complexity of games will also demand much better rationalization of the design chain, says Allen. Companies will need to exert more time and effort on project management and develop professional project management practices for coordinating a process that now tends to occur across multiple studios and requires greater attention to deadlines and release dates. For the next generation, middleware solutions will become much more important to keeping projects manageable and on time. "Looking towards the next five years, rendering and physics engines plus active character technology will play strong roles," she says.

Closer to Home

Getting games into the hands of consumers remains one of the key challenges in an industry with very mixed marketing and merchandising skills. "The mass merchants have always done what we consider a weak job merchandising," says Cole, but even he was surprised by the poor selection and salesmanship at the biggest games venue of all, Wal-Mart. The company only carried 22 of the 40 titles DFC used in its shopping comparison (Best Buy had 37, Toys R Us had 35 and Target had 30), and its pricing was often only a few pennies less than the specialty chains. "But the price and selection issue does not truly convey the subjective view of Wal-Mart's game section being an overall mess," says Cole. As its most direct competitor, Target was hands down the best general merchandise retailer, with much stronger selection and merchandising.

The good news is that retail venues are increasing noticeably and coming closer to both the dedicated gamer and the family. The strip mall game stores are proliferating and in many cases they are better stocked and manned than the mall chains. Cole found this to be the case at strip mall outlets for GameStop and EBGames. These venues, which are usually near local grocery stores where families shop have gotten "more spacious and not as geeky" as they once were, he says. And in the end, broadening the base of gaming means making access as convenient as renting a video or buying milk. "To me, bringing solid game retailing out into the suburban neighborhood locations where you pop in right on your way to the grocery store or dry cleaner is a major deal."

Contacts: Contacts: Keri Allen, mail@keriallen.com ; David Cole, dcole@dfcint.com

[Copyright 2004 PBI Media, LLC. All rights reserved.]

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