Sunday, December 4, 2005

Idly gathered game industry statistics of doom

While I’ve been settling into the comfy moist goodness that is Seattle, I thought I’d jot down a few of my research notes. A blog is a remarkably nice method of recording information for later. It is searchable, automatically indexed by posting time, and has the surprising habit of collecting comments from people who are much better informed than the original poster.

Without further ado let’s look at today’s game industry numbers

American console adoption flatlined since the 80’s
“So this chart is pure number of units sold. It doesn't take into account duplicate ownership, and doesn't take into account population growth. You overlay those two facts to get a percent population with a console in the household, and that's what it looks like. 8 Bit years, 31% of households had a gaming system. This year, where is going to end up? Somewhere between 31-32%. The growth we have seen has been driven by population growth, and by duplicate ownership.”

Reggie Fils-Aime, Chief Marketing Officer of Nintendo

This was a stunning tidbit to me since it has been a matter of public knowledge that game revenues have been growing steadily for many years. The always forthcoming ESA claims that US revenues increased from $3.7 billion in 1996 to $7.3 billion in 2004.

The most basic conclusion is that we, as an industry, have become increasingly sophisticated at squeezing more money out of our current customers. However, we have done quite poorly at expanding beyond of a relatively fixed core audience.

Half as many (arcade?) gamers as in 80’s
“In 1982, he tells us, there were 44 million gamers. Today, there are 18 million.”

Kotaku on Nolan Bushnell, Founder of Atari

I can only assume that Mr. Bushnell is referring to arcade gamers in the US since the number of console gamers alone is dramatically larger than 18 million. Add in casual gamers and the numbers grow even larger.

Weak 2005
“Much of the problems have occurred in the last few months. After a strong first half of the year (up 9% over last year), sales growth has stalled over the last four months, declining by 17% year-over-year. Year-to-date sales are down 2.1% through October.”

"Our most recent forecast predicted U.S. console and PC software sales growth of 6% for 2005, and we now acknowledge that our forecast is too high in light of the weaker than expected October and likely weak November sell-through data. On balance, we now expect sales for 2005 to be flat to slightly positive."-

We are at the end of a console generation and slow sales are to be expected. The Xbox 360 is kick starting the next console transition early, but supplies are still quite limited. These numbers really aren’t that surprising. Except to see the inevitable mergers, closings and buyouts that accompany the mini-shake down when old consoles die and new ones are born.

Longer term declines over the last console generation
“In 2003, the global market combining hardware and software sales fell 10 percent year-on-year to 1.1 trillion yen (10 billion dollars), according to Tokyo-based Computer Entertainment Suppliers' Association.

That represents a 27-percent drop from 2001 when the market stood at 1.5 trillion yen and Tokai's Kawamata said Sony and Nintendo aim to reboot the sluggish game market with brand-new hardware.”

When an entire market drops by a third during what was predicted to be a growth cycle, there are interesting dynamics at work. A 27% drop in global sales despite mild growth in the US is quite likely driven by the shocking contraction of the Japanese gaming market.

I’m trying to track down links to document the actual numbers behind the Japanese market collapse. I know I’ve run across them, but foolish I forgot to bookmark them. If you run across such information, drop me a note.

In a mature multi-billion dollar market you expect a bit of slow down in revenue growth as you reach maturity. However, that isn’t what is happening here. Instead we are seeing dramatic fluctuations that belie an industry built upon an unstable and poorly diversified value proposition.

Success rates of new games
“A new report on the risks involved in game publishing and development has been released suggesting that, in the next generation, as few as 80 games a year will turn a profit.”

There are around 1000 titles released each year in Japan

Just for reference, there are roughly 500 to 600 retail titles released each year by the top 20 game publishers. There are hundreds of smaller titles that don’t quite make it on the radar and are much harder to track.

This is roughly 16% of all titles that hit profitability. Now, I’ve heard some people claim this is a decent percentage. However, for a new product launch this is pretty darned miserable. Robert Cooper’s research found that typical success rates of various product categories are as follows:
  • Highly innovative: 78%
  • Moderately innovative: 51%
  • Low innovative: 68%
Even low innovation brand extensions are kicking the butt of your typical game. Now, the number of highly profitable games is even less. If Halo accounts for 20% of the industry profit during last year’s Christmas season, there really isn’t that much to go around for everyone else.

Profit equals return on investment. If profits are low for a product category, then investments in new products will also often be low. Low profitability threatens the entire industry and makes it far less likely for there to be support for artistic innovation.

The culprits for low profitability are slightly more nuanced than the “increasing technology costs” that everyone is so quick to blame. Rational companies only invest in technology when there is competition forcing their hand.

We have hundreds of teams pursuing a mere half dozen highly saturated product categories (aka game genres) in which there are only one or two market leaders possible. It doesn’t help that most current genres are mature and their population is fixed or contracting. Also that ‘rationality’ of game industry management is questionable. Poor management practices, a lack of mature product design processes and a fixation on technology for the sake of technology also contribute.

End of data dump
All in all, the latest numbers provide a delightful snapshot of our dysfunctional yet lovable industry. The next two years are certainly going to be quite the rollercoaster ride for a lot of folks. Longer term, great difficulties are certainly lurking on the horizon. Many have been sitting under our noses for years.

(I recommend business model modifications and adoption of improved product design methodologies. :-)

Take care