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The video game industry’s E3 Expo starts on Sunday evening in Los Angeles next week. This is the conference where all of the cool new games are announced. While it lost its way in the past, last year’s show was a big success, with more than 40,000 attendees. And it looks like this one will be bustling as well. We talked about the conference and industry issues with Mike Gallagher, president and chief executive of the Entertainment Software Association, which puts on E3.
VB: What can we expect to see this year at E3?
MG: If you liked it last year, then you’ll love it this year. Our momentum has continued. The eyes of the world will be on Los Angeles to see what’s coming next in entertainment. That’s where the video game industry is now. We define the entertainment experience for the rest of the world, and E3 is where you see it first. We went back to the key stakeholders: you, the media; the analysts; publishers and developers. We decided to crank things up a little bit. We have 10 percent more attendees at about 45,000. We cut off registration because we feel no need to overshoot that number. We want to preserve the chemistry. We’ll have 300 exhibitors across 350,000 square feet, and that is up. We have 4,500 mainstream print, broadcast and online journalists. We have 1,000 foreign journalists coming and 200 buyers. The White House chief technology officer Aneesh Chopra is coming. The trend line is good, and the buzz is very high.
VB: It seems like gesture controls or motion sensing will be a big theme at the show?
MG: Last year, I said our industry was redefining the interface between humans and computers. Nintendo set that in motion with the motion-sensing Wii controller. It made it easy for everyone to be a gamer. That has been a key component of our industry’s success and Nintendo’s success. We saw the teasing of more of that last year. And this year, you get to play with things like Project Natal from Microsoft and Sony’s Move controller. We will also see an interesting announcement in the handheld space from Nintendo. We will see a number of titles that we can play from Microsoft and Sony.
VB: It seems like you’re saying the whole world should be watching games because things are happening in the game industry that are important to the rest of society?
MG: Absolutely true. The video game industry has never been broader than it is today. About 38 percent of women are gamers. The average gamer is 35. A quarter of gamers are over 50. We are reaching every segment of society. If you want sports, shooters, strategy or other games — all of those are under one roof at E3. If you are looking for the cutting edge of creativity, the cutting edge of innovation, you do it in video games. Musicians do it through music games. James Cameron spoke at length about Avatar the film last year. But he also talked much more about the intersection of games and motion pictures going forward. This was well before Avatar was the blockbuster it would become. There is a huge amount of interest in our industry, and it is all on display at E3.
VB: On the other hand, the U.S. console game sales reports have been bumpy, going up and down, this year. How concerned are you about that?
MG: Our industry has never enjoyed a greater level of interest from the consumer. Everywhere there is a screen, people want to play a game. Whether it’s the iPad or plasma television or PC, people want to turn it on and play games. That is a great wind in the sails of our industry. We are working on monetizing that. John Riccitiello, chief executive of Electronic Arts, pointed out that in 2003, there were 200 million gamers. In 2009, there were 1.2 billion. The trend lines are positive, and it’s much broader than just the consoles. Now the consoles are becoming the hub in the home, and they all have connections to Twitter, Facebook and Netflix. You see an increasing relevance across the board. On monetization issues, you see progress being made. It’s just not reported by the industry analysts that track this stuff. I’m very encouraged when I see that there are $5 billion to $6 billion in digital transactions in games, in addition to the traditional console space where we are pretty good at counting. It speaks to the dynamic nature of the industry.
VB: Are you working to get more of the interesting platform companies into the show, like Apple or Zynga?
MG: What you have to realize is that there are some very interesting companies already in the show. We do outreach to companies like the ones you listed. But remember, EA bought Playfish. Those types of games from Facebook are represented at E3. It was probably a little too early for Zynga, since they have been so busy growing. We have a great dialogue with them. I have visited them and am very impressed with their success. The doors are always open for those companies to come to E3. We have a great deal of interest in the smartphone game market. The screens are so much better and the games are reaching new consumers.
VB: Is this transition to digital online games critical to your members, and are they handling the transition well?
MG: Our industry is handling it far better than other forms of media. Newspapers are falling off the face of the earth because they lived in denial of the digital transition to the web. Movies are figuring it out as they go, and they are seeing a major erosion of one of their primary revenue streams in DVD sales. The traditional music industry was eaten alive by the digital environment because they weren’t ready for piracy. We are integrating the digital experience while maintaining the traditional one as well. We are going to bridge this gap. It’s happening now, incrementally. EA is offering everything from free-to-play games to console games to social gaming. More members are adopting a variety of business models. At the same time, you see traditional games like Red Dead Redemption doing fabulous sales.
VB: How strong is the ESA’s membership now?
MG: We are up to 34 publisher members. We added eight this year and 10 last year. They represent the full breadth of the industry.
VB: You still don’t have Activision Blizzard as a member. I suppose you’re working on that?
MG: That is their choice. The door is open. The ESA has a very important mission to pursue for the industry, and the members benefit. When we go to the state legislatures to seek incentives for our industry — and we have been successful in more than 20 states — members and non-members benefit. We work on anti-piracy techniques with internet service providers, using both legal and technical resources. We share those approaches with the members. The members lead and the non-members follow. We have doubled our membership since Activision left.
VB: If Activision Blizzard had joined, I suppose you would have been more vocal about the problems the Blizzard Entertainment division had with the (temporary) ban of World of Warcraft in China?
MG: China is a very complicated space, for us and every other industry. You have an opportunity for spectacular growth in a premium market. But there are serious and fundamental flaws in their policies on market access and other matters. Activision Blizzard has had to deal with those problems on its own without the resources of the ESA. We assist our membership on a targeted basis in China. We have meetings with my counterparts from throughout the world. We are moving forward. We have a very important mission, and that has been underscored by the fact that the U.S. Supreme Court is going to look at a video game case.
VB: How are you expecting the Supreme Court case (about laws banning violent video games sales to minors) to go?
MG: We are looking at the chance to put this behind the industry once and for all. The Supreme Court is very intelligent, and we will advocate our case zealously on behalf of our industry, artists and consumers. We want to focus much more on the positive aspects of what this industry means to the country and to our culture.
VB: You mentioned the state subsidies. I know that Canada has made a good run at recruiting American companies. Is that a concern? They are offering a lot of financial incentives.
MG: It’s an opportunity for our companies. Canada has a good educated workforce and their incentives are generous. What we are doing in the U.S. is going to the states to make sure they are doing what they can to be competitive. In Texas, the state legislature tripled the incentive pool over two years to $60 million. That’s a significant move that helps put Texas on a more equal footing. The goal for us in the U.S. is to reach the same level of success. It’s a concern from the U.S. perspective. We want to close that gap.
VB: How do members look at used game sales as an issue?
MG: This is a very sensitive issue. There are antitrust concerns at the association level, where it’s not legal for us to discuss pricing. We scrupulously follow those antitrust rules. I don’t have a lot to say. We have no discussions on it. It is not an agenda market. What you can see in the market is that there are different techniques being used by the publishers to deal with used games.
VB: What’s the latest on piracy?
MG: Last year, I called it a scourge. It has only gotten worse. With the growth of broadband, the magnitude of piracy has expanded dramatically. We did a survey of member games. There were 13 million illegal downloads of top-tier member titles in December alone. Call of Duty Modern Warfare 2 became the most pirated game of the year after it came out in November. In a matter of six weeks, there were 3.8 million illegal copies made. That is an enormous lost opportunity for the industry. We make enforcement a priority.
VB: What do you think of digital distribution? OnLive is getting started next week.
MG: I think the server-based games or web-based games are illustrative of the consumer’s desire to play games on any screen they come in contact with. I see it as an indicator of the innovation, excitement, and adoption of games as a culturally leading form of entertainment. Within that, there is turbulence. Some new avenues for the industry are being opened up at E3.
VB: What are you personally looking forward to at the show?
MG: I have to fight like crazy to get a couple of hours to see the show floor. I want to see the new hardware enhancements, what Nintendo is showing on the handheld space, and the new titles. You see the richness of the visuals and sound and stories behind games when you walk the floor at E3. It’s hypnotic.