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The video games industry is in the midst of a permanent, seismic shift that will see fewer top-tier console titles published. Revenue could decline an order of magnitude or more as gamers continue to shift to social and casual games, figures suggest.
As digital distribution on a range of platforms continues to make inroads and momentum shifts away from packaged retail games, established publishers will have to revisit their business models to compete with developers going direct to customers, according to speakers at the recent GameON Finance conference in Toronto.
“There is more disruption coming with mobile, social, streaming games and connected TV,” Piers Harding-Rolls, senior analyst and head of games at the market research firm Screen Digest of London, said against a backdrop of Disney’s closure this week of Tron Evolution developer Propaganda Games of Vancouver, British Columbia.
Publishers must address the sharp disparity in revenue opportunities between console and the growing social and casual game market, Harding-Rolls said.
In the U.S. alone, some 57 million console gamers spent $7.5 billion in 2009, the last year for which complete data is available, Harding-Rolls told conference delegates gathered at the Design Exchange, the former site of the Toronto Stock Exchange.
In contrast, some 109 million social gamers spent $250 million during the same period — much of which relies on a freemium model (where players play for free and can upgrade by paying for items) — or 30 times less than on consoles.
That spending works out to $131.58 per console gamer and $2.29 per social gamer — 57 times less than a console customer, Harding-Rolls said before he added a glimmer of hope.
“The average spend in freemium is slowly increasing,” Harding-Rolls said, noting that 0.5 percent of freemium users are what he termed “big spenders.”
Asked later what that term meant, he said in an interview that in social gaming, where less than 2 percent of customers pay anything, the 0.5 percent “big spender” slice of the market represents people who spend $100 or more in their lifetime.
“It’s going to be hard for the big companies to reposition themselves,” Harding-Rolls said, referring to traditional publishers. “They have to do it in a very careful way to realign to multiple segments.”
He pointed to Electronic Arts as having “the most advanced strategy of traditional publishers” to make a transition and noted that Disney will be one to watch as it steer attention to social game company Playdom, acquired last year. “We’ll see a shift away from console development and layoffs as publishers jettison costs.”
That doesn’t mean that console gaming will disappear altogether, Harding-Rolls said. “There’s still going to be a market for next-gen consoles and they will still have a retail solution, not an entirely digital base. They have an existing, highly monetized audience.”
The challenge to publishers as they change their focus will be realizing revenue that enables them to generate comparable revenue, Harding-Rolls said.
“Only a small percentage of social games are monetized and revenues are not at all comparable to the traditional [retail game] market,” he said. “It’s not like they can just turn off the business. We’re talking about public companies. They have to maintain a scale of business by keeping going on the console side and developing the digital side.”
That likely means that publishers will have to develop new business models beyond the freemium and secondary or subscription revenue models, he said.
“It’s a very fluid and exciting market but it also has big challenges.”