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Despite the fact that people are saying that video games is a recession proof industry, the big companies are struggling. Take 2, THQ, and EA announced disappointing results. There are alot of takes on what is wrong with the industry such as Om Malik's belief that they are too focused on blockbuster hollywood-style games. I think Om is right, but the industry's problems go deeper.

The video game industry challenges:

1. Growth demands of a public company It is one thing to lead a company past $10MM; it is another to lead it past $100MM; it is a whole different ballgame leading it past $1B. What we have are the management of the big video game companies learning it is completely different growing beyond $1B. Stockholders of public companies demand steady double digit growth. That means a $1B company must grow revenues by at least $100MM (more likely by $200MM). What you will see is that this is a tough requirement for this industry.

2. The structure of the video game industry  First, that steady revenue growth is based on the previous year's revenue. Now keep in mind that most of the video games that form these companies' revenue bases have development times of 18 - 24 months. That means the sequels to games that delivered the bulk of revenues in year 1 won't be released in the following year. So think of it this way - the games that will support this year's revenues targets will be a whole new group of games than those that supported last years $1B in revenues. That's alot of hit games!

3. Insufficient infrastructure to support growth needs So those two cycles of games that are needed to fuel the video game company's growth demand - they require game concepts, producers, project managers, developers and artists. Analysts and reporters like to harp on the cost of developing blockbuster games ($15-25MM); big video game companies have plenty of cash - what they lack are the people to develop the games to fuel the growth. Remember, video games is a young industry and they have not done a great job developing quality studios to fuel that growth. For those of you pointing out that video game companies have recently closed studios, I suggest that the quality of the studios is the real reason. Studios that are able to consistently put out top quality games are fine, the studios that are closing are those that struggle to meet deadlines or produce sub-standard products. If you don't have the people to build the products, you will never meet your growth targets.

4. Failure to recognized need to address, smaller, faster growing segments Finally, this ties in with Om's point that the large video game companies are over-focused on hollywood blockbusters at their peril. It is hard for video game makers to not stay focused on blockbuster titles because the hardcore gamer market is still growing strong (although slowing) and it is what they know how to do. However, the companies are ignoring other faster growing customer segments such as casual gamers, online gamer, and social gamers. The problem is that from the perspective of the large video game developer these markets are still relatively small to the core gamer market, today - therefore not a dependable, significant source of revenue growth in the short term. However, in a few years these markets have the potential to be a substantial source of growth. The other problem is that these new segments present new customers and new business models for big video game companies. To tackle these segments they will need to set up independent groups who are focused solely on these markets in order to learn about the market and build capabilities to develop those types of games (different from core gamer games). Of the big video game companies, only EA is attempting to address this market.

So to sum it up, big companies require big money growth, the video game industry demands two cycles of games, and they are not developing the infrastructure to support these demands. Lastly, they are ignoring the new emerging gaming markets because it is not a reliable immediate source of big revenue which will haunt them in a few years when one or more of those markets become huge.

It was only a matter of time to see some game developer leverage the power of the internet. That's what Rockstar Games is doing with the GTA IV release. The rise of gaming platforms connecting to the internet creates many cool options for game developers. Grand Theft Auto is pulling your GTA IV stats from your platform machine and posting them to a central website. Now, XBox and Playstation players can compare how "bad" they are - Legends will be made! This is a small first step of what is possible. What if we create a character for a web-based game. In order to generate some traction and fan support the game could be an ad or micro-payment based. Then we could create advanced platform games that will allow the player to use his/her web character. We could create geo-location games for the mobile phone and imports character data. Everything could be connected and the internet could serve as the nucleus of gaming franchises. Obviously this is not a simple undertaking. Rockstar is doing a good thing by keeping it simple and identifying the potential problems. That knowledge will ready them to create an even more encompassing game environment where gamers can create criminal kingpins whose exploits span platforms, mobile and the internet - Now that is Legendary. That is my little "video game fan boy" spiel for the next few months. Anyone else have ideas on where gaming could go?

As the video game industry matures, it will need to invest in understanding its customers. Sometimes you get the feeling that games are made based on what the people in control of the process want to play (or what their gut tells them other people would want to play). Essentially, it is a glorified guess. For the larger companies, they deeply believe in this process because it got them to that level of success. They ignore the fact that they were lucky; while they guessed a successful game, there were 10 other companies who guessed wrong.

As these big video game companies grow and go public, they are subjected to heavy pressure to continue to create new hit titles. Well, they may be able to guess one hit game...maybe two...even three, but when their revenue projections begin to rely on 10-30 solid titles, the odds of guessing will catch up to you. So what do you do? The initial reaction of a immature industry is to go conservative. They try to find ways to release sequels every year even though it will not move the title forward very much (essentially trading future brand equity for current sales). They look at the hits of their competitors and try to replicate it them. I think you can see every large video game company committing these faux-pas.

What they need to do is try to understand their customer.

This past Friday, I completed one of the first projects that was assigned to me back in week one. The project was to analyze data surrounding video games of boy-targeted TV licensed properties. Incidentally, a goal of the project was to better understand the customer. For the project, I amassed an impressive data set that included sales, advertising, TV ratings, and platform install base info and tried to sift through it looking for key lessons about the genre. It turned out to be a very difficult project. The difficulty was not in interpreting the results, it was finding the proper methodology that would deliver relevant results. To this end, I had to redo my research three times - revising data, finding new data, modifying regression methodologies. On that 3rd go around I was very relieved and amazed to get some solid findings. Now, I am not going to reveal the key findings (thats why THQ pays me the big bucks), but I can say the results reveal two distinct levels in the target market that dictated different product types and different marketing strategies. I won't be so bold as to claim my results are hard and true facts about how this genre operates, but they are starting point for further observations to test the validity of my conclusions. More importantly, it establishes a methodology for other THQ brand managers to evaluate their markets. ...And that is a step towards better understanding their customers.