Challenges Faced By the Video Game Industry
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. And this is what the management of the big video game companies are now learning. Stockholders of public companies demand steady double digit growth. That means a $1B company must grow revenues by at least $100MM. Challenges 2 and 3 make this a tough requirement for this industry.
2. The structure of the video game industry Steady revenue growth is generally based on building on the previous year's revenue. This rule does not apply to the video game industry because 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 year 2. This means that 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 annual 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. Remember, video games is a young industry. Their processes to develop and manage studios are immature. This creates a big capability gap to be able to build the games needed to deliver consistent revenue 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, (and 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, these 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.
