In case you don't recall reading through my April Tom's Rpt on Video Gaming, some news of late shows a major trend:
"Andrew Vanacore, AP Business Writer, On Friday July 30, 2010, 4:09 pm EDT
NEW YORK (AP) -- The Walt Disney Co. is selling Miramax Films to a group of investors for $660 million,..... Analysts also noted that the Miramax sale came the same week Disney bought online social-gaming company Playdom for $563.2 million, reflecting the broader shift of people's time and attention to the Web........"
A clever, strategic move by Disney's Management? What's next for the other players?
--- Tom
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LA Games Conference 2010
The Historic Roosevelt Hotel
Los Angeles, California
29 April 2010
www.lagamesconference.com
By: Thomas Palamides, Canadian Consulate General Los Angeles
Report Date: 6 May 2010
Introduction:
The 3D phenomenon that has hit the film industry may be ready to take on the video gaming industry as well. Free-to-play (FTP) online video games are another habit which is taking America by storm. The full-thrill adventure experienced by the FTP user has not translated into significant revenue for the traditional game publishers – at least not yet. Several countries in the Far East are at the forefront of developing the right business models for FTP profitability.
The social media gaming industry generated close to $700 million USD in sales in 2009. What is it going to take to get to $2 or $3 billion USD in revenue? Innovative distribution models for online gaming are being tested. The truth will come when real-time data analytics are possible as companies pursue the road toward perfection. Furthermore, what constitutes a blockbuster video game? Where are the opportunities for the small developers? Does the general public accept the translation of authentic movie characters into video games?
Finally, the debate between retail verses digital distribution continues. Is there a winner, and loser, or did Albert Einstein have it figured out some one hundred years ago when he said: “Life (or business, or global trade…) is like riding a bicycle. If you stop moving forward, you’ll fall over.”
Report:
2010 Gaming Trends – Analyst Presentations
(1) Shawn DuBravac, Chief Economics, Consumer Electronics Association
At the 2010 consumer electronics show (CES), one witnessed the official launch of the 3DTV in the consumer market. Further study indicates that there is extreme interest from the gaming industry:
- 1 in 4 consumers are interested in having a 3D video game experience.
- 1 in 5 say playing video games in 3D would be the primary reason for purchasing a new 3D ready TV.
In the United States it is estimated that there are 114 million households. Research indicates an average of 2.9 screens per household. About 1/3 of these screens are replaced annually. That means almost 100 million screens, of various sizes, are added to the marketplace every year in the U.S. The indication here is that as consumers continue to embrace new technology, there are commercial opportunities beyond 3D.
The full spectrum of displays available may be segmented based on screen size as measured in inches: 1, 3, 5 (mobile handheld) ….(void) ..15, 17 (notebooks), 24 (desktops), and 27, 55+ (televisions). The “void” size has recently been filled by (1) E-readers, (2) Netbooks, and most recently (3) the iPad in the U.S, [and the WePad in Germany]. Within the 5 -15 inch market it is estimated that 20 million units will be sold in 2010.
As the 5-15 inch market segment grows, it will expand the gaming market as well. Moreover, the Netbook industry, which is generally used in conjunction with another device, will breakdown the “binary barrier” that has traditionally existed between gamer and non-gamer.
A manufacturer can dominate any one of the aforementioned market segments if they are able to sell 20 million units annually. It is anticipated, that in 2010, for the television segment, (sizes 27 inches and above), 37 million units will be sold.
(2) Mr. Atul Bagga, Director/Senior Analyst, ThinkEquity
We are excited about “free-to-play” (FTP) which is showing strong growth in the social gaming industry. The reason for such a position is because FTP allows for three important factors:
(1) Price discrimination
(2) Control of piracy and community building and
(3) Increases longevity of game
As an analyst, I believe that the data indicates that eventually everyone will play games when offered something for free. If one looks at World of Warcraft (WOW), which charges a subscription, there are 10 million users. When you look at Zynga’s Farmville, which is FTP, there are more than 75 million users. We believe that eventually, companies will be able to monetize the FTP user through advertising (ad sponsorship).
We view the relationship between Average Rate Per User (ARPU) and the number of users as a pyramid: At the base is the largest group – the free user, with an ARPU of potentially $1 USD. In the middle of the pyramid are the paying users who typically have a $15+ USD a month subscription. At the top of the pyramid, the “big spenders” users, brings in an average of $100+ USD ARPU. If you can extract $1 from the consumer at the base of the pyramid more revenue can be generated compared to the other two groups. It’s simply a matter of volume, and cost of ownership.
We have seen in China that the average Chinese gamer ARPU has gone from around $10 in 2003 to more than $50 USD in 2008. The factors that have lead to this increase are surely the strong economy of China, the higher profit margins associated with online game distribution, and the proliferation of virtual goods which has set up the perfect balance between time and money.
Young people do not have a lot of money, but do have free time. As they enter the workforce and gain responsibilities they generally have less time, but now have disposable income. Therefore, we see the FTP model as being addictive, and hooking the customer, for a very long time.
Keynote Interview
A Conversation with John Pleasants, CEO, Playdom
Interview by: Mike Vorhaus, President, Magid Advisors
Q: How large is the social media (SM) gaming industry?
JP: The social media gaming industry was $750 million USD in sales in 2009. Revenues in 3 to 4 years should be $2 to 3 billion USD in the US alone.
Q: Will Facebook (FB) be the Google of the SM industry?
JP: I would imagine that they are the dominate platform in the western world.
Q: $10s of billions, What’s it going to take to get to that size?
JP: Look, there are three drivers for our industry today. (1) Our gamers are social. They do not require deep CPU power, are lighter weight, and nurture a single experience. What we are doing is bring socialization back into gaming. (2) A lot of the technical details are now handled in the back-end servers. Most people do not understand what it takes to launch a game. (3) Most games are free-to-play. These three factors are the temples of our industry.
Q: Okay, but what’s it going to take to get to be a $10 billion USD plus industry?
JP: As product life cycles grow other things will become important. Factors such as publishing and distribution, cross promotion, technical infrastructure, monetization, business intelligence are all part of the equation. Strategically, you have to look at the mobile platform as well. What is Google’s Android strategy? How are you going to steal customers off other platforms?
Q: How does one get from 1 to 2 percent monetization, to 2 to 3 percent?
JP: You have to take “friction” out of the system. If you achieve 5 percent monetization you have broken through to a success. Over time the system has to become more liquid. We have noticed that if a customer has virtual dollars stored in his or her account, they are more likely to commit to a purchase. If you have to refill, then they tend to walk away. Internally, there is an ongoing corporate struggle to grow market share, or make money. This continues today.
Q: Some games have higher monetization strategies than others. So a portfolio strategy is generally needed; however, how do you make the game achieve these higher numbers?
JP: We have tool bars that have been used with success in delivering higher monetization, but this is one off. We also have avatars, but we are not cross promoting this right now.
Q: Tell us about Playdom’s upcoming games?
JP: We are hoping to release ten games in the next six months. We are about 400 people in a number of locations. We have taken risks and continue to do so. Several of these releases will be new original content.
Q: Are we going to see studio Intellectual Property in Facebook anytime soon from Warner Bros., Fox, Disney…?
JP: I think it is coming. The reach on social platforms is phenomenal. Smart phones will become even more social. Just because you have a good brand, you still have to manage the social media business model.
Q: Most games are social from a marketing standpoint, but not with friends. Why?
JP: We have two games that are multiplayer capable among four people. The asynchronous aspect is very attractive. As the industry evolves, and become more competitive, I think the synchronicity model will blend into social media gaming. Facebook is putting huge work into its communication tools between users. It started with “invites”, and “news feeds”. We will see more in the coming months.
Keynote Interview
A conversation with David Perry, CEO, Gaikai
Interviewed by: David Reitman, VP Content & Entertainment, Switch and Data
Q: Before you launched Gaikai, what was the variable in the space both from the users and the company perspective?
DP: Let us start at the beginning. I was co-founder of Acclaim. We licensed foreign games from Korea and China. We received good press. Over time we learned a great deal. It was like having crystal ball for when we go one hundred percent digital.
The cost of acquisition of players is the rule that the Chinese live and die by. At one time I was tracking over four hundred Massive Multiplayer Online (MMO) games which gave me a deep knowledge of trends and metrics. We were looking at the analytics that pertained to free to play.
We realized that subscription games, such as World of Warcraft (WOW), had thirty clicks to install. You had a number of screens that had to be clicked through regarding security warnings, licensing agreements, procedures…This was a great turn-off to consumers. I thought to myself: How do we change this?
I believe people today have less time and less patience. We are at the point where “seconds” matter. The analytics showed this trend. The Holy Grail then becomes: What would it take to remove this “friction” from the system?
We went to Adobe to ask them to change their Flash install for us. They laughed. We then showed them that we could load Photoshop with a single click. Adobe woke up in surprise.
We worked with Adobe for over two years and have now made it possible to embed games anywhere. We have single line of Java script. We will launch at E3, in June 2010, in Los Angeles.
Q: You are not doing the same thing as other companies. You have approached the market differently. How so?
DP: Everyday I use the word “friction”, trying to overcome obstacles in our business. I feel that driving subscriptions is one of the hardest things to do.
A service like iTunes, which requires a subscription to have access to look at content to buy, is a bizarre concept. They are taking the digital customer, and keeping them exclusive to the publisher. This is not the way to go. We have different expectations.
We are going to have a globally distributed network of servers, located in three hundred data centers, so that there is a rapid milli-second response time. The standard approach that traditional game publishers have used is to use only five strategically positioned data centers globally. This is a cost savings approach, rather than worrying about latency response time. Having a distributed data network gives us a competitive edge.
In addition, there is no charge to the user, or the publisher, until the game starts. If the user clicks on the game, then we charge the publisher. Our business model is based on user time (server minutes).
In the future it is all about data. Knowing where every single dollar is being spent will be critical. We are building a real-time data engine (4 to 5 seconds feedback response) to provide analytics which will enable this process. We call it “Guide Fire”. You can use it for beta testing right now.
The State of the Games Industry – View from the Top
Michael Pachter, Managing Director, Entertainment Research, Wedbush Morgan Securities
Nanea Reeves, SVP & COO, Global Online, Electronic Arts
Brian Ward, SVP, Worldwide Studios, Activision Blizzard
Teemu Huuhtanen, President, North America, Sulake Inc. (Habbo Hotel)
Phil Rosenberg, SVP, Bus. Dev. Sony Computer Ent. America (Playstation)
Moderator: Eric Goldberg, Managing Director, Crossover Technologies
Eric: A few overview statistics. The global industry for console sales is $35 billion. Farmville, with 85 million users, and FTP, has 2-3 percent paying customers. The SIMS game, with 100 million users, is 100 percent subscription-based. China’s leading online game publisher, 10 Cent, which is a pioneer in FTP, was the first company in the world to pass $1 billion USD in virtual sales.
Q: There has been some recent press stating the doom and gloom of traditional gaming relative to console and retail. Is this true?
Michael: We are in a state of flux. Ten years ago we were a packaged goods industry with 8 -10 percent annual growth. Today it is in the low single digits, but still growing. However, digital is growing at 30 to 50 percent annually.
Q: The question is: Why do I play an Electronic Arts console game when I can play a Zynga game for free?
Nanea: We still have a $500 million USD in revenue from the retail business. We have to now move the direct-to-customer mindset to influence the general trend of digital consumption.
Q: Must the retail business be defended?
Nanea: It is not really my job to defend traditional retail, but to figure out how to maximize the franchise. Also, who is going to build all this content? Furthermore, the finance guys want numbers so that they can make forecasts. For the time being, we are placing our bets with traditional.
Q: What is the definition of a Blockbuster?
Teemu: Even though my company, Habbo Hotel, is the largest virtual world in the western world, I would actually have to say that Facebook (FB) is tough to tackle. A hit on FB would be 150 million users; however, on other platforms, 20 million would be a hit. Destination sites will control everything in the future. FB controls this very well.
Phil: Sony itself is changing. Xbox has the most online users, Nintendo’s Wii the least, and Sony’s Playstation in the middle. A blockbuster to me would be 5 million PSP3 unit sales and 10 million online users for a single title. Customers are definitely different in the traditional and digital worlds.
Michael: I think a blockbuster would be big revenues and big profits. $150 million USD per year would be a great franchise. If you can get 15 million users, to pay $1 USD per month, you would have a hit.
Q: Now that more than fifty percent of the US population plays games, how does that change your approach in making games?
Michael: Games are almost accessible to anyone. On the digital side, companies have the ability to experiment more based on cost structure. Farmville is the harbinger of the future.
Q: Where are the real opportunities?
Teemu: When iPhone came out you had only about one year before the big publishers entered. Facebook has probably only one year more for the small developer community.
Q: Where hasn’t the window closed [for the small developer]?
Michael: (1) the Android and (2) the $1.2 billion USD acquisition of Palm by HP. This, I’m sure, was done for access to Palm’s intellectual property portfolio. I think this will create some competition for Apple.
Q: What about different places to play games?
Nanea: I like to think of it as “what mood am I in”, rather than where I am. Several companies can really scale if they can think beyond the guys eating pizza in the basement of their home. The audience, that includes women, is bigger now. Bringing in multi-tasking will help as well.
Keynote Interview
A Conversation with Ira Rubenstein, EVP, Global Digital Media Group, Marvel Entertainment
Interviewed by: Andrew Wallenstein, Deputy Editor, Hollywood Reporter
Q: The feature film Ironman II is coming out with a video game, but we are seeing a shift. Could you explain this?
Ira: Marvel has over five thousand properties. Marvel entered the movie business with Ironman, and The Hulk, by creating a creative team. We formed a similar creative committee so that our game storyline is not true to the movie, but only to the character, thus extending the timeline of the property. In addition, this makes it possible for the publisher to produce a higher quality product.
The Marvel universe is very open to having different storylines, because it knows that when it comes to games we have to do something different. Early research shows that the older audience (16+) are open to the departure of the gaming storyline from the movie storyline. The ones that find it difficult to accept are the 10 to 13 demographic.
Q: You are taking an interesting approach to Flash-based systems. Please explain?
Ira: When I started at Marvel two years ago we just licensed rights. It was obvious that we were missing a whole younger demographic, particularly those on social media platforms. We partnered with developers for multiple games. To drive down development costs we reusing game engines and added advertising. Once a month we introduced new games properties. We saw that some games were successful, and others were not. The hits were repurposed with other IP and released.
Q: Disney now owns Marvel. What do you see changing?
Ira: I think it’s a real exciting time. The change has been that Disney has tremendous resources and distribution. In the game space we have had numerous meetings to figure out a strategy to leverage our IP. Disney offers us broader game engine technology, release dates, and many other business aspects which may be leveraged. Through our creative team, we’ll stay true to our brand.
Digital Distribution
Digital vs. packaged Goods – Adapt or Die?
Brandon Beck, Co-founder & CEO, Riot Games
Tim Chang, Principal, Norwest Venture Partners
Joe Minton, President, Digital Development Management
Chris Petrovic, General Manager, GameStop Digital Ventures
Alex St. John, President & CTO, hi5
Moderator: Pascal Brochier, CEO LVL UP Ventures/ Former Pres., Global Retail, Vivendi Universal Games
Q: Where do you see the role of packaged goods for the future of gaming?
Joe: The statement that “retail is dead” is hyperbole. It is a $46 billion USD global gaming industry. In the west, it is $33 billion USD for the console industry. Both package and digital are growing, though at different rates. Packaged goods are going to be here for a while.
Alec: Why isn’t retail dead? Games are played by kids and they don’t have too much cash. Second, the “friction” for installing an application safely on your computer is currently largely insurmountable.
Tim: I’ve spent a lot of time saying that the metrics of digital services would change. What if we knew what was an important metric. One could foresee the day when it is important to understand exactly what data are relevant to your company. We are not quite there.
Chris: For us, it is not one or the other, but supporting both industries. We are growing still. We will open 400 new stores in 2010. More than 500 million people enter our retail stores every year. I would like to suggest that our retail presence helps with game discovery. Having the deepest customer relationship is important.
Pascal: For the $60 retail sale the path has been Recruit, Monetize and Engage. With the digital distribution it now shifts to Recruit, Engage and Monetize.
Q: Fragmentation of audience continues. Where will be the greatest impact?
Chris: Two things are fragmenting: Time and Money. People are engaging in game play more frequently, and staying with it longer.
Tim: Gaming is a natural mechanic. I think browser supported gaming is the way of the future rather than device specific platforms. Japan has required FLASH-based support on mobile for years. This had a lot to do with the quick uptake of mobile gaming.
Alex: There are games that sell on marketing and brand. We see it constantly for consoles, mobile and PCs systems. They all do it. The alternative way games sell is through addiction. This will be the dominate way by which games are sold by 2015.
Brandon: The more connected devices become to the Internet, the more pressure is placed on the retailer.
Joe: I’m not a believer in that consoles are going away. There are too many interested parties in that space. Apple shows us that that tight control on the audience counts. I think we are going to see a lot of retail touch points going forward extending retail productivity.
Q: What do you see going forward for the gaming industry?
Alex: This is a real exciting period because we are falling apart. The demand for game play is increasing. The high quality online games problem is not solved. There is opportunity to develop an exotic hybrid business model (a blend of advertisement and commerce). The social media guys are “babes in the woods”.
Joe: One of the biggest hurdles will be for the independent publishers. People can put out games of all sorts. However, the average iPhone application generated only $700 USD. That is not sufficient to keep a company in business.
Chris: Fifty percent of the used games purchased at our stores are for the PS2 platform. That platform was released eleven years ago. The East and West Coast population drive trends, but in the heartland of America, people still use the older platforms. Further to this point, the number one selling card is Zynga Game Network. Putting a timeline to the future of gaming and retail is futile, because we see a bigger picture than most companies.
Q: Who is going to pay for the content creation?
Tim: As platforms mature the bar always goes up. We have existing IPs, but what if they enter the social gaming arena. Revenue splits are a sticky issue.
Chris: Anecdotally, it is clear that production costs are escalating as social media expands. Some independent game publishers are entering retail to generate money.
Alex: Wild Tangent started in advertising revenue games. I’m seeing a lot of small games getting start-up money from advertisements. Those websites that have an audience are doing a revenue split with developers.
Conclusion:
At this year’s LA Games conference there were no earth-shaking new product announcements, nor are any predicted for the upcoming E3 Conference next month in Los Angeles. The video game industry, with its 5.8% compounded annual growth rate for the U.S. (Pricewaterhouse Coopers – Sept 2009) will continue to experiment with social media gaming. The social gaming arena, which is expected to grow 20 to 30 percent annually, will foster new companies and new business opportunities.
Established Hollywood-based content companies (i.e. console game publishers and film studios with large libraries) know that steps must be taken to participate in the lucrative revenue streams which social media gaming has to offer. The struggle confronting the stalwart companies comes in finding the appropriate strategy which uses existing corporate assets, while leveraging the evolving ideas of the social media community, within the cost structure of the institutions and profit centers.
Thomas Palamides
Trade Commissioner
thomas.palamides@international.gc.ca
T: (213) 346 - 2757 Direct
F: (213) 346 - 2767
550 S. Hope Street, 9th Floor
Los Angeles, California. 90071
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