Thursday, October 13, 2005

We Got Game

Many conservative and mature individuals may view video games as an occasional stress reliever. However, many gaming participants under their mid 30’s consider interactive games as a major part of life. In this regard, this phenomenon is comparable to that of rock music to the baby boomers. Instead of Led Zeppelin or the Eagles, the makers of Halo, Grand Theft Auto, and the likes have cultivated loyal fans lining up to purchase the next sequels and hits.

Video gaming has impacted our culture. My observations and also those of others show that gaming participants (gamers) range widely in age and game purchasing patterns. Apparently, games have changed exponentially since the 1950’s when Ralph Baer had the idea that games could be played on TV. Only few would have seen what was about to be created decades after playing Pong and Atari for the first time. Generation X and those following have been witnessing the transition in the video gaming industry.

Industry participants have come and gone. Some familiar names such as Nintendo have survived by adapting to changing technologies and demographics. Conglomerates like Sony, Vivendi Universal and Microsoft have entered the playing field and possess great influence in changing environments. While some company divisions focus primarily on game consoles, other companies such as Electronic Arts have sustained loyal gamers for their popular gaming programs. We have seen large conglomerates enter the market as others have built their companies supported by the growing video gaming popularity.

I do not condone allotting time spent on video games to pass the time, however we cannot ignore that the gaming phenomenon has evolved into a healthy industry. Not every company involved in the industry will capitalize from growing industry sales trend. On the flip side, those that develop and apply viable business models with steady revenues will thrive from rising numbers of gamers and sales.

Many now realize that, like the radio and television, the Internet is simply a medium that we use on a daily basis. So, where do video games fit in the picture? Perhaps a brief historic overview will give us a hint of where interactive gaming is headed.

As our Executive Vice President Tom Au mentions in his book A Modern Approach to Graham & Dodd Investing, the Internet could be viewed as the radio during the Roaring Twenties. The number of radio broadcasting stations increased from 3 in 1920 to 500 in just four years. In the fifties and sixties, television became the new means of communication. During both of these eras, “experts” pronounced to listeners and viewers new and efficient ways of conducting business. These overly optimistic views spread through the public and fueled investor confidence in the stock markets. One cannot ignore the similarities of these two eras and the recent Internet era.

Of course, we all know that dismal economic periods followed these booming eras. Keep in mind what was going on with the music industry during the seventies. Rock & Roll began to have sub-genres, and rock music became a big business. One could make an argument that people in the 1970’s turned to music to escape reality (period of "stagflation” and oil shocks), just as some people currently do when they engage in virtual interactive reality. Perhaps the video gaming industry will experience a similar success that rock music had during the seventies.

The Internet represents a new playground for gamers and allows industry participants to profit by adjusting business models. Interactive gaming has gone beyond the console and cartridge or CD model. Industry participants have become creative in distributing their games to the consumer and generating additional and recurring revenue. Previously, these interactive software producers were vulnerable to piracy and illegal downloading.

Stolen intellectual property remains a large problem for many policymakers and business decision makers. It’s not just video games, but all software-related products and that of other entertainment industry participants. Protecting innovators and patent-holders is key to sustaining a productive future. Who in the right mind would be willing to expense the hefty R&D costs (estimated to have topped $10 million to develop a new hit game), if these producers figure that their end product will be stolen and sold by those who exploit piracy practices? This problem has been affecting many companies, particularly those in the entertainment and software industries. Some companies have addressed this problem through various methods.

Some independent gaming producers have turned to offering free downloads. This represents a step towards making these vendors who copy intellectual property obsolete. However, the intellectual property holder needs to generate revenue through other means besides from the end-product sale to the consumer. Some game makers share profits from host sites that generate revenue from advertisements. As we have seen after the Internet bust, the advertisement-only model does not generate sufficient revenue stream for companies to sustain positive profits (excluding Google).

However, there may be some light for those who have applied the subscription-based model. Some gaming industry participants charge retail prices of $20 to $50 for their software. Additionally, some have been successful in building loyal gamers who willingly pay a subscription to participate online. Popular PC games charge approximately $15 per month or $45 per quarter. Microsoft also offers a subscription service for its Xbox console and charges $5.99 per month or $49.99 annually.

Subscription-based models may point to the answer to piracy that has been plaguing the entertainment and software industries. Companies who become successful on implementing this subscription or lease-like strategy will benefit from the growing number of Internet users and broadband connections. Of course this also depends on how well these companies monitor rogue gamers and gather subscription-paying gamers. Organizations have arranged tournaments with attractive prizes for winners to increase popularity of selected games. Gaming continues to evolve as serious gamers make a living as professional gamers. The video gaming world has come a long way, just as baseball has evolved since the Knickerbocker days (the time when first published rules of modern day baseball were documented in 1845).


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