shrink-wrapped software–yesterday’s story
In the heyday of shrink-wrapped video game software, the dominant companies, like Nintendo, Electronic Arts and Activision, had three key advantages other than engaging original content. None were well understood by Wall Street. They were:
–these firms owned/controlled the strongest distribution networks
–like other entertainment forms, fans restocked their inventories with titles in the newest format. So they enjoyed a big surge in sales growth every four or five years as a new generation of game devices was introduced, and
–perhaps the key competitive advantage, the industry spawned a group of intense users of their products, maybe 300,000 strong in the US and an equal number abroad. These hard-core gamers could be counted on to buy almost any well-crafted game.
How important was this group? If you figure that the wholesale price of a shrink-wrapped game would be $40, and that it would be a hit only in the US or only abroad, then you could be very confident of generating revenue from a good game of about $12 million from the hard-core group. Until the past few years, when game development costs spiraled up over $20 million, that meant that a well-made game would be highly profitable even if no casual gamers bought it.
Enter simple games, cheap to develop and delivered either through social networking sites or through cellphones. My assumption, and that of Wall Street, I think, has been that these gamer players are by and large casual fans who dabble but don’t get very involved in game play. Maybe it’s just that the games are relatively simple and don’t require the lightning reflexes most hard-core shrink-wrapped gamers display that fosters this belief.
It turns out, however, that that’s not so, at least according to a recent survey by market researcher NPD. In fact, there is a large group of hard-core mobile and social networking gamers. These gamers bear more than a passing resemblance to their hard-core console gaming counterparts. For example:
–avid console gamers spend 18 hours a week (yes, that’s right) playing; their digital counterparts spend 16 hours
–hard-core console players buy 5.4 games a quarter; digital gamers buy 5.9.
One big difference between the two groups is size. There are presently about twice as many obsessed console gamers as there are mobile/digital ones.
A second is dollar purchasing volume, although the disparity may not be quite as high as it seems at first. At $50 each, hard-core console gamers spend just under $1100 a year on games. Their mobile/digital counterparts lay out only a tenth of that. But console gamers’ net outlay can be far lower than the gross, depending on how many of their games they resell, either privately or through video game stores.
The real question on the table, if you think there’s a chance (as I do) that social gaming will develop along the very lucrative lines of console gaming, is how to make money from the idea that digital/mobile gamers aren’t as “casual” as they may seem. Using the shrink-wrapped game industry as a model, I think one should look for companies that:
–can charge by the device for use, and
–are able to attract large numbers of hard-core gamers who provide a steady stream of recurring revenue–whether by buying game downloads, microtransactions or advertising.
Ideally, this would seem to mean finding social network companies that have their own game subsidiaries. As far as I’m aware, the only publicly traded ones exist in Japan. The worry about companies like DeNA and Gree (I own both) is whether they will be able to exporting their very successful domestic market model to the rest of the world. All the Japanese firms are trying, and aiming either at China or the US. But it’s too early to tell.