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Marketplace Morning Report

Business model for big gaming companies under attack

Marketplace Staff Jun 8, 2011
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Tess Vigeland: Oh my lord, Los Angeles is being invaded by mythical knights, avenging mutants, zombie hordes and World War II tank divisions. Standard fair for tinseltown. But the invaders this week are not the product of Hollywood’s celluloid dreams.

They’re the digital creations of the gaming industry. E3 is in town, the annual conference of gamers. And our own Steve Henn got the great assignment to be there. Hey Steve.

Steve Henn: Hey. How are you?

Vigeland: Very well, thank you. So how is the gaming business?

Henn: It’s in a state of flux. Sales and revenue for the big gaming consoles — like Nintendo and Xbox — actually fell last year something like 13 percent. It’s still a $10 billion industry, but that was a big drop.

Vigeland: It is indeed. What’s going on?

Henn: Some of the smartest people in the industry say the price of what people are willing to pay for an hour of entertainment, for a video game, is dropping like a rock. Bing Gordon was the creative director for EA, Electronic Arts, for years. He’s now a venture capitalist in Silicon Valley and on the board of Zynga, the company behind FarmVille. In the early ’80s, Gordon actually helped set the prices for video games. He says back then people were willing to pay like $1 an hour for entertainment. Today that’s fallen to something like $0.15 or a nickel.

Vigeland: Wow.

Henn: If you think about it, your iPhone games, like Angry Birds, are $0.99. And there are games on Facebook, like FarmVille, that are free.

Vigeland: Well then how are the Sonys and Nintendos of the world dealing with that?

Henn: They’re cutting their prices. Sony just unveiled its new hand-held gaming system here. It’s called the Sony Vita. And really this thing has all the hardware of a top-of -the-line smartphone. It has wireless, some have 3G connections, multiple cameras, touchscreens, super fast, state-of-the-art chips. And they’re selling it for $250. They’re just not going to get a lot of profit out of that at that price. The other thing that’s going on is the big game publishers like Electronic Arts and Capcom — the folks that create most of the hits for these game systems — are putting out more and more elaborate games, trying to justify their sticker prices of $60, $70, $80.

John Davison is a vice president at GameSpot and he’s been following the industry for years.

John Davison: Now you routinely hear about $20 million games, $40 million games. If the rumors are true, the “Star Wars” game is like $100 million that they just spent to make “The Old Republic.” So to place a bet is just like, you know, I think to a lot of people that’s insanity, right?

So Davison says either these old-line gaming companies are going to have to come up with new ways to get people to pay for their gaming fix or they could be headed for some serious trouble.

Davison: I think over the next three to five years, it’s going to be anarchy, here particularly because the mobile space has shaken things up, the free-to-play space has shaken things up.

The business model of the big gaming companies is under attack. The mutant hordes are being driven to the verge of extinction by sweet, little iPhone apps like Angry Birds and invasions of virtual piglets on FarmVille.

Vigeland: Well I challenge anyone to come up with a bigger waste of time — at least for me — than Angry Birds.

Henn: Yeah, me too.

Vigeland: Marketplace’s Steve Henn joining us from the E3 Conference just down the street here in Los Angeles. Thanks a lot.

Henn: Sure thing. Take care.

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