In Defense of Console?: The Sky Is Not Falling Edition

Before I get started I have to say a word about priorities The first quarter is always a tough one. Products, trade shows and return to work always conspire to make this period a difficult time to prioritize our lives. Last week I was smacked in the face by the deaths of two people well before they were done living. They both spent extended periods of time fighting disease, so the deaths were not a surprise, but nothing can prepare kids who are still kids bury their parents, or parents to bury their child. It is the wrong order of things. I hope no one reading this has to see these things around you, and especially not coming in pairs in a single week. Then we were all struck by the incomprehensible tragedy in Japan. With all of our friends and colleagues in our business tragedies that seem so distant when they happen in other parts of the world, suddenly strike very close to home. At the risk of sounding overly dramatic, I must put down in text that as much as we get wound up in what we do and how important our business is, we are just making games. Games can inspire, entertain, illuminate, educate and a whole bunch of other great things, but at the end of the day, we are not curing cancer - yet, and we are not bringing world peace - yet, so I took a few moments today to remember my priorities.

The big news coming out of GDC seems to be the attack of the mobile device. Stories seem to fall into two camps. People with vested interests in the devices or the games say the days of the Microsoft/Sony/Nintendo triumvirate are over and people on the console side of the world who look at iOS/Android games as a horrible virus, threatening to infect the hearts and minds of gamers and developers alike. Of course journalists continue to the stoke the fire, like James Brightman of Industrygamers.com who seems to be losing faith in the console business model. Everyone assumes the two markets are some horrible combination of cannibalistic and mutually exclusive. They are neither.

I may be relying once again on my brilliant grasp of the obvious and therefore cannot fault others for missing the parallels, but we have seen this same scenario play itself out in every other form of media. iOS, Android and digital distribution are not new media or even new games, they are new distribution channels. Media will adapt and specialize just as stage plays turned into movies and movies turned into sitcoms, but right now, they are just removing friction between game makers and customers. Whether we are talking about the impact of printed books on storytelling or DVDs to film, over the entire history of media expanded distribution expands the opportunity for content creators. But no one sees it immediately. Every time a new format is introduced the old formats feel threatened. Film was perceived as a threat to live performance, but a walk down Broadway or London's West End proves the concern to be overblown. Similarly, television was perceived as certain death for film, DVDs for theatrical release and even the remote control to sponsored television. In each case, the market only expanded - and we are seeing it in games.

According to Appdata, at one point Cityville hit a high of over 101 million monthly average users. This is over 10 times the sales of a blockbuster console game, just about 10 times the size of Warcraft and 5 times the purported life to date sales of Grand Theft Auto 4. Rovio is reporting similar numbers with Angry Birds. These titles are reaching and converting tens of millions of new consumers our industry never reached before. These consumers never knew they liked games, and they are finding they do. We joke about the crack model, but it works. They will get hooked on iOS and a chunk of them will move to mid core on the PC and a chunk of them will chase the high right onto the console. We already saw this with the Kinect. I remember a time not too long ago when a platform was considered to have achieved critical mass if it did 1 million units the first holiday season. Kinect has done 10 million to date and these are not core gamers. Social games core audience of middle age women and Kinect’s target marketing on places like Oprah are no coincidence. Consumers already accepted the up sell, all we need to do is convert them to game buyers.

I used this quote about half a year ago, before Call of Duty: Black Ops and Red Dead Redemption, when these same people were saying the console business was dead and I pointed out it why it is not. It comes from an investor in Avatar explaining why he went ahead and invested a film would not earn out unless it was among the biggest films of all time.

“I was really impressed by their understanding of the business, that there is so much competition these days for people’s leisure time that you have to create something you won’t find on TV, on computer games, the Internet, to draw audiences into the theater,” [Avatar Investor] Clayton says. “This wasn’t purely a creative process for them, like it is with some producers. Jon and Jim absolutely understood the need to cater to audience tastes.”

We have an expanding audience of gamers - I hate use the word "gamer" someone who plays games is no more a "gamer" than someone who watches television is a "televisioner" or a movie lover is "movier" after this sentence, let's stop using it - If we want them to use a 3DS, NGP or console, all we have to do is give them an experience they cannot have on an iPhone. While NGP is moving dangerously close to the iPhone model and thereby begging the consumer question, “Why?,” Nintendo’s hardware telegraphs a different gaming experience. iOS and Android eliminated inefficiency, but so far, they have not made games better and even though Angry Birds sells well – amazingly well – we have not seen a platform defining game. To date they prove games are fun and people are willing to play them if we do not require them to leave their homes and pay USD 60. They did impact our ability to sell some handheld games, but their major impact on the dedicated market is eliminating the ability to sell crap. Before iOS, if Nintendo did not sell games for a dollar, they did not happen. Now Nintendo does not control the whole market. When Iwata-san or Reggie Fils Amie talk about the threat of casual, it should be music to consumers’ ears. What they call a threat, consumers call competition and it translates to better games. Now Nintendo and all other third party publishers must earn the premium dollars they are charging. We are already seeing it on console.

As the film business matured and downstream revenue and amortization opportunities emerged we saw the introduction of the blockbuster turn into the requirement of the blockbuster. If you want to see a return on your film, you are either making Transformers, or Paranormal Activity. We are getting to exactly the same place in games. The good news is the market responded and is turning out high quality, blockbuster product that cannot be played on anything but a console. Last week I watched my son play Killzone, with the Move controller and peripheral - until I stole it and started playing myself. We could not have this experience on an iPhone. Sure this is for core consumers, but anyone in the business will tell you, we sell into the core first and then expand the market toward the mainstream. The iOS/Android market is dramatically and exponentially expanding this secondary market. To really see the vibrancy of the market, we need not look to Killzone and peripheral driven games, just look at the player minutes in Black Ops or pent up demand for Dragon Age II. But no one will argue that making blockbuster games is hard, expensive and risky.

In his article, Mr. Brightman believes it is so hard we should quit making them and focus on the obscenely profitable model enjoyed by Angry birds. Mr. Brightman is absolutely correct. Paying USD 140,000 for a game that returns USD 70 million is much better than paying USD 20 million plus for a game requiring 2 million units with an average sale price of USD 60 to break even. He could say the same about the television model in which The Simpsons producers an entire season for a fraction of the cost of a tentpole film and goes into its sixth or seventh or twelfth syndication run generating tens of billions of dollars is a better model than the film business where a tentpole film needs multiple release windows to generate a much smaller return. But Mr. Brightman has only provided half of the equation. I am waiting for the follow up article telling us how choose Angry Birds as the game to pursue out of the other 99,999 being started right now, or instead of the 51 games built by Rovio prior to Angry Birds. Hollywood will pay big money to be able to extrapolate the model into television in film so they can start to know which of the 95% of the television pilots should not be made. It is very easy to focus on the profitable title after the fact. But in markets where half, or less than half of the product makes most of the profit, it is impossible to figure out which half not to pursue. Fortunately, the casual market helps out here as well.

Blockbuster games require large investment, making publishers risk averse. They tend to relay on proven forecastable formulas, quickly leading to clichés. Consumer fatigue sets it in as originality wanes. While it is ill advised to introduce disruptive game play in a USD 40 million game, as the CEO of Rovio pointed out to Venturebeat as he argued console games are dying, iOS game allow for innovation (is it worth pointing out to Mr. Vesterbacka that iOS is in fact a console and he pays 30% more to Apple as a percentage of revenue than we do to Sony or Microsoft and even Android is a platform in the sense Google approves the apps for ads and keeps over 100% more of the revenue than Microsoft or Sony?). In fact, it is brainless not to take a risk in an iOS/Android game and short sighted not to try in a downloadable. Many original game ideas will fail – and that is the beauty. Once again, we have a market where identification of failure costs tens or low hundreds of thousands of dollars, rather than tens of millions. as we just saw with the investment in Rovio, investors and publishers can start to look at successful games and pay the “I did not have to pay for failure” premium to acquire games and the companies who make them.

Rather than looking at the casual market as a blanket threat, we should look at it as a return to the old days. More consumers coming to the market. More opportunity to test new game ideas. More downstream revenue windows and more amortization opportunities to support larger investment and hedge risk.