The business of computer software-generated video games has
become a game within a game.
Vendors both large and small are scrambling to keep up with
the rising migration of game players from dedicated console
devices such as Xbox, Wii and PlayStation to less-involved,
casual games played on social networks using PCs and mobile
The video game maker's ultimate goal: develop the game that
captures the most players. More users mean more recurring
revenue. And it means new and supplemental revisions of the game
introduced and sold over several years.
It's what decides success and failure for game companies, says
Michael Cai, vice president of research for Interpret LLC, a
"It's definitely a pretty hit-driven industry," he said. "If
(gamers) play your game for a long time, sometimes for years, you
can continue to monetize them."
As serious as the business may be, a game is still a game.
Video games are recreation, and tap into basic desires to have
fun, says Brian Blau, an analyst for Gartner, a research
"When you look at the reason why the industry does well, (it's
because) games have been part of the human psyche forever," he
said. "People love to play video games."
Over the past four weeks, the 19 publicly traded stocks in the
computer software game group made the largest advance among the
197 industries tracked by IBD
. The industry is home to thousands of independent game
developers churning out new product. From an investor's point of
view, only eight of the biggest game-maker stocks trade over 10 a
share. They tend to compete in different segments of the
Activision Blizzard (
) andElectronic Arts (
) built their success on console and PC-based games, and are
moving into the emerging mobile games market.Chang-you.com (
) andNetEase (
) are leaders in China's market for massively multiplayer online
games (MMOG) and massively multiplayer online role-playing games
(MMORPG). Zynga (
) is the world's leading provider of social-network-based
Global spending on electronic games will reach $112.1 billion
by 2015, up from $70.1 billion in 2009, says Gartner. The growth
includes consumer spending on gaming hardware, software and
online games as well as investments by game developers in their
Consumers in the U.S., United Kingdom, France, Australia,
South Korea and Japan spent $21.5 billion on games and related
hardware last year, says Interpret.
And don't make the mistake of thinking it's all about kids.
Children ages 6 through 12 accounted for only $1.5 billion of the
Activision, best known for its World of Warcraft game, grew
revenue by 26% in Q4 after posting 12% growth in the prior
Changyou also grew revenue by 26% and 29%, respectively, in
its last two quarters while the much larger NetEase increased
revenues more slowly, by 9% and 4%, over the same period.
NetEase is the exclusive dealer of WOW games in China. But its
own games also appeal to consumers, says Tian Hou, an analyst for
T.H. Capital, in a Feb. 7 report.
"NetEase has constructed a robust pipeline of diversified
content that meets gamers' interests," she wrote.
Some game makers, and
overall game sales
, are not faring as well.
Electronic Arts saw revenue declines in its last two quarters.
Zynga reported that year-over-year revenue growth stalled in its
fourth quarter. Zynga's number of users are up from a year ago,
but daily and monthly active users and overall visitors declined
Analysts say one reason for the decline is the slowing user
growth on Facebook, the world's leading social media site. Zynga
grew out of Facebook's meteoric rise.
Zynga's games are mostly free to users. Game players who want
a more advanced experience pay. But most don't, says Cai.
"You can only convince a small percentage of your players to
pay, and in Zynga's case that is typically 1% or less," he
Wireless is fast becoming an important part of the games
By 2016, the number of consumers playing video games on mobile
phones and tablets in the U.S. will reach 174 million, up from
61.5 million in 2010, says eMarketer, a research firm.
Mobile has opened the door to the rise of so-called "freemium"
games, which consumers can play for free and decide later if they
want to pay to add more advanced features. Many freemium games
are supported by ads in or around the games.
Non-console PC games dominate in China. Game developers there
also face stiff government scrutiny before selling any new games.
Sales could spike with a government reversal of its ban on game
console sales, says Lewis Ward, an analyst for IDC, a research
"That could possibly change the dynamic for that market," he
Zynga is looking at online gambling to change its fortunes. On
Feb. 22, Nevada became the first U.S. state to legalize online
poker, followed by New Jersey on Feb. 26. Zynga hosts one of the
world's largest communities of poker players on the Web. It's one
of several companies that have applied for a license to serve
Venture funds poured $356.9 million into game companies last
year. That is slightly below the prior year, but up 119% from
2007, says PricewaterhouseCoopers and the National Venture
Investments in the sector could slow this year if the market
is sluggish, says Tracy Lefteroff, PwC's global managing partner
of the venture capital practice.
"If the public markets don't pick up, you may have a flat or
down year," he said.
Last year global shipments of smartphones topped more than 722
million, up 46% from 2011. Tablet shipments jumped even higher,
up 78% to 128 million worldwide vs. 2011, says IDC.
Game developers have taken notice, says Gartner's Blau.
"All of the big game developers are looking at mobile and will
continue to," he said.
But consoles remain the largest piece of the business.Sony
(SNE),Nintendo (NTDOY) andMicrosoft (MSFT) will deliver new game
consoles later this year. Sony hasn't yet revealed pricing or
other details about its upcoming PlayStation 4, says Brian Pitz,
an analyst for Jefferies Group, in a Feb. 21 report.
"Sony will likely withhold this information until it learns
more about Microsoft's launch strategy," he said.
With about 60% of game revenue coming from games that play on
consoles, evolving console technology is pivotal, says Blau.
"This is the time of year when the games industry is going to
find out what is going to happen for the rest of the year," he
The market appears poised for continued growth as more
developers enter the market. Faster Internet speeds and the fast
growth of mobile devices will also help push the games
Growth of smartphones and tablets provides a rising platform to
reach more consumers, says Interpret's Cai.
"The sheer number of people who have smartphones and tablets
is several times larger than the installed base of three consoles
combined," he said.
Mobile has also opened the door to freemium games, says IDC's
"If you have those devices, you already have the gaming
platform and you can access games and pay if you want to," he
Mobile is also bringing games to new markets: Brazil, India,
Russia and China, Ward says.
"The rising standard of living in the BRIC region means that
many more people who didn't have access to games five years ago
now have the financial capability of investing in games," he
Companies counting on console games as big revenue drivers could
be in trouble, says IDC's Ward.
"If you are invested in console games, you are running a
significant risk if the customers you are anticipating end up
migrating over to tablets and smartphones and free PC games," he
Mobile devices can also provide a tougher landscape for game
makers, says Gartner's Blau.
"There is a lot more content available on smart devices and
PCs so there are other distractions other than games," he
Hit games are also necessary for continued interest and
revenue from gamers, says Interpret's Cai.
"The risk is always there; you just have to continue to make
hits," he said.
Changyou gets 80% of its game revenue from its longtime game,
"Tian Long Ba Bu."
But in a Feb. 6 report, T.H. Capital's Hou warns that TLBB is
losing users and that Changyou's "pipeline lacks possible hit
games for long-term growth."