The Death of Traditional Video Gaming
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Nearly fifty thousand video game industry members gathered this month in Los Angeles for the annual Electronic Entertainment Expo, E3. Over 200 exhibitors showed off their latest titles and hardware for upcoming video game releases. However there is a shift going on in the video game industry. With the next generation of video game consoles it remains to be seen whether the $60 per game and $300+ consoles can make the shift.
Video game sales were down 42% in April 2012 compared to 2011, according to the LA Times. This shift is exemplified by the explosion of casual, social gaming. Video game enthusiasts will continue to buy video game consoles and pay for video games. However hundreds of millions of people are playing games on their smartphones, tablets and social networks. These users are not paying hundreds for a video game console and they are not paying $60 for every new game they play. The casual games are either free and ad supported or only a few dollars, some also now include in-game purchases. Additionally these casual games are designed to be played within a web browser or on a tablet or smartphone. This means they are not as complex or graphically intense as a console game, which drastically reduces the cost of developing a casual game.
Zynga (NASDAQ: ZNGA) is the most well-known of these new casual game companies. Zynga has over 250 million active users and all of their titles are casual social games. Their top games include CityVille, FarmVille, CastleVille and Zynga Poker; CityVille alone has 40 million active players. At the time of their IPO, Zynga generated over 90% of its revenue from games within Facebook (NASDAQ: FB). Facebook generates 12% of its revenue from Zynga games that are played through Facebook and use the Facebook currency, Facebook Credits, (though Facebook is currently phasing out Credits) exclusively. Thus Zynga and Facebook have a mutually beneficial relationship. Though it is lopsided with Zynga far more reliant on Facebook than Facebook is on Zynga. The two companies have signed a deal whereby Zynga games on Facebook will continue to use Facebook Credits as currency through 2015 (Facebook gets a 30% cut from all Facebook Credits sold).
As of 2011 Zynga’s top three titles, FarmVille, FrontierVille and CityVille account for 57% of , revenue. In the first quarter of 2012 Zynga reported a net loss of $85 million, largely because of their $180 million purchase of OMGPop, the maker of the mobile game Draw Something. Zynga also reported that the majority of its growth is now coming from mobile games such as Draw Something and Words with Friends. Zynga only earns about half what it does per user from mobile games compared to Facebook based games. Whether or not Zynga is too reliant on Facebook, is actually worth the billion dollars they raised from their IPO, or should not have paid $180 million for OMGPop, they are an example of the addictive nature of casual social games.
Zynga is not the only example either, Rovio Entertainment has built an entire company off of their hugely popular Anrgy Birds franchise. Angry Birds has had over one billion installs and is free on some platforms, ad supported on others, and 99 cents on yet others. Rovio has also announced plans to diversify their offerings with a new non Angry Birds game later in 2012. It is clear that smartphones and tablets like the iPhone, iPad and Android are dwarfing the mobile game consoles released by Sony and Nintendo. Casual social gaming is here to stay not only through mobile devices but through websites like Facebook and Google Plus.
The question before game console makers such as Sony (NYSE: SNE), Microsoft (NASDAQ: MSFT) and Nintendo (NASDAQOTH: NTDOY.PK) is how they will adapt to a more casual form of gaming. Nintendo has already done this somewhat with the Nintendo Wii targeting families and other non-traditional gamers with their motion based WiiMote. They look to continue this with their upcoming Wii U console. As well as trying to keep a foot in the traditional gamer camp with titles like Assassins Creed 3, Batman Arkham City and Mass Effect 3. Maintaining the casual gamers, gaining ground with more traditional gamers while offering apps like Netflix so that people who buy the Wii U can use it as an entertainment device is crucial if the Wii U is to replicate the Wii’s success.
Microsoft on the other hand is doing well with the traditional gamer market and is releasing Halo 4 as well as other block buster traditionally appealing titles. Microsoft has released a new Xbox Music service that will be available on the Xbox, Windows and Windows Phone. Microsoft also released SmartGlass which further interconnects various Microsoft devices and adds additional functionality. While playing a football video game on your Xbox, you could design a play on your windows based tablet and then use it in real time on the Xbox.
Microsoft has also released the Kinect which is a motion based controller for casual gaming on the Xbox that has been very successful and targets the motion based gaming of the Wii. 40 TV channels are also rolling out their content to Xbox Live subscribers such as Bravo, HBO and Comcast on top of the content apps Microsoft already has like Hulu+, Netflix and ESPN. These new features, Kinect and entertainment additions will position the Xbox going forward as far more than a hardcore video game console.
Unlike Microsoft with SmartGlass and Nintendo with its Wii U demonstrations, Sony which makes the PlayStation 3 did not have much in the way to new casual gaming initiatives or entertainment at E3. Sony pushed connectivity during E3 and cross gaming between the Playstation 3 and the portable Vita gaming console. Sony also announced a number of new interesting concept games and that the PlayStation library of games would be coming to PlayStation certified HTC Android devices. This last announcement will help Sony’s titles gain some traction on mobile devices. However the titles will be older ones and the number of devices certified to play them will be limited.
Going forward Microsoft with their popular Xbox 360, Kinect, content deals and overall platform of integrated devices will be best suited to capture the casual gamer. The casual gamer will use the Xbox for some video gaming, some entertainment and some family gaming. SmartGlass and more services like Xbox Music will serve to further integrate and broaden the appeal of not only the Xbox but all Microsoft products. Microsoft has also announced Internet Explorer for Xbox which will be controlled using voice controls bringing further non-gaming functionality to the Xbox.
The Playstation and Wii do not have this ecosystem behind them. However Sony is trying to attract non-traditional gamers and Nintendo is beating the competition to market with its next generation console. Nintendo's focus is keeping the casual gamer while trying to appeal more to the traditional gamer. Nintendo is doing this with a newly unveiled Wii U Pro Controller which looks somewhat like an Xbox 360 controller. The Pro Controller is missing the touch screen that the other Wii U controller features. Nintendo is also pushing more traditionally appealing games along with this more traditional controller like Darksiders 2 and Batman.
However these efforts by Nintendo and Sony pale in comparison to the platform Microsoft is building across their devices, with the Metro UI, common rendering engine for IE and Smartglass functionality. The common core shared by Windows Phone 8 and Windows 8 will further integrate Microsoft's offerings into a complete ecosystem. The Xbox will become the living room component of this ecosystem as more than just a gaming machine, but as an entertainment device.
ded004 has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Microsoft and is short Sony (ADR) and has the following options: long JAN 2013 $22.00 calls on Sony (ADR). Motley Fool newsletter services recommend Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.