E3 2012: A Quiet Year For Videogaming

E3 took place in LA last week, perhaps for the last time, but it failed to really hit the headlines in the way it usually does. Why? Well, as expected, it was a very quiet year for announcements, with most firms recognizing that now is not a great time to heavily invest in the industry (see the recent game retail crisis, etc.). It was common knowledge that Sony and Microsoft were unlikely to announce new consoles, but even Nintendo failed to excite, despite the Wii U coming out later this year. However, there was some interesting news aside from the inevitable announcements of game title sequels.

  • Microsoft focused on the “home entertainment” angle. The Xbox has always been a potential Trojan horse to get Microsoft into consumers’ living rooms — and it demonstrated this strategy at this year’s E3: new music services, deals on video streaming, and, most interestingly, SmartGlass technology to link various Microsoft-based platforms.
  • Sony played it straight. Along with some new game announcements (mainly sequels, of course), it announced a revamp of PlayStation Plus — adding more free full games to make the service even better value. Sony’s interesting new product was Wonderbook: Book of Spells, an augmented reality (AR) book tied to the Harry Potter franchise that works with the Move peripherals. Sadly, while Sony has years of interesting AR/video products (dating all the way back to EyeToy in 2003 and EyeToy:Chat in 2005), these never seem to draw in consumers in sufficient numbers.
  • Nintendo snatched defeat from the jaws of victory. It should have walked away with the conference, but instead it failed to impress — failing to confirm pricing or launch details for the Wii U. Still, we got Pikmin 3 — finally! Luckily for Nintendo, at least some of the third-party publishers announced some interesting Wii U titles.

Elsewhere, the show highlighted a slew of sequels from the major publishers and the continuing resurgence of the indie developer sector. Most interestingly, Peter Molyneux’s new firm 22Cans announced Curiosity; it’s not really a game but more of a social media experiment. Elder Scrolls Online also got its first real showing. Whether the franchise can reverse the ongoing trend toward free-to-play (F2P) MMOs remains to be seen; it’s a strong brand but, arguably, not Star Wars strong and The Old Republic is losing subscribers.

What is E3 good for?

Slow years like this inevitably lead to questions about whether E3 is as relevant as it once was. After all, many of the new game announcements were trailed or leaked prior to the show; with so many online sources (Eurogamer, Joystiq, Kontaku, Spong) covering gaming every day of the year, E3’s no longer a great way of getting that big-hit mainstream press coverage. However, E3 is:

  • Great for doing proper business. While the gaming media (and gamers) bemoaned the move to a much smaller show in Santa Monica in 2007 as lacking in glamour, you can bet just as much useful business was done between distributors, retailers, developers, and publishers.
  •  A useful date in the diary for an industry temperature check. E3’s June date puts it right at the point when vital Q4 titles and hardware have been finalized — meaning distributors, developers, and the media get hands-on with near-final game builds or hardware. Admittedly, given that some titles have already slipped to 2013, the usefulness of the timing has been somewhat diminished this year.
  • A great venue for the whole gaming ecosystem to have a meeting of minds (hopefully). E3 was born in the PC gaming age, just as consoles were enjoying their second coming (e.g., original PlayStation, Sega Saturn). It has continued to be dominated by these platforms — mostly the consoles and their portable stable mates. While recent years have seen some embracing of mobile gaming, the booming casual/social game market hasn’t been particularly well represented. This is changing: Zynga was at the show this year for the first time — albeit on more of a recruitment drive rather than to demonstrate its wares — and the pace of change should accelerate, turning E3 into a truly platform-agnostic forum for the industry.

What It Means: The Failure Of Game Retail For Publishers And Platform Owners

As discussed in previous posts, game retailers have to radically change their strategy if they are to survive on the high street, but what does this major shift in consumer buying habits and, potentially, retailers’ strategy mean for the titans of the videogame world: publishers and platform holders?

The good news:

  • More direct digital sales. A decrease in the physical availability of the product is bound to spur the (already growing) trend in digital downloads — particularly for more obscure titles or add-ons that are unlikely to be stocked/discounted by non-dedicated game retailers. The boom in indie PC games is a clear example of this already happening; boxed PC games have been a highly fragmented market prone to piracy for years, and systems like Steam have enabled otherwise unlikely titles to make it big via secure digital distribution.
  • The long-term decline of the secondhand market. As previously discussed, publishers have long considered secondhand games a thorn in their side, diverting sales from new titles — or so the theory goes. While an online secondhand market will continue to grow, the disappearance of high-street stores with lots of available secondhand titles (often shelved next to the same title, new) reduces impulse-buying opportunities.
  • A smoother supply chain. Obviously, digital sales don’t require holding inventory; in addition, much of the complexity of distribution, credit facilities, and returns will disappear if physical boxed games end up being distributed mostly via two or three massive online stores and major chains/supermarkets. However, there are significant downsides to dealing with only a few firms like WalMart, Tesco, or Amazon — see below.
  • Direct engagement with customers (or at least better information via partners). What do you, as a publisher, know about your end customer — or how many units were bought in a particular state? Perhaps a buyer is tied into your loyalty program or online service — but that doesn’t tell you where they bought from. By simplifying the supply chain and even selling digital goods directly, you gain insight into the buying behaviour of your customers and should be able to respond more quickly and effectively to their needs. Whether the big retailers like Amazon will share this information (even for a fee) is trickier; it depends whether they view the data as a revenue opportunity or a strategic advantage.

The bad news:

  • Supermarkets and multi-category retailers become the primary physical retail outlets. You may have simplified your supply chain, but when Wal-Mart becomes responsible for 50% of your title sales, you become overly reliant on its largesse. And firms like Wal-Mart and Tesco negotiate hard for discounts. A secondary consideration is that, like books, videogames will become a loss leader for multi-category stores: pull punters in with $10 off Mass Effect 3 and then sell them $200 of groceries. As a publisher, you still get your revenue, but this exerts downward pressure on price points and devalues games.
  • Online retail is still a mixed blessing. The gold rush in online shopping is largely over for most categories, including videogames. A few, well-behaved retailers dominate in multiple geographic markets; they don’t tend to discount massively and do now take part in pre-order and limited-edition promotions. But their long-term strategy isn’t necessarily obvious. Could Amazon become a leading competitive digital game distribution service? Will eCommerce (and rent-by-post) players jump into the gap left by high-street stores for secondhand games? The answer to both of these questions is probably ‘yes’.
  • A short-term spike in the secondhand market. A key strategy (as I see it) for those struggling physical stores is to up their game in secondhand and trade-in games. While long-term publishers and platform holders may be able to cut off the air supply to this market with digital downloads and a reduction in the number of physical game disks/cards, that is going to take some time. Be prepared for struggling chains to keep pushing the boundaries in terms of what they see as their right to exploit this (more) profitable segment.
  • The high-street showcase disappears. Often overlooked — especially by people who see GAME and GameStop stores as somewhat grubby holes (guilty as charged!) — is the showcase that these venues provide for new titles and new game systems — however seemingly badly organized to an outsider. 3D-based systems are the clearest example here: you can’t demonstrate a 3DS on TV or YouTube; you actually have to play with one in-person. Ultimately, this also means that videogames cease to hold a special place in consumers’ minds (just like books and music) — dedicated stores where you can browse and be immersed in your hobby/obsession, rather than just picking up the latest Call of Duty while you do the weekly food shop.

Today’s videogame market is such that both publishers and platform owners will probably benefit most from a slow, graceful decline in high-street videogame stores rather than catastrophic collapses — even if the threat of the latter accelerates plans around disintermediation.