Scarberia speaks from the penalty box

Scarberia:Scarberia has been an executive in and around the games business for almost 20 years, both in publishing and product development. "The reason for the pen-name is to protect plausible deniability in case I piss anyone too important off, since I still rely on them for deals, good gossip and expensive dinners...."

“For us in The Business, and of course by The Business, I mean, The Industry…”, Paul Schafer (Canadian), Late Show With David Letterman.

The Games Industry is huge. And despite all the bad economic news, we can still find positive reports about how the Industry is still growing, how it’s one of the only entertainment mediums with a positive future, how it has surpassed film box office receipts, blah, blah. But is this Industry really a Business anymore?

In order to thrive, a Business needs to have an eco-system of companies and contractors with a reasonable expectation that their investments of time and talents can result in profits. Everyone in a Business won’t and even shouldn’t make profits, of course, but most of the good ones will and should. Otherwise, they’ll do something else. And these profits will be the direct result of selling goods and/or services at a higher price than the costs that go into them. All very simple and, admittedly, simplistic.

Throughout the 1990’s, the Games Business was a great business. Lots and lots of people made money, some made obscene amounts. But without running the numbers, I would hazard that a healthy majority of that growing eco-system was making a good living. But this living wasn’t like the dotcom boom, when many people worked in ventures that had no chance of ever making profits, or even real revenue. The Games Business was making and marketing and selling games that people wanted, with costs that allowed good games to be blockbusters, and decent games to make a decent profit.

But with every new generation of hardware, this has gotten harder. The first big increase in costs was the shift from 2D to 3D, which required an expensive retooling and retraining of product development in the mid-90’s. The next was the rising necessity of supporting on-line features, first on the PC and later on the consoles. This was followed by dramatic growth in marketing budgets. And finally, with the arrival of the 360 and PS3, there was the requirement again to retool and retrain expensively for HD.

What this means is that even before the latest economic crisis, the Games Business has been struggling to make profits. In fact, without the sales from games on the previous generation hardware, which are now quickly disappearing, I calculate that hardly any publisher is making anything but losses. Of course we can all point to Nintendo and Blizzard and a couple others, but their exceptionalism proves the thesis. Ten years ago, only the lousy, the unlucky and the corrupt were losing money. Now it’s Microsoft (maybe making a small operating profit now for the first time), Sony, EA, THQ, Eidos, Midway, and nearly everyone else who are losing not just small, but very large amounts of money. This is not because they are all lousy, unlucky and corrupt. It’s because there is practically no Business in the Games Industry anymore.

Let’s look closer at some of the exceptions. Nintendo is the one true aberration and they’ve done it through innovation and a very tight control over their platform. Good for them, but the Wii isn’t helping hardly anyone else in the Games Business. In fact, without the DS, we wouldn’t have a global, profitable platform left for the independent publishers and developers.

How about Activision? With CoD4 in 2007 they had one of the only next gen titles to make lots of money; and with Guitar Hero they had one of the most profitable games in history. This was not an easy feat to repeat, and signs are that it didn’t happen at the same levels in ‘08. But thanks to the Blizzard deal, Activision looks to be the only independent publisher to have a plausible future that looks better than their past. What about Ubi? They’ve done an incredible job with a few quality games, but there’s a good argument to be made that most of their current and recent profits would disappear without the Montreal and Quebec subsidies. In other words, they have more in common with corn and sugar farmers than they do with being in a Business. And they are very, very good at what they do.

So where does that leave us? I’m sure all the publishers will keep hammering away at this generation of hardware, hoping that things will become more like the last cycle. And maybe it will. But if it eventually does, it will not be this year, and probably not even next because of the economy. They will also continue to look for THE NEXT BIG THING: mobile phone, casual, MMO, browser, free-to-play. There are isolated bits of success in all these categories, but little evidence that there’s a near-term, global Business model to make up for the profits disappearing through massive risk-taking on big titles with big marketing budgets that need to be big, big hits in order just to break even.

What this means for the development community, and the entire Games Industry eco-system, is decline. In fact, the Industry was probably already overbuilt three years ago. But it’s only now that those investments are showing that they will not be paying off any time soon. So there’s a long way to go backward before the new equilibrium. And even then, without some new big growth market, I’m not sure there’s enough business to be a “Business” again any time soon. We’ll remain an Industry, big and seemingly powerful, but a much duller, scared and miserly one.

And yet, what has been done is the creation of a medium. One that pound for pound still delivers the best entertainment value for the money. Games are not going away. In fact they’ve only just started. But we as an Industry may have tried to feed it too fast for its own good. Prepare for a rough diet.