Video Game Industry Trends

April 9, 2009 | Alex Ferrara | Bessemer Venture Partners Notes on the Video Game Industry

Video Game Industry Themes ,[object Object],[object Object],[object Object],[object Object],[object Object]

$500 million First Week Sales $239 million First Week Revenue Source: Associated Press Scale of Dark Knight vs. GTA4

Worldwide Gaming is bigger than Music, DVDs, or Box Office Source: Citigroup, NPD, October 2007; ESA 2008 Asia $11.5bn Europe $11.4bn U.S. $10.7bn

$34+ Billion Industry Worldwide Source: Citigroup, Brent Thill $68 Billion of Total Consumer Spend in 2007

Traditional Video Game Value Chain Publishers Console Vendors Retailers Consumers Spend Value Capture $68 billion $9 billion $25 billion $33 billion Royalties & Licenses Independent Studios

Console Game Publishers Face Challenging Economics Low contribution margin and high fixed costs make “hits” critical to success Revenue from a $50 Console Game Trend Ad agencies and media Overhead, freight, co-op, bad debt, etc… Developer Retailer Retailer Console vendor Media manufacturer Paid To Publisher Marketing $6 (12%) Publisher Operating cost $10 (20%) Publisher Development cost $8 (16%) Publisher Markdown reserve $3 (6%) Consumer Retailer profit $13 (26%) Publisher Publishing license $7 (14%) Publisher Cost of goods $3 (6%) Paid By Purpose Amount

Console Game Publishers Face Challenging Economics Electronic Arts Activision Blizzard ,[object Object],[object Object],[object Object],[object Object],Source: Capital IQ

Video Game Value Chain Publishers Console Vendors Retailers Consumers Spend Value Capture $67 billion $9 billion $25 billion $33 billion Long-Term Trend Themes ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Digital Distribution ,[object Object],[object Object],[object Object],[object Object]

Digital Distribution Publishers Platforms & Aggregators Consumers Both distribution models will continue to exist, however the latter will grow more rapidly particularly in the emerging online-only category ,[object Object],[object Object],[object Object],[object Object],Facebook Myspace Miniclip AddictingGames RealNetworks …

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],How Will Digital Distribution Impact Console Vendors?

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Virtual Consoles Must Overcome Substantial Technology Challenges

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Meanwhile, Penetration of Console Networks is Increasing…

If digital distribution is a big trend, why has PC gaming failed? ,[object Object],[object Object],Source: Citigroup North American PC Game Sales Annual Sales ($ billion) Share of Overall Market (%)

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],If digital distribution is a big trend, why has PC gaming failed? Source: Steampowered, March 2009 Gamer PC Hardware Profile Stats from Steampowered.com Users Various Operating Systems in Use including XP, Vista, 32 bit, 64 bit More than 50 different graphics cards in use with varying degrees of performance DirectX 9 & 10

[object Object],[object Object],[object Object],[object Object],Adobe Flash is Ubiquitous and May Be the Key Enabler Flash Player 6 Flash Player 7 Flash Player 8 Flash Player Penetration in Mature Markets 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Flash Player 6 Flash Player 7 Flash Player 8 Flash Player 9 Flash Player 9 Mar-08 Junr-08 Sep-08 Flash Player 10.0 Flash Player 10 Dec-08 Source: Millward Brown: June 2006 – Present, NPD: 2000 - 2005

Starting to see successful flash-based publishers ,[object Object]

Consumers Desire Social Gaming Experiences Source: MMOGChart

Next Gen Defined by Connectivity/Community ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Source: NPD, October 2007; ESA 2008

Consumers Desire Social Gaming Experiences Source: Gamer DNA Rock Band and Guitar Hero III share common game design themes, however Rock Band is designed for a more social gaming experience. Do these social elements contribute to increased player activity? Rock Band - Players/Day Guitar Hero III - Players/Day

Case Study: Nintendo DS Source: VGChartz, press releases ,[object Object],[object Object]

Case Study: Nintendo DS Source: VGChartz, March 2009 <- Weekly Puzzle Downloads via Wifi <- Multiplayer and ghost data sharing <- Virtual pets can play together <- Local multiplayer & capture the flag <- Multiplayer competition DS is the first portable device designed for connected multi-player local games

Publishers Benefit Because Connected Games Reduce Secondary Market Game Sales Source: CapitalIQ ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Traditional Retail Pricing Model for Console Games Source: VGChartz

Business Models in Flux ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

The Penny Gap & Online Game Business Models ,[object Object],[object Object],[object Object],[object Object],Demand Price Traditional retail economics assume a linear relationship between price and demand… Demand Price Free $0.01 However online the price/demand relationship typically looks more like this Source: Josh Kopelman

Freemium Pricing Source: VGChartz ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Conclusions ,[object Object],[object Object],[object Object],[object Object]

Video Game Industry Trends

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