If you look back on the year 2007, the thing that seemed to catch most people by surprise was the growth of what is often referred to as 'casual games' or the 'casual gamer.'

The big products were the Nintendo Wii and DS, systems that are not the power technology leaders of their generation. Electronic Arts started its own Casual Entertainment division. Ditto Vivendi Games with its revival of the Sierra Online brand.

One of the biggest acquisitions of the year was Disney’s purchase of Club Penguin for over $350 million. Club Penguin was a cute, simple 2D virtual world that was less than two years old. Meanwhile, the media has jumped onboard with all kinds of stories about the explosion of the game demographic to 'soccer moms' and even senior citizens.

So what exactly is new in the video game industry? Are casual games the new frontier where pioneers will strike gold? It is easy to see why so many are bullish on what is now referred to as the casual game industry.

As development costs soar for high-end games, the risk/reward ratio starts to go out of whack. A product like Club Penguin can be developed for a very low cost, but its developers got acquired for more than just about any other game company in recent years. Could the game industry really be headed towards a market where low cost games also make the most money?

Of course, everyone probably knows that it is never simple to make money in a competitive environment. DFC Intelligence would take it a step further and argue that what is called the casual game industry has always been a huge part of the video game business. However, in recent years, casual games have been overshadowed by the growing success of monster epic games with complex controls and deep storytelling and role playing elements.

It should be first noted that DFC Intelligence is not a big fan of the term 'casual games'. This term has generally been used to refer to PC games that, in recent years, have been available for free to play online. Probably the most played games of all-time are the products like Free Cell that have been bundled for free with Microsoft Windows. In some Asian markets, the term casual games refers to any product that is not a massively multiplayer online game (MMOG).

When DFC Intelligence forecasts the 'casual game market' we are generally referring to games in categories such as puzzle action, arcade action, classic puzzle games (crossword), traditional card and board games etc. Our forecasts are for products in those categories that are not distributed at retail, but instead rely on an online business model. On the PC side alone, DFC expects this category to grow to over $2.3 billion a year by 2012, but in reality that is only a small part of the 'casual game story.

DFC prefers to look at the market in terms of simple games versus epic games. In today’s game industry there is a huge market for both products. The problem with simple games is that, because they are often easy to develop, barriers to entry are low and these products can often start to look like a commodity.

It is hard to get consumers to pay for something that is widely available for free. In contrast, the epic games are few and far between, a new version of Halo has taken an average of three years. These games are clearly not a commodity, but the obvious downside from the manufacturer’s end is that the development costs alone are soaring to an average of over $20 million.

What became very clear in 2007 was that not only do a large portion of consumers like simple games, but they will pay big bucks for those products if they are packaged right. Making money from simple games is really a question of proper packaging, marketing and distribution.

One way to sell a simple game is to package it with a fancy controller. The Wii was marketed for its controller, the DS has a touch screen, the PlayStation 2 EyeToy features a camera, SingStar uses a microphone, Guitar Hero has an actual guitar, Wii Fit has a balance board, Dance Dance Revolution has a fancy dance pad and so on. These are all very simple games, but they were also some of the most expensive and successful products on the market in recent years.

One common misconception is that 'casual games' are only played by 'casual gamers'. The other misconception is that casual or simple games are easy. Games like Tetris, Pac-man, Dance Dance Revolution and Guitar Hero are not complicated, but they are definitely not easy.

Furthermore, these products appeal to a full range of gamer types. Many of the so-called epic games appeal only to fairly serious gamers. More simple games can appeal to not only serious gamers, but also the casual gamer. The difference is that hard-core gamers will often play both simple games AND complex epic games. More casual gamers will only play the simple products.

Simple games have been the driving force for the video game industry since its rise in the 1970s. Back then, games like Pong, Space Invaders, Asteroids, Pac-man, Donkey Kong and others had consumers spending billions of dollars a year in the arcades, one quarter at a time.

However, when game systems went into the homes, and later when PCs went online, these products became widely available commodities that consumers could easily play for free. Arcades and amusement centers that survive today, like Dave & Buster’s, still feature relatively simple games. However, these simple games are packaged in a way that is definitely not simple or cheap.

For example, Daytona USA is a simple car racing game that was widely promoted by Sega for its home game systems in the 1990s. However, for the arcade version, up to eight life-size racing cars, each with their own screen and controls, can be linked to a close circuit television for a competitive racing experience with simulated motion. The game is simple, but this is not an experience that can reasonably be emulated in a household.

In 2007, the big trend was simple home games with complex controllers. Products like Guitar Hero, Rock Band and Wii Fit are selling for $100 and more because they feature fancy controllers. One of the best selling games of 2007, Nintendo’s Wii Play was nothing but nine simple mini games packaged with a Wii controller.

It is the packaging that distinguishes these games. A product like Dance Dance Revolution is widely available for free online, but without the fancy dance pad it is just not the same.

Of course, the problem with bundling a game with a complex controller is obvious. From the manufacturer’s point of view it is no longer a simple or inexpensive proposition.

The inventory risks are large and retailers and publishers must make a big bet that consumers will be willing to fork over a significant sum for a hunk of plastic. For products like Guitar Hero, much of the appeal comes from the expensive licensed music IP. Clearly there will only be a handful of products that can follow this model and they will tend to come from the most well-capitalized players like Nintendo.

The good news is that there is a growing opportunity for simple games to be distributed to a mass audience at a low cost. Through online connections there is the ability to go back to the old arcade model where consumers spend billions of dollars a few cents at a time. This is the microtransaction model that is just starting to emerge.

The game industry has been dependent on an expensive retail distribution model that encourages most products to sell in the $20 to $60 range. This leaves no flexibility to capture the consumer that is willing to spend a few dollars on some quick discretionary entertainment.

For several years, the casual game industry focused on a $20 digital distribution model, but this was too much like the current retail distribution model. The ability to sell products online for less than $10 will open up entirely new opportunities for the game industry in coming years.

This begs the question of what will happen to the complex epic game with the $20 million development budget and $60 retail price tag. The answer is a huge and growing chunk of consumers are out there waiting to play these type of products.

In 2007 the big revenue generators included epic games like World of Warcraft, Halo 3, Call of Duty 4, and Mass Effect. However, a true mass market game platform needs to play both the epic games and the simple games.

The first two PlayStation systems sold over 100 million units each because they appealed to the full spectrum of consumers, from the casual consumer to the hard-core consumer. Ironically, it was Nintendo that helped invent the era of the epic game with the launch of the complex 3D adventure Super Mario 64 in 1996.

For the Nintendo 64, Nintendo only wanted to focus on the large epic games. Titles like Super Mario 64 and The Legend of Zelda: Ocarina of Time remain some of the best-selling video games of all time, but as a game platform the Nintendo 64 was outsold by the PlayStation over three to one.

On a worldwide basis for 2007, it looks like the PC passed the PlayStation 2 as the leading revenue generating platform. The PC has become a platform that can satisfy the wide range of consumer game interests, from the casual to the hard-core gamer.

Not surprisingly, the diverse PlayStation 2 still had a strong year even after the development focus has shifted to all the new systems. Going forward, the challenge faced by the Wii is that it is not that strong when it comes to the more complex epic games.

It is likely that 2008 could be the year of the epic game (with a focus on the number 4). Products like Devil May Cry 4, Metal Gear Solid 4 and Grand Theft Auto IV could be the big stories for the first half of 2008, and all these products are coming out for the Xbox 360 and/or PlayStation 3 (but not the Wii).

The key challenge faced by Microsoft and Sony is to avoid the Nintendo 64 syndrome of being locked only into the market of serious gamers. DFC estimates that this is a worldwide market of over 40 million gamers, which is clearly nothing to sneeze at. However, Sony alone is used to selling over 100 million game systems.

Microsoft and Sony are clearly not ignoring the market for simple games. The good news is that the Xbox 360 and PlayStation 3 can both do an excellent job at BOTH simple games and the more complex and graphically rich epic games. The problem has been more one of packaging and positioning.

Microsoft has made a big focus on Xbox Live Arcade and products like Scene It, but so far these seem to have attracted the hard-core existing Xbox 360 owners that want to take a break from Halo 3. The simple Xbox Live Arcade game Geometry Wars created quite a sensation in the early days of the Xbox 360 where it was available as a $5 download.

In late 2007, Vivendi Games launched a version of Geometry Wars: Galaxies for the Nintendo Wii and DS priced at $40 and $30 respectively. Once again it is less about price and more about packaging and marketing. Microsoft at heart is a technology company, not a consumer entertainment company, and they have struggled with packaging products for the more mass market consumer.

Sony faces a different challenge with the PlayStation 3. The good news is that the PlayStation 2 has remained strong and the PS3 is coming down in price. In addition, the Xbox 360 had a huge lineup for 2007, but after two years on the market the system failed to reach the 20 million mark that DFC said would probably be necessary for the Xbox 360 to establish a sustainable lead over the PS3.

The bad news is that the price and lack of product is still a major issue for the PlayStation 3. Sony has done an excellent job of reaching the mass market gamer, but only if they have the right product. The PlayStation 3 has a long way to go to expand its appeal and start to look more like a mass entertainment product, as opposed to a product for the bleeding edge technology consumer.

DFC Intelligence forecasts that 2008 will be far and away the biggest year ever for the game industry. Simple games, complex games, portable games, PC games, Wii, Xbox 360, PS3, consumers will be buying it all.

It is all about reaching the consumer in the right place with the right product. If 2007 showed us anything, it is the game business is clearly an entertainment industry, not a technology industry. Products that are fun and exciting are not necessarily the most complex. The companies that fail to grasp that basic concept that will struggle in the years ahead.