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ANALYSIS: Territory report: Germany

ANALYSIS: Territory report: Germany
Germany represents the third largest market for PC and video game hardware and software in Europe, behind the UK and France with a total market value of $1.94 billion in 2006. This eight per cent year-over-year increase showed stronger growth versus prior years, where an economic recession and high employment restricted growth opportunities for the industry.

Flat domestic consumption, high interest rates and a weak labour market combined to hinder German hardware and software growth from 2001 to 2005. While the consumer retail environment continues to face obstacles, 2006 was an incrementally better year for consumers, with unemployment easing, economic growth by GDP standards accelerating and the beginning of a new console cycle.

Hardware was the key driver of this growth, with unit sales by volume increasing by 16 per cent and hardware sales by value growing by an impressive 29 per cent year-over-year. The hardware growth can be explained by the mix shift towards higher-priced next generation consoles and a signficant bump-up in handheld sales with the introduction of the DS Lite.

ECONOMY:
Software unit sales grew by 1.7 per cent and software sales by value increased by only 0.6 per cent, as stronger next generation and handheld growth was offset by the expected decline of current generation software, which fell by 26 per cent year-over-year.

Austria continues to behave in line with the broader German games market. Both markets speak German, and the retail environment is similar in both countries.
On the other hand, Switzerland has a smaller yet more fragmented market, with great logistical barriers obstructing market consistency. Within the territory, Italian, French and German are used as predominant languages of commerce in specific pockets, which requires a more localised approach to publishing, distribution and retail.

On the economic front, Germany remains one of the most powerful global economies, with the fifth largest in the world – growing by 2.7 per cent year-over-year in 2006. According to Germany’s Federal Employment Office, the seasonally adjusted unemployment rate fell to 10.8 per cent by the end of 2006, a slight improvement from 12.1 per cent in January 2006.

Both the economic growth and unemployment rate decrease are solid improvement indicators versus the previous five years, where Germany experienced a long period of stagnation and average economic growth of only 0.7 per cent per year. The economic improvement underpinned a corresponding acceleration in growth for the video game market, as improved consumer settlement translated to increased video game purchasing in 2006. Unfortunately, this improvement was overshadowed by much more rapid growth in the rest of Europe.

GAME RATINGS:
Germany has one of the toughest, strictest and most active regulatory environments on video games in the world. The country-specific ratings system curbs the publication and distribution of violent and morally questionable content, more so than in other countries.

While other European countries follow the pan-European PEGI ratings system, Germany has its own review board called the USK (Unterhaltungssoftware Selbstkontrolle), which translates to German Voluntary Monitoring Organisation of Entertainment Software. Since the introduction of the Youth Protection Law in 2003, all software titles must include the USK endorsement label.

The German ratings system is delineated into six different categories:

1. Without age restrictions, similar to the ESRB’s ‘Everyone’ rating;
2. Restricted to users below the age of six;
3. Restricted to users below the age of 12;
4. Restricted to users below the age of 16;
5. Restricted for users below the age of 18.

The games in this 18-plus group often involve first person shooter elements, or a steady diet of violent content. For example, GTA: San Andreas has a ‘Restricted Below 18’ rating and is a previously censored product which does not feature any blood-heavy graphics, whilst certain overtly violent missions are missing.

6. Finally, there is an ‘Adults Only’ group, featuring games that show more bloody violence, like Half-Life 2.

In addition to the game ratings system, lawmakers have also taken an active role in curbing the proliferation of violent and questionable content in video games. In December 2006, lawmakers from two of Germany’s state governments, Bavaria and Lower Saxony, proposed legislation that would punish video game players and creators with imprisonment for acts of cruel violence inside games.

Perpetrators would face stiff financial penalties, or up to 12 months in jail for the execution or promotion of in-game violence. The proposed law changes came in direct response to a high school shooting where the teenage assailant was a huge fan of Counterstrike.

These recent developments underpin a broader movement in recent years towards safer, more culturally acceptable video game content in Germany. For instance, Gears of War was banned from sale in Germany due to the violent nature of the game. This trend is expected to continue, with distribution and sales patterns being heavily affected by the ratings system.

PIRACY:
Since Germany has a greater mix of PC software than in other European nations, piracy has a correspondingly bigger impact on publishers’ revenues. IDG estimates that piracy accounts for a ten to 15 per cent loss in potential revenues.

TRADE ORGANIZATIONS AND TRADE SHOWS:
The Bundesverbands Interaktive Unterhaltung (BIU) is the primary lobbying organisation for the video game industry in Germany. The body is comprised of publishers, and was established in Aprill 2005 as a successor to the VUD, the original German video games trade organisation.

PC ENTERTAINMENT SOFTWARE:
PC remains the largest platform in Germany for entertainment software, comprising 44 per cent of the entire software market by volume in 2006 versus 50 per cent the previous year. While PC household penetration is still north of 60 per cent, the slight year-over-year decline in PC mix can be attributed to an uptake in next genration software.

The PC will continue to serve as the top platform for software for many years, due to the high household penetration for PC hardware and the price-elastic German consumer base which often prefers value-orientated PC titles over frontline console SKUs. Also, there is cultural trepidation with console content, which is associated with violence and distasteful societal influences.

PC software unit sales by volume declined by ten per cent year-over-year, but the introduction of some higher-priced PC SKUs led to a relatively flat one per cent year-over-year decline in software sales by value. Similar to 2005, Vivendi’s World of Warcraft continued to lead the market, with an impressive 345,000 units sold, accounting for around e10m in sales.

Koch Media’s Anno 1701, which was released in Q4 2006, placed second with approximately 320,000 units, or €12.7m in sales. PC SKUs from The Sims and Counterstrike franchises, as well as Elder Scrolls 4: Oblivion with approximately 200,000 copies, rounded out the top five.

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