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Thinking Outside the Box

Thinking Outside the Box
There’s something creeping up on the industry that’s about to change it beyond recognition. Ironically it doesn’t have a cool sounding name like Doom, PlayStation 3 or Voodoo 3D acceleration. No, unfortunately it has all the descriptive drama of a German car owner’s manual: digital distribution.
Sounds dull, doesn’t it? But if new reports about its growth are anything to go by then it could revolutionise how we buy games, not to mention the kind of games we consume.

Downloading games is hardly anything new, especially to PC gamers, but now all three major platform holders are investing heavily into online gaming portals, is the traditional boxed product under threat?
“My personal opinion is that retail will die,” says Patrick Buckland, CEO of Stainless Games, the company that brought Crystal Quest and Novadrome to Xbox Live Arcade. “In 20 years time consumers will laugh at the idea of going into a shop. It is a more efficient way of getting content to consumers.”

While such predictions are certainly not held by all sectors of the industry, forecasts do suggest that digital downloads will become the predominant channel of entertainment consumption in the future.
Indeed, in a 2005 report, market analysis group ScreenDigest predicted that the European market for legitimate movie downloads is poised to be worth more than £60m a year by 2010 in the UK and €250m across Europe as a whole. Significantly, it now believes these forecasts underestimated the growth of the sector.

To date, two factors have held back the explosion of digital distribution: reliability and speed. But a recently published YouGov report suggests that as much as 65 per cent of respondents would be interested in downloading files if these issues were addressed. The implication is clear: if speed and reliability improve, the expansion of e-distribution in gaming could turn from an increasing flow to a cascade.

“We now have 60,000 users a month and are currently experiencing a 100 per cent year-on-year growth,” states Paul Howes, business manager at games on demand portal Metaboli. “Consumers are becoming ever more comfortable with downloading games and because of our streaming technology they can start playing the product after ten per cent of the file size has been downloaded. That’s ten to 15 minutes on a decent 2MB broadband connection.”

Other technology groups believe there’s even more scope for improvement. CacheLogic has developed an innovative ‘asset delivery framework’ it believes will change the economic rules of online content delivery forever.

“Our custom-built CDN is different to the competition’s,” states David Barret, CacheLogic’s marketing and communications manager. “It’s faster, more robust and with a flexible service capacity that can reduce distribution costs by as much as 50 per cent.

“It’s also aimed at all content owners who are looking to distribute their material over the internet – gaming and software companies, film and television program makers, studios, broadcasters and retailers.”

But while there’s a level of performance willy-waving going on among those set to benefit most from the proliferation of e-distribution, one thing’s for sure: it’s going to affect publishers, developers, retailers and ultimately the consumer in radically different ways. To ignore its impact would be folly; the equivalent of those who initially thought the internet was a bit of a fad.

But is there really a comparison? “I believe e-distribution will change the industry, but the analogy I would draw is the impact iTunes and the iPod has had on the music industry,” points out Karl Jeffrey CEO of Climax. “It happened to that industry before ours only because the memory and bandwidth requirements for music are much smaller. As soon as the networks and storage are there to deliver premium games on demand why would anyone buy a boxed game?”

Unsurprisingly this is not a view shared by retailers. “Commentators have been writing off High Street retail for some time now and yet it shows a remarkable resilience,” responds Gennaro Castaldo, head of PR at HMV.

“They have overlooked a key factor: while many of us increasingly appreciate the benefits and versatility of buying online or downloading, we also love to shop on the High Street. It remains a major leisure activity, and we like the idea of owning something tangible.

“That doesn’t mean that retailers should be complacent, however, and we’re currently trialling and evolving a ‘store-of-the-future’ format that will look to create a vibrant and stimulating shopping environment for our customers, that will cater to their changing lifestyle aspirations.”
It’s a plucky defence, but according to ScreenDigest, e-distribution is likely to see a shift in value chain power from retail to console platform holder.

Emerging portals like PlayStation Home, Xbox Live Marketplace and Nintendo’s Virtual Console, along with other sites like Virgin’s Awomo (A World of My Own) should not be underestimated. The ability for Sony, Microsoft and Nintendo to have direct relationships with their consumers can only strengthen their power, leading to lower game prices, less opportunities for pre-owned games, community and brand loyalty and the chance to build their own role as retailers, at least potentially.

Valve already knows about such advantages, having delivered games via Steam since 2002. “We view Steam as something that makes our games better, regardless of the channel through which they are purchased,” comments Valve’s marketing manager, Doug Lombardi. “For example, over five million Half-Life 2 retail customers around the world have seen HL2 Deathmatch and Lost Coast appear in their Steam menu of available games and been exposed to all the Free Weekends on Steam.”

One fly in this ointment however is that retailers will still hold power in terms of selling consoles on the High Street. If the major platform holders increasingly miss out the middleman and deliver games direct to consumers, retailers could refuse to shift consoles. It’s an unlikely scenario but does highlight the fact that partnerships will still be important going forward.

The truth is that no-one can be certain how e-distribution is going to affect each sector of the industry. In particular many publishers contacted were unwilling to outline their strategy for embracing e-distribution.

Some are watching and waiting, while others seem happy with existing relationships with sites such as Metaboli and JumboPlay. Indeed one prominent CEO of a UK developer told us that he couldn’t go on record because publishers simply won’t be so powerful in the future and this would undermine existing business relationships.

But there are exceptions. EA recently reported digital revenues of $127m, a 47 per cent year-on-year rise. Indeed, EA has been offering downloadable games online since 2005. And with companies like Disney, Codemasters and Ubisoft investing heavily in the online sector, direct sales would seem a logical next step.

For developers the growth of e-distribution couldn’t be more intoxicating, encouraging innovation and new opportunities. “There are two main benefits for us,” states Matt Edmunds, COO of Stainless Games.

“Firstly, it enables us virtually to self-publish titles. Secondly, it’s been a real breath of fresh air with e-distribution opening up a whole new market for casual gaming. This is only just starting to be recognised by the mainstream publishers. In terms of the games themselves, in the short-to-medium term expect to see more episodic titles, more customisation via downloads and other features which exploit incremental or micro-payments.”

But ultimately the consumer will decide whether games on demand will flourish at the expense of traditional boxed product. Adrian Pilkington, Commercial Director of Sky Games, already sees a shift in attitude.

“One thing that always strikes me from research is just how few games the average gamer buys each year. If digital distribution can increase the range and variety of games that gamers are interested in that’s a good thing. If we can present games in a format and at a price that suits the customer, the natural assumption will be that they would buy more games.”

Significantly, there are no hard numbers to predict just how big e-distribution will be in five years time, never mind 15. And while views about this sector differ wildly depending on the interests at stake, there’s a general sense that a power struggle is going to emerge over who controls and takes advantage of the space.

So should retailers quake in the face of this new threat? CacheLogic’s David Barrett puts it most succinctly. “I like to squeeze the avocados. Sure, I can purchase my goods online, but I still like to see the products. Predictions of retail’s demise are greatly exaggerated.”

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