Development’s next top models – Part 2

[img :119]This report profiles the seven major distribution channels used by the games industry. Based on stats from 2006, the research examines retail, mobile, online full-game downloads, casual PC games, downloadable console titles, item sales and MMO subscriptions and explains the market share claimed by each. An overview of the market, explaining the portion owned by each channel can be found on the right.

RETAIL

[img :120]Overview: Retail is (and will remain for the foreseeable future) the dominant sales and distribution channel for games. The mechanisms behind retail – manufacturing, infrastructure, POS, inventory, sale or return agreements – are the foundations of the industry’s most common commercial models, whose rigidity is reflected in common commercial models but is also driving innovation in digital distribution.

Benefits: Access to the broadest base of consumers; established mechanisms, relationships and commercials models; dominated by consoles which have single technical specifications.

Downsides: Static business models; commoditised distribution model; inventory management drives price instability; piracy and hacking (normally a maximum of 10 to 20 days after retail release); retailers own customers.

Sustainability: Good. Retail will retain its position at the head of the growing list of distribution channels for at least the next five years, and probably longer. It faces a war of attrition with digital distribution, which will take a steadily growing proportion of the market.

Market share (of 2006 global games software revenues): 72%

MOBILE

[img :121]Overview: Mobile, despite the hype, has still reached low levels of mobile phone owners, and despite low break-evens and rapid development cycles combined with low production costs, the channel is hamstrung by structural problems which have slowed (and will continue to slow) its growth. The direct to consumer, ‘off-portal’ channel is still in its infancy.

Benefits: Limited delivery costs; no sudden technology leaps; connected user; vast installed base of handsets.

Downsides: High operator margin (30 to 50 per cent in the west); difficult billing mechanisms; low audience penetration; often low quality games; device proliferation; low revenues below top deck placement; operators’ consolidation of games partners; poor demographic data; low profitability; low/no revenue share for independents.

Sustainability: Low. The structural problems in this sector are such that only a few companies can survive at scale.

Market share (of 2006 global games software revenues): 10%

ONLINE FULL-GAME DIRECT DOWNLOAD

[img :122]Overview: Digital download of games direct-to-consumer online where consumers pay for games or premium content to download the games onto their PCs or consoles in their entirety, or split into pieces. A wide range of channels exist, but only a few at scale (Steam, EA Link, Direct 2 Drive). Rising broadband penetration will drive this channel, but penetration is still minimal at present.

Benefits: Lower costs; connected users; broadband rates sufficient; better revenue splits.

Downsides: Limited opportunity today; publisher apathy; retail opposition; technology costs; security issues; developers bypassing publishers need to fund development and marketing.

Sustainability: With low market penetration, the market has been slow to grow, but eventually the market will take hold, increasingly driven by full game downloads on console.

Market share (of 2006 global games software revenues): 0.4%

CASUAL PC GAMES

[img :123]Overview: The casual PC games market has enjoyed rapid growth in the last five years driven by demand from a broad, mass-market demographic for simple, fun gameplay experiences. Distribution of casual games is via a growing number of channels including community sites, games portals, and direct from developers’ sites. These games are monetised variously by subscription, premium downloads, multiplayer wagers and advertising.

Benefits: Cheap, fast development; simple value chain; multiple distribution channels for the same content; huge addressable market and mass-market demographics; growing potential.

Downsides: Low development fees; commercial models favour the aggregator not the originating studio; over-supply of developers and titles; competition from lower cost markets; highly crowded marketplace; plagiarism rife; low barriers to entry; customer management.

Sustainability: Good. A crowded series of distribution channels at varying stages of maturity, but all addressing a demographic that will continue to grow.

Market share (of 2006 global games software revenues): 3.2%

DOWNLOADABLE CONSOLE CASUAL GAME

[img :124]Overview: All three current generation consoles have online stores selling casual, retro and back catalogue games downloaded directly to the console’s hard drive or flash memory cards. Hundreds of such games are in development in this young but growing market. Publishers are jumping on board, driving up production values and leading to an increasingly crowded marketplace.

Benefits: Cheaper, faster development; favourable commercial terms; low/no marketing costs (today); higher conversion to sale ratios.

Downsides: Small market (today); increasing competition; low/no marketing upside; untested viability; rapidly rising budgets; publishers’ arrival; limited 360 and Wii downloadable game size (today).

Sustainability: A crowded, immature channel but with good potential from 2008. Early results have been promising. Competition and console penetration will drive the market.

Market share (of 2006 global games software revenues): 0.1%

ONLINE ITEM SELLING AND INCREMENTAL DOWNLOADABLE CONTENT

[img :125] Overview: A new channel in the west via online consoles (post-launch content for boxed games) but established and dominant in Asia (in MMOs). Most providers rely on players filling wallets (via credit cards or game cards purchased at retail) which allows micro-payments for small goods and services, including added functionality, personalisation, game levels and other content. A number of leading console games have successfully trialled incremental content downloads.

Benefits: Low cost and high return; user price insensitivity; higher revenues per user; captive audience; customer focus delivers useful secondary revenue stream

Downsides: High technology development and maintenance costs; regulatory back-lash (Asia); low studio take up in west (today); skill-set and mind-set barriers

Sustainability: The channel has great potential with fascinating P2P commercial models being trialled in Asia but in the west the surface has barely been scratched,

Market share (of 2006 global games software revenues): 7.3%

MMO – ONLINE SUBSCRIPTION

[img :126]Overview: While major releases are sold at retail, most MMOGs are available as a free download and monthly subscription enables continuing access to the game world. Subscription revenue is offset by the high costs of creating, marketing, maintaining and updating that game world. Failure rates are high, often due to underestimating ongoing costs. Although console-based MMOs are coming, PC will retain most of the market.

Benefits: Steady, predictable revenue stream with greater longevity than offline title sales; captive audience of subscribers; self-sustaining growth after reaching critical mass

Downsides: High risk, cost and complexity; high post-launch costs; critical mass difficult to achieve; audience churn; project change after live beta; hacking, farming and security; World of Warcraft’s domination (in the West only)

Sustainability: The market for subscription MMOGs is being challenged by new MMOG models such as item selling/trading, but successful games like World of Warcraft are driving subscription gaming into new demographics, ultimately benefiting the entire market.

Market share (of 2006 global games software revenues): 6.7%