History
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Think pieces
History
A history of the games
industry and a look at its
immediate future.
The Games Industry: Past, Present and Future
This section is split into three parts:
Pre 1994: details the growth of the industry to the advent of the 32 bit era.
1994 to 2000 : details developments and trends during the PlayStation era
The Business
Explanation of the
business processes
involved in creating a
game.
Companies
Background and analysis
of the most important
public games companies.
Glossary
Links
Contact Us
Risk Warning
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2001 and Beyond: details the likely development of the industry over the next few years
Introduction
The games industry, as it stands today, consists of two major sectors: the video games market
and the computer games market. Until the early 90's, both markets evolved in much the same
way, following a boom/bust cycle dictated by the shelf lives of the individual games hardware
standards of the time. Since then, the games market, overall, has begun to stabilise, partly the
result of a strong and growing computer games market dominated by a single hardware
standard, the PC, that crucially, is open and, as a result, ever evolving. The video games
market, on the other hand, has always been dominated by proprietary standards, currently:
Sony's Playstation 2, Nintendo's Game Cube and Microsoft's Xbox. The closed nature of these
video game standards, coupled with the reluctance of the standard owners to release major
hardware upgrades (to prevent obsolescence) has and will continue, for the foreseeable future,
to result in their limited shelf lives and the continued cyclicality of the market.
Indeed the maturing of the market over the last decade has resulted in a more uniform pattern
of growth emerging, based around 6 year market cycles. A pattern of 4 years of growth
followed by a 2 year transition period has become something of a standard within the industry.
The industry will enter the first of what is expected to be 4 years of growth in 2002-2001.
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Pre 1994
Site Contents
Home Page
To 1994 The Shaping of a Market
Think pieces
History
A history of the games
industry and a look at its
immediate future.
The Business
Explanation of the
business processes
involved in creating a
game.
Video games market
Electronic games first entered the consumer market in the early 1970s with the release of
Atari's Pong arcade game and later, Midway's Space Invaders in the USA. These were
followed a year later by the launch of the first video game system for the home by Magnavox.
A string of competing new and revamped systems then followed with Atari and Mattel,
amongst others, also entering the fray. For a decade US companies dominated both the arcade
and video game markets. The status quo changed in 1985 when the Japanese company,
Nintendo, released its 8 bit Famicom console (renamed the Nintendo Entertainment System
for the US market) and another, Sega, released its 8 bit Sega Master System in 1987.
Companies
Background and analysis
of the most important
public games companies.
Glossary
Links
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By the time Sega had released its 16 bit Megadrive (known as Genesis in the USA) in 1989
and Nintendo had released its 16 bit Super Nintendo Entertainment System ("SNES") in 1991,
the Japanese companies were enjoying an increasingly firm grip on the global video games
market. Lead by Sega and Nintendo, the games industry reached its cyclical zenith around
1992/3 with combined sales over 55 million hardware units.
First the 3DO company (in 1993) and then Atari (in 1994) tried to break the Sega/Nintendo
market stranglehold with what were, at the time, technically more advanced hardware
platforms, but both failed due to a combination of over-pricing, poor software support and,
over time, comparative technical obsolescence. In early 1994 the market, reaching the end of
its cycle, began to slump dramatically. Although a transition was anticipated, the speed with
which the market deteriorated took many within the industry by suprise. The reasons for this
were varied: significant anticipation of the next generation of 32 and 64 bit video games
systems (which were still a year from launch), the increasing perception of 16 bit as being
outdated, the failure of the intervening video games technology to stimulate the market and the
high risk nature of the cartridge-based games business model all combined to create a video
games market void that lasted until 1995/1996 when Sony and Sega launched next generation
consoles.
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Pre 1994
Computer games market
As early as 1984, a computer games market (as distinct from the above video games market)
had also become established following the release of affordable and programmable home
computers by Commodore, and, especially in the UK, by BBC and Sinclair. These were
replaced towards the end of the decade by the growing use of IBM-compatible PCs in the
home and the cheaper and more games-orientated Atari ST and Commodore Amiga range of
computers. The PC games market with its continual hardware evolution has never been
affected by the sorts of cyclical downturns experienced by the video games market as
platforms came in and out of fashion. Due to their failure to evolve at the same rate as the PC,
all the other computer games platforms also gave up their market to the PC.
By 1994 the PC was the leading computer games platform and with the video games industry
in decline had become the most important games platform overall.
To 1994-2000
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1995-2001
Site Contents
1994 to present
Home Page
Think pieces
History
A history of the games
industry and a look at its
immediate future.
The Business
Explanation of the
business processes
involved in creating a
game.
Companies
Background and analysis
of the most important
public games companies.
Glossary
The 1995-2001 cycle was one characterised by strong growth and considerable change. Although
the video games market comprised Sega's 32 bit Saturn console (launched in 1994) and
Nintendo's 64 bit N64 (launched in late 1996/7), the period was dominated by new entrant Sony's
32 bit PlayStation. Learning from the failures of others to break the Sega/Nintendo stranglehold,
Sony garnered widespread developer and publisher support as well as generating notable
consumer hype before launching its console in 1994/5 at an unprecedented price/performance
level. Sega reacted by lowering the price of its console but the Playstation had built up too much
momentum and, from an early stage, it was clear that Sega would struggle to match the growth
of its rival's machine. The Playstation quickly established a lead in the video games market
outselling Sega and Nintendo's offerings by a vast margin. Sega re-entered the market with its
128 bit Dreamcast console but despite a strong launch in Japan in November 1998, publisher
support lost momentum and Sega exited the hardware business in 2001.
New Trends
The 1995-2001 cycle also saw the emergence of some significant new trends:
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Consumer Profile
The average age of games players rose considerably during the period. In the UK, PC games
players tended to the oldest with magazine reader surveys suggesting an average age of 27-31
(similar surveys in the US put US PC gamers at around 32-36 years old). Playstation games
players came next with an average age of around 25-20 (console user average ages begin high
and tend to fall from there) with Nintendo the youngest at 18-15. We believe this was the result
of a number of factors:
●
●
A marketing refocus by Sony with greater emphasis towards club culture and "twentysomethings" resulted in a much older initial PlayStation userbase than pervious consoles
had achieved and this resulted in a broader social acceptance.
This was, in no small part, helped by the wider appeal of games that the advent of
detailed 3D graphics and CD-quality sound brought. The greater verisimilitude of games
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1995-2001
●
●
software (in particular driving and other sports games) allowed people to more easily
associate with gaming experiences.
The fact that the first generation of teenage games players in the early 1980s were then
in their 20's and many are still active games players.
The increased cost of computer and video games hardware putting gaming (certainly at
the beginning of the cycle when hardware and software prices were high) out of reach of
many children.
We believe the average age of PC games players will continue a pattern of approximate 1 year
growth per year whilst PlayStation games player average ages will continue to fall towards the
mid-teen level. New console launches result in the demographic cycle beginning again so
PlayStation 2/ Xbox and to a lesser extent Game Cube gamers will start in the mid/late 20s.
Storage Media
The standard software storage media for video games made a significant step change during the
period from the silicon-filled ROM cartridges of the MegaDrive and SNES days to compact
discs. With the ability to store around 30 times the amount of data than even the largest cartridge
and with a per-unit cost of around 20p-50p compared with per-unit cartridge costs of up to £25,
CDs represented not only a major technological step forward but also changed the dynamics of
games publishing. The dramatic reduction in inventory risk that CD-ROMs represented made
publishers far less susceptible to market swings such as that experienced in 1994 when many
distributors and publishers had to write off vast quantities of expensive, unsold stock and some
went under as a result.
The late 90s saw the introduction of DVD technology in the games industry. PlayStation 2, Xbox
and Game Cube all use DVD technology or variations thereof and the PC market is slowly
following suit. DVDs cost around 50p-£1 to replicate (this is expected to fall with increasing
volume) and can store around 6 times the amount of a CD-ROM.
Costs and Prices
The widespread adoption of CD-ROM enabled more storage-intensive content such as video, CDAudio quality sound, and pre-rendered computer images and animations to be included in games
titles. Production costs, as a result, spiralled as developers tried to outshine competitors with
cinematic style plot development and time and money intensive pre-rendered cut scenes. That
combined with the continually increasing sophistication and complexity of games design resulted
in a leap in average development team size and, as a result, cost. Typical development costs per
title rose to between £300,000 to £1m from £100,000 to £400,000 and by the end of 2001 had
reached between £1m and £2m.
In contrast to the rising costs of CD and DVD-ROM based games, there was intense retail price
competition during the cycle but margin pressure has been taken by retailers, and has had little
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1995-2001
impact on wholesale prices for publishers.
Software
Software styles changed with the rapid developments in computer graphics hardware and
software. The emphasis shifted from 2D to 3D especially in video games software, as a result of
the inclusion of dedicated 3D accelerator chips within console hardware. This was mirrored in
the PC industry where 3D accelerator cards became a de rigeur part of PC games players' kit and
typically provided (and continue to provide) visual quality far superior to that of existing video
games machines. The popularity of software genres (i.e. types of game) narrowed with
competitive sports/racing games and violent fighting and shooting games becoming by far the
most popular. The period also saw the rise of licensing and the increased importance of game
brands and franchises, such as Electronic Arts' EA Sports range of games. These have become a
critical part of games publishers' growth strategies because not only do licences have broader
appeal but they tend to be cheaper to exploit on an ongoing basis and have more predictable (and
often longer) sales profiles.
A very significant new trend in the US and UK markets during the period was the segmentation
of the PC market into consumer and gamer titles and the development of a different market
dynamic to each. Gamer titles are those aimed squarely at the hardcore games player who has a
high disposable income but is also highly discerning. This market is very hits-driven and qualityled as a result and as soon as anyone develops a successful new type of game a slew of "clones"
follow whilst the original developers/publisher milk the newly grown brand for as long as it is
commercially viable. The gamer market has represented the bulk of the PC games market since
the market's inception at the beginning of the 90s but began to lose considerable ground to the
consumer market during the latter half of the cycle. Consumer games titles differ in that they are
either brand-led (eg Who Wants to be a Millionaire, Monopoly), appeal to a radically different
demographic (eg Barbie, the Sims) or can be easily associated with a popular past-time (eg
hunting). Quality is less of an issue at this stage of this emerging market and will not become a
factor for the foreseeable future as the demographic to which they appeal cannot differentiate
(and arguably is not interested in differentiating) between high quality and low quality product.
All the examples given above are represented in products that have sold in excess of 1m units
each - something only a handful of hard core games achieve over their lifetime. In addition, the
absence of the quality issue gives them a vastly improved shelf-life and has resulted in the
emergence of discount stores (such as Walmart) as significant players within the US games
industry.
The Rise of the Internet
Despite the rapidity with which the internet rose to prominence, online games communities were
amongst the first established and internet multiplayer gaming support quickly became a standard
feature of all new PC games. Developers also began finding the internet a useful testing ground
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by releasing limited demos of titles, then adapting the games according to the feedback they
receive. The internet has also allowed developers and publishers to provide more efficient
technical support and to circulate updates and patches (bug-fixing software) more effectively.
Most importantly though, the internet has begun to introduce new business models, games genres
and supply chains. Massively multiplayer games which feature 24/7 persistent game universes
and are capable of supporting hundreds of thousands of players have proven particularly
successful with their subscription-based revenue model and disintermediation of physical
distribution and retail. Interestingly whilst some publishers have publicly decried the internet's
ability to generate profitable sales, those publishers that currently run massively multiplayer
services are investing heavily in new projects and by the end of 2001 there were approximately
50 persistent world games in development in the West.
Much as the PC games market began to be split between hardcore gamer titles and mass market
consumer titles, so too did the online games market with simple parlour games (such as chess,
Bridge, Poker) attracting a broader demographic and larger user base compared to hardcore
online gaming.
One other model introduced during the cycle was rentable, streaming games. Streaming
technology allows broadband users to play full, commercial games without the need for CD or
DVD-ROMs. Despite some early technical problems, streaming games is now a viable
distribution means although it will need deeper support from games publishers before it can start
making serious inroads into the physical distribution games business.
Network gaming is covered in greater depth within Thinkpieces and the publishing business.
To 2001+
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2001+
Site Contents
2001 and Beyond
Home Page
Think pieces
History
Platform
Global Shipments
(09/02)
Launch Date
(Japan)
(Anticipated)
Annual Sales
Peak
Sony Playstation
92 million
1994
1998/9
N64
33 million
1996
1999
Sega Dreamcast
6 million
1998
2000
PlayStation 2
42 million
2000
(2004/5)
Nintendo GameCube
6.7m
2001
(2003)
Microsoft Xbox
4.3m
2001 (US)
(2004)
Nintendo Game Boy
119m
1989
N/A
Game Boy Advance/SP
24m
2001/2003
N/A
A history of the games
industry and a look at its
immediate future.
The Business
Explanation of the
business processes
involved in creating a
game.
Companies
Background and analysis
of the most important
public games companies.
Glossary
Links
Source: Durlacher
Contact Us
Risk Warning
Need a stockbroker?
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2001+
The industry is now well into the new games cycle, having experienced a 2 year transition period
moving from Sony PlayStation, N64 and Sega Dreamcast to PlayStation 2, GameCube and Xbox.
N64 and Dreamcast have now been phased out whilst Sony continues to break new ground with
PSX sales. Despite being 9 years old, the PSX (now known as PSOne) is forecast to achieve 3m
sales between March 02 and March 03. However despite the potential addressable market the PSX
installed base appears to represent, the active PSX market is considerably smaller (most
PlayStations are simply not in use any more) and comprises the "low end" of the market – value
gamers (whether by geogrpahy or spending power) and younger gamers. Learning from this, both
Microsoft and Sony are keen to extend the lifespans of the current generation of hardware as long
as possible. This combined with current hardware development timetables leads us to believe that
the next cycle will not begin until 2006 with 2H05 being the earliest date for a next generation
hardware launch.
Placing a value on the games industry can often lead to highly misleading results, especially where
the figures are compared with other industries. Many include the value of hardware retail sales
although for the majority of companies within the industry, it is only software sales which are of
direct importance. The games software industry is expected to experience 3-5 years of sustained
(15-25% CAGR) growth between 2002-2006. We anticipate this cycle will see around 160m
consoles (excluding Game Boy Advance) sold compared to the 130m of the last cycle.
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2001+
We examine the major platforms/hardware companies in more detail below:
Sony
Games represents a 1 trillion yen (£5.4bn) department within Sony, which, at its peak during the
last cycle, generated well over 40% of Sony's global profits. Recognising its importance to the
company, Sony invested heavily in ensuring PlayStation 2's success. In the year to March 2000,
the company made £1.2bn in PS2-related R&D investment and ploughed a further £0.8bn into
establishing sufficient fabrication facilities to ensure volume production.
Sony launched PlayStation 2 in March 2000 and remains the video game market leader by quite a
margin. The machine sold a record-breaking 980,000 in its first two days on sale in Japan and has
gone on to achieve an installed base of some 41.2m by December 2002, 13m of which lie within
PAL territories (mainly Europe) and 17.1m of which lies in North America.
As it strived to do with the original PlayStation, Sony has built up a considerable support base of
developers and publishers. Indeed, Strong third party publisher confidence underpins Sony's
success and since most development projects are now PS2-led (if not PS2 exclusive), Sony is
assured of a consistent flow of releases for its platform which in turn leads to consistent hardware
sales. We believe that this momentum combined with its existing substantial installed base gives
Sony an unassailable lead in this cycle. We forecast a global installed base of 90-110m PS2 by
2006.
Despite having predicted the advent of online console gaming in 2001, and with a couple of years
of trials and service development behind it, Sony has been remarkably slow to evolve its online
proposition to a commercial stage, especially in Europe where Microsoft has beaten them to a full
launch. Sony certainly views online as critically important to its overall console business strategy
but has yet to develop a demonstrable commercial strategy.
Nintendo
Nintendo is undoubtedly the most successful video games company in the history of the industry.
It achieves a consistent level of profitability year-in and year-out, has built up a $5bn+ cash
reserve and created some of the most successful and best-known intellectual properties not just in
the games market but the associated TV, film and toy markets.
Nintendo achieved a worldwide installed base of around 33m N64s, mainly in the US and Japan
and almost entirely driven by sales of Nintendo-created software. The company failed to secure
much third party publisher support principally because it decided to continue using expensive
cartridge technology when the rest of the market had moved to lower inventory risk CD-based
storage media. Nintendo has followed the N64 with its GameCube console, launched in 2001 and
has gone some way to learning its lesson. Although GameCube uses a proprietary DVD-based
optical storage technology, replication costs are considerably less than cartridge and with this
reduced publishing risk model, Nintendo initially managed to secure stronger third party
publisher support this time round. Nintendo has traditionally aimed its products at younger, teen
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and pre-teen gamers making use of lower hardware prices and creating games aimed at younger
players. In doing so it avoided going head to head with Sony during the 95-01 cycle and managed
to maintain respectable market share.
However, Nintendo has begun finding life considerably more tough during the current cycle,
especially in Europe where sales have been weaker than many had anticipated possibly because
games tastes are considerably older and more mature than Nintendo's franchises' target markets,
but also because retailers are finding it increasingly difficult to justify supporting three competing
platforms. This weakened performance, combined with a business model which, although better
than that for N64, is still inferior and higher risk than both Sony and Microsoft's models, has
resulted in the reduction of many European and US publishers' GameCube commitments. This, in
turn, will lead to a lower volume of GameCube titles which will perpetuate a downwards spiral of
third party confidence and product development that Nintendo will find seriously hard to rectify.
Nintendo will always be able to grab a large share of the younger gamer's market (which tends to
flourish in the second half of the games cycle) so we remain confident that Nintendo will hit our
25-35m 2006 forecasts although expect it to be at the lower end.
Nintendo released a partial successor to their Game Boy handheld machine called Game Boy
Color in 1998 and a 32bit version of the Game Boy, the Game Boy Advance, in early/mid 2001.
It launched an augmented GBA, the GBA SP with rechargeable battery, front-lit screen and a
new form factor in early 2003. Despite its age the Game Boy has now achieved well over 119m+
units sales globally and sales projections suggest continued strong growth for the Game Boy
franchise (driven by GBA and GBA SP) during the next few years.
Microsoft
Microsoft launched its PC-Console hybrid, the Xbox, in November 2001 in the US market and in
Spring 2002 in Europe. The Xbox with its PC processor and graphics card, and in-built hard drive
and network connectivity is essentially an utlra-cheap TV-based PC. After all, all it needs is a
mouse and a keyboard and it would be a PC more powerful than many in the market for a tiny
fraction of the cost. However, Microsoft continue to position Xbox as a games machine only and
reiterate that its plans for the Xbox are solely games-related. Microsoft clearly have vested
interests to protect. It has its WebTV division in which Microsoft has already invested well over
$300m. WebTV functionality could be built into Xbox very easily but would seriously jeopardise
the WebTV initiative. More importantly, it has strong software partnerships with PC
manufacturers who would all be threatened by a £200 PC.
There is now little doubt that Microsoft are committed to this market for the long term. The
Company spent $500m on promoting the global (staggered) launches of the Xbox and have built
up a substantial in-house development capability which has already produced a blockbuster
release (Halo - which has sold over 2m units, despite the limited installed base). Microsoft have
also done well to secure and maintain the confidence of the major Western publishers although it
remains exposed in the Japanese market where local publishers are wary of siding with a US
company over its two Japanese rivals. Besides the Japanese equation, Microsoft's biggest
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2001+
challenge will be building up the momentum of publisher support/software sales/hardware sales
necessary to ensure long-term success. The $375m cash acquisition of British super-developer
Rare in 2H 02 has gone some way towards addressing these 3rd party publisher confidence
problems and Microsoft may well target an even bigger publisher acquisition to cement its
standing within the console market and augment its Xbox2 proposition (due between 2H05 and
1H06). We forecast an installed Xbox base of 25m-35m by 2006.
One market that Microsoft does have something of a lead over Sony and Nintendo with is the
online console gaming market with Xbox Live enjoying a successful US launch in late 2002 and
with a European launch in March 03. However, despite a technical and strategic lead over Sony,
the take-up of the Xbox Live service will be hampered by the relatively limited installed base of
Xbox users, in particular in Europe and Japan.
PC
The computer games software market (essentially, now the PC market) contracted around 5% in
value in 2002, possibly as a result of Xbox and PS2 sales but mainly due to the reduced flow of
major PC titles and the increased prominence of mid-priced PC titles. With some key AAA
releases due in 2003, the market is expected to resume modest growth. Although the installed
base of PCs can be numbered in the hundreds of millions the installed base of PCs capable of
playing the latest PC games is a subset of this and the active games user base an even smaller
fraction. Estimates for these are difficult to make as the technology replacement cycle is so fast
and the fact that most PCs have multiple users. We estimate that the UK installed base of gamescapable PCs in the home is probably around 3-5 million with approximately 2-3 million new PCs
being added each year.
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