With the technology world abuzz with the upcoming IPO of Zynga (creator of Farmville, Cityville) it is an interesting juncture to take a step back and observe how the video game industry has evolved from its inception, and where it is likely headed in the future given the tremendous change it has witnessed in the last two decades.
The origins of the video game industry can be traced to as far back as the year 1947, when a patent was filed for what was called a “cathode ray tube amusement device.”At the outset, there was no industry to speak of, and many such games were invented for different platforms on stand alone bases, often purely as experiments, without much thought given to financial gains. Naturally, these experimental games had limited visibility and remained among the inventors and the tech-savvy.
The concept of video games gained mainstream popularity in the 70s and the 80s, with the surge in arcade games. The late 80s and 90s, particularly, witnessed a steep increase in the relevance of video and computer games, one that led to the formation of what would become a massive industry that has exceeded Hollywood in annual revenues.
The golden years
The industry went through a period of significant change with the transition to home computer and video games in the 90s. The main factors that contributed to this were the rapid advancements in technology at the time (Sony Playstation, Nintendo 64, powerful PCs) as well as the rising penetration of PCs owing to falling costs. The market for home video games gained traction, and soon replaced arcade games as the major source of revenue for the industry.
The early part of the 21st century witnessed even more advancements in technology, as computers improved even more and the sixth and seventh generations of game consoles were developed. This slowly led to video game consoles dominating the PC as the platform of choice.
The coming change
From the above, it is clear that the industry has witnessed several changes during its history and each of these changes led us to look at video games differently. It is of little surprise then, that the industry is facing another change. Except this time, the change that looks to be right around the corner promises to be the most significant one yet. The principal driver behind this change has, of course, been the Internet.
The signs have been there for some time now. The introduction of the Massive Multiplayer Online Role-playing Games (MMORPG) clearly signaled that the future of the game industry would be collaborative or social gaming. Indeed, when Blizzard announced the extension of their Warcraft franchise into the World of Warcraft, some gamers were initially skeptical about how they would achieve the scale required. Today, World of Warcraft is the largest MMORPG by far with over 10 million active players, and has been instrumental in redefining the online gaming industry. This naturally led to numerous duplicates which were successful in their own right, albeit not as much as World of Warcraft. But one thing remained, game developers and companies alike tried to leverage the Internet and incorporate it into their games. A prime example of this is Microsoft’s XBOX Live and the XBOX Live Marketplace, both of which revolutionized the industry and introduced a powerful new way of doing business.
The casual gamer
A characteristic of the industry in the past was that most games were made for the serious gamer. Sure, there were always the popular ones such as Pacman and Tetris, but the focus of the industry was completely on the enthusiasts. The trend has been changing for sometime now, largely in two ways. Firstly, with breakthrough innovations such as the XBOX Kinect and the Nintendo Wii, companies are looking to make gaming a family affair and expand their audience. Secondly, and more prominently, the surge of social networking and the increasing amounts of time spent by people on such sites has given a big push to social and online gaming. Of course, the ready-to-use platform named Facebook has contributed immensely.
This is where companies like Zynga came in, looking to capitalize on this changing trend. Indeed, with a series of simple, addictive and free-to-play games (Zynga Poker, Farmville), Zynga has captured the attention of millions of users through Facebook. All new business models pose doubts about feasibility, sustainability and scalability. However, in the case of Zynga’s games, scalability was never an issue thanks to their partnership with Facebook (Which they have extended up to the year 2015).
To achieve sustainability, Zynga was able to apply elements of the model used by the MMORPGs. The motto is simple – Lure more people in by using different means (such as a buddy referral benefit), get them hooked on and make them purchase virtual goods for money. The market for virtual goods in games is astoundingly large. Zynga alone made $235mn in sales in one quarter this year, and are well on their way to achieve the billion-dollar mark in sales for the year. This is a truly remarkable feat for the company to have achieved in such a short time. For some perspective, the total sales of video games across all platforms in 2010 were $18.5 billion.
The future – Coexist or Cannibalize?
As Zynga ventures into more platforms such as Android and iOS as well as competitors to Facebook such as Google+, many have predicted that mobile and social gaming is a new trend, one that will slowly but surely supplant traditional video games. Many other startups have entered this space, looking to create the next Angry Birds or the next Cityville.
While it is true that the growth potential for online casual games is immense and social gaming is the way forward, it need not be at the expense of traditional video games. For a serious gamer, the value proposition offered by games on handhelds and browsers pale in comparison with those on the more powerful consoles, which provide for more complexity, better graphics and a larger variety in games. For this reason, it appears that social gaming and traditional video games can coexist and even thrive in their own right.
That being said, game companies will have to adapt to these changes in the industry to stay relevant. Indeed, many companies have modified their strategy for the same reason. We are seeing a larger number of sequels to popular games as companies try to build franchises around games (Eg. Gears of War), both to boost future sales as well as tap into other avenues (Hollywood adaptations). A larger fraction of games are being made for a wide range of platforms, right from the iOS to the XBOX. Companies are looking to expand their horizons by acquiring other companies. For instance, Zynga recently (unsuccessfully) tried to acquire Angry Birds creator Rovio for a staggering $2.25 bn. MMORPG creators are looking to create incentives to bring in fresh players (Such as World of Warcraft making the first 20 levels free to play).
We are entering an exciting phase in the life cycle of the video game industry, one that promises tremendous growth for companies willing to innovate. One thing is clear though, the business of video games is here to stay, and can no longer be dismissed as “just games”.