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The 21st Century games industry: What, where, why
June 2001
It is a peculiarity of the traditional games industry that industry forecasts can be made with a relatively high
degree of accuracy compared to other technology and media industries.
There is a certainty to the period of growth that the games industry is about to experience that few other industries can match, for very good reasons.
Cyclical growth has been a characteristic of the games industry since its inception, and the cycles have proven remarkably
uniform in pattern. Periods of strong growth have tended to last 4-5 years, followed by flat or falling sales during a two year transition period as new platforms are introduced. The last two growth periods occurred
between 1989 and 1993 and between 1995 and 1999. The industry is currently in the latter stages of its latest two year transition period, as it moves out of the downward part of one console cycle (PlayStation,
Dreamcast, N64) and into the incline of the next console cycle (PlayStation2, Xbox, GameCube and Game Boy Advance).
Although the first signs of net growth are beginning to be seen, strong year-on-year growth will only really be felt at the end of 2002. From that point on, the industry is expected to experience a sustained period of strong 15%-25% compound annual growth (CAGR) until around 2005.
So what makes this cyclical framework function and why are we expecting the market to accelerate to new highs?
New platforms require time to build up installed bases of hardware sufficient to support profitable levels of software sales.
Clearly, as it is games that drive hardware sales, the two need to progress hand in hand. In an industry as technology-driven as the games industry, obsolescence (or more accurately perceived obsolescence) can come
easily, and since games consoles comprise hardware standards that do not change during their life spans, obsolescence is built into the console and can also be influenced by early announcements about forthcoming
platforms.
We can say with a degree of certainty that, irrespective of the sales achieved for PlayStation 2, Xbox and GameCube, none of
their manufacturers will release new consoles within the next 2-3 years and all of them will be superseded at some point in the next 5 years by faster, more sophisticated consoles.
Our confidence in the current cycle's ability to outstrip the growth records reached in the last cycle is derived from a number
of factors.
Even in the largest gaming territories, penetration of games consoles has not exceeded around 4 in 10 homes and the demographic
of gamers remains firmly bedded amongst young males. However, this is changing. The average age of console gamers tends to start high and drop as the price levels for hardware and software decrease to more
pocket-money and gift-friendly levels. This starting age level is increasing with every new cycle and is reinforced by an average PC gamer age level that is increasing at a rate of around 1 year per year. Many
gamers have grown up with the games industry and are simply continuing their hobby as they age. At the same time, the ever-increasing sophistication of game aesthetics and gameplay are allowing those that never
wanted to play games in their youth to finally be able to relate to games. Where ten years ago one might have been hard pushed to recognise a specific car brand in a racing game, one can now easily recognise car
brands and models as well as the tracks and environment in which the game takes place.
Our optimism is reinforced by two other factors.
Whilst the PC games market is frequently beset by oversupply, poor margins and technology compatibility problems, it
has come to represent a fairly stable backbone to the game industry with typical CAGRs of 5%-10% since the beginning of the last decade. As long as the PC is used (and bought) for productivity, internet, office use
and work, there will remain an addressable market for PC gaming.
In contrast to forecasts for the traditional games industry, the network games industry is one which has more often than not
failed to meet forecasts. However, after a slow start, there is growing evidence that network gaming (by which we mean wireless, wire-line and iDTV gaming) will grow to represent a significant new component of the
overall games industry. Commercially successful product/service launches on the DoCoMo iMode service, Sky's Open service and a variety of profitable persistent world games services, in particular, in Korea and the
USA, have finally given network gaming sceptics reason to reconsider their views.
The games industry is thus poised at a pivotal point, and whilst the industry undoubtedly faces great changes during the
current cycle, few would doubt that growth is not assured.
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