State of the Game Industry 2008

1. State of the Game Industry 2008
GameOn Finance Conference
- October 2008 -
Wanda Meloni
President
DFC Intelligence
San Diego, CA
DFC INTELLIGENCE P R O P R I E T A R Y

2. The Interactive Entertainment Industry
Total Worldwide Market - $47 Billion in 2008
 Console Games: $27 billion in 2008
 Older systems still make up a large part of market - PS2,
Xbox and GameCube account for about $15 billion in
revenue but that is getting ready to decline because
industry is going into a 5 year transition period
 PC Games: $9.5 billion in 2008 with the majority coming
from online games/MMOGs
 Portable Games: $8.5 billion for 2008 projected to grow
to about $10 billion by 2012
 Emerging markets: more portable devices, connected
consoles, online distribution, micro-transactions, user-
generated content, gaming with social component
DFC INTELLIGENCE P R O P R I E T A R Y

3. Total Worldwide Interactive Entertainment Industry
$50,000
$45,000
$40,000
Console Online
$35,000
PC Online
$30,000
PC Games
Portable Software
$25,000
Portable Hardware
Console Software
$20,000
Console Hardware
$15,000
$10,000
$5,000
$0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
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4. The Console Market
Lose Money on Hardware, Make Money on Software

Microsoft and Sony have been willing to take a hardware loss of $100+ per unit

Hardware manufacturers receive royalties based on every software unit

manufactured
Amounts to about 15% of retail price, it puts all the risk is on third-party developers

A single title can change it all

A single hit title can secure a system

Microsoft ambitious but remains weak in Asia

Recent moves are designed to shore up its chances but still no guarantee

Early start, strong online and more Japan developers

When will Microsoft make money?

Nintendo doing better than expected

For the first time consumers that grew up with Nintendo will be buying systems for their

children
Could be a strong second system and do well with 25-35% share

Sony has a lot to lose because it will be very unlikely that they can maintain their

67% market share
Still likely to maintain 40-50% market share

PS3 not expected to break-even

DFC INTELLIGENCE P R O P R I E T A R Y

5. PC vs. Console Market
 Consoles are bigger market overall no matter which way you slice it
except for…
MMOGs, casual games, and advergaming

 The console market and PC market are not mutually exclusive domains
They are each unique domains of specific types of gamers and gamer behaviors

(e.g. modding, MMOGs are PC, fighting games are console)
Where PC gaming and console gaming was mutually exclusive was in the domain

of retailer and publisher allocation of limited resources
 PCs have until now not been living room devices
HDTV changes that a bit but the future of media center PCs and gaming isn’t

certain
 PC gamers are older, more affluent, and tend to focus on a few big titles
that they play religiously
 The PC is always a center for innovation and that is what keeps it alive
 Consoles are gaining on areas that have been exclusive domains of PCs
Wireless and home networks coupled with user created content may eventually fuse

the world of PCs and consoles together
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6. Total PC Games: Retail Plus Online
Total Worldwide PC Sales by Region: 2004 - 2010
$12,000
$10,000
$8,000
Asia /ROW
Europe
$6,000
NA
$4,000
$2,000
$0
2004 2005 2006 2007 2008 2009 2010
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7. PC Game Play Expands Beyond Retail
 Retail Sales of PC Games Have Declined but the Overall
Market is Stronger then Ever
 New Models Dominate
 Online Games: $6.5 billion in PC online games in 2008
 Subscriptions: Games like Everquest, World of Warcraft and City of
Heroes get $50 at retail + $15 a month
 World of Warcraft: worldwide success with over 11 million users
 Digital Distribution: growing download option for games
 Advergaming: Top free casual game sites attract 200,000+
simultaneous users
 Top PC games like The Sims series and Half-Life can have retail
sales similar to top console games.
 Similar Trends are Likely to Occur as Console and Portable
Systems go Online
DFC INTELLIGENCE P R O P R I E T A R Y

8. Content is King
Content, Content, Content:
 Franchised/Branded
 Original
 User-Generated
Major Trends:
 Game content is “interactive” unlike film content which is linear
 Game content needs to be real-time, created with real-time tools
and open platforms
 Move towards use of procedural content, in combination with hand-
generated content
 The tools are changing – more middleware is being used
 Mod tools and easy-to-use consumer level tools necessary
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9. Online Game Markets Worldwide Forecast
Worldwide Online Game
Total Market - $7.6 Billion in 2008
Revenue: 2001-2012
 Forecasted to reach $13 billion by
2012 $14,000
 This market is fragmented among
many companies and markets $12,000
 Compare with Nintendo and Sony
$10,000
who have total combined game
related revenue of $10-15 billion a
in millions
year $8,000
 Much of online game revenue and $6,000
play is still from single player games
 Even digital distribution can still have $4,000
a strong physical retail component
$2,000
$0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
PC Online Console Online
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10. Online MMOGs
Total Market - $3.5 Billion in 2008
Worldwide MMOG Revenue:
Massively Multiplayer Online Games

2001-2012
(MMOGs) have been dominant revenue
generator via subscription model
A handful of successful games with big

focus on Fantasy Role-Playing (MMORPG) $6,000
Western markets: Big growth started

with Ultima Online (1997) and $5,000
EverQuest (1999), average subscription
costs rise from $10-15 a month
$4,000
East Asian markets: Pay-per-use

models and games like Lineage, Mu,
in millions
Legend of Mir, Fantasy Westward $3,000
Journey
Top games can last 5-10 years

$2,000
World of Warcraft was first big international

hit with over $300 million in revenue first
year $1,000
MMOGs could come to consoles, Final

Fantasy XI is already a success $0
01 02 03 04 05 06 07 08 09 10 11 12
More niche MMOGs: Runescape, EVE

20 20 20 20 20 20 20 20 20 20 20 20
Online, Puzzle Pirates
Potential to add digital distribution models

MMOG Revenue
to traditional subscription model
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11. Casual Games
Worldwide Casual Online Game
Total Market - $1.5 Billion in 2008
Revenue: 2001-2012
True mass market products with

some portals reaching over 20 million
users
$3,000
Casual Games have broadened the

demographics, especially older
women and working adults
$2,500
Some big name products like Tetris

and Bejeweled, and star developers
like BigFish ($100 million in revenue $2,000
2008) and PopCap
in millions
Model was free advertising supported
 $1,500
but is going towards adding digital
distribution and subscription
$1,000
Digital distribution model is “try

before you buy”
1% conversion rates mean 1 million
 $500
downloads to break even
$20 price point is probably too high

Emerging revenue opportunities:
 $0
Console systems (Xbox Live Arcade)

01
02
03
04
05
06
07
08
09
10
11
12
20
20
20
20
20
20
20
20
20
20
20
20
Skilled games

Mobile games

Casual Game Revenue
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12. Genre Comparison
Casual Games
Team: 25 members

Cost: $75k - $300k

Production Time: 6 months

Platform: PC primarily, some console starting

AAA Games
Team: 100 members

Cost: $15 - $30 million to produce + $40 million for marketing

Production Time: 24 – 36 months

Platforms: Multiple necessary - Consoles, PC, Online

MMOGs
Team: starts with 100 members and can move up to 450 by launch

Cost: $15 - $25 million for high-end + $500,000 annually for servicing

Production Time: 3 – 5 years

Platform: PC

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13. Business Models are Changing…
 Free to play: big trend in Asia
 Advertising in games: $937 million by 2012
Advertising on casual game sites

Corporate sponsored games

Product placement in games

In-game advertising in high-end retail titles with online connection

 Digital Distribution: $5.6 billion by 2012
Has become a key model in Asia to avoid piracy problems. In Western markets it

has been mainly used for casual games (with small file size) and products that can
not get retail distribution
Great supplement to retail, makes it model of choice for retail games with free

online play
Will not eliminate traditional retail for full games except in rare cases (Valve)

Update/add-on/extra, user created content: mods/Sims 2, virtual items

 More subscriptions
 Micro-transactions
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14. Emerging Trends
 Households that play games on multiple systems
 A single consumer plays games on the PC, console and
portable system and exchanges information between
platforms
 Game systems are always connected which expands
business models, distribution and consumption choices
which may start to shakeup established industry structure
 Large scale success requires diversity: of platforms,
products, markets and business models
 A truly global business
 Asian business models go to the West
 Console systems and Western brands start to penetrate Asia
 Both large global brands and solid niche markets
DFC INTELLIGENCE P R O P R I E T A R Y

15. Regional Tastes…
Key Lesson: Each market has its own idiosyncrasies
 North America: Strong diversity, sports titles critical, largest market,
emphasis on realism and first-person perspectives and action titles.
 Europe: More like N. America than Japan. More cost conscious,
traditionally last market to get console. PC gaming is strong
especially in Germany.
 Japan: Size of console and Japanese oriented content is critical,
cuter more abstract titles are big deals, and Japanese company
support.
 Korea & China: MMOGs especially because they avoid piracy
issues. Real-time strategy in Korea as well. RPGs in China.
 Mobile Phones: Much bigger in Korea, Japan, and Europe than U.S.
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16. Game Industry Sales by Region
Game Sales in 2004
10%
 North America: Clearly the
N. America
13%
key market.
Europe
44% Japan
 Europe: High prices have
ROW
limited sales.
 Japan: Declining in
33%
importance, but PC, online
and portable are becoming
more important.
Game Sales in 2010
 ROW: Asia is exploding on
16%
PC online game side and
N. America
Europe
37%
could become important for
Japan
13%
console systems.
ROW
34%
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17. Game Industry Forecasts by Region
Total Worldwide Entertainment Market by Region - 2004 to 2010
$50,000
$45,000
$40,000
Asia/ROW PC
$35,000
Eur PC
NA PC
$30,000
ROW VG
$25,000 Jap VG
Eur VG
$20,000
NA VG
$15,000
$10,000
$5,000
$0
2004 2005 2006 2007 2008 2009 2010
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18. Think Globally – Act Regionally
U.S.A. - “Regional Proficiency Clusters”
San Francisco – platforms: PC, Sony, Nintendo, new technology, funding opportunities

Seattle – casual games, Microsoft

San Diego – affiliate studios, online gaming

Los Angeles – movie franchises, branded content, Japanese subsidiaries

Raleigh/Durham – middleware, online gaming

Austin – Audio and music, online gaming

New York, Boston – starting to see more growth in these regions

Australia
Brisbane – strong academic influence, regional gov’t. provides incubatator program

Scandinavia
Norway

Sweden

Emerging Countries
 Asia – Korea, Singapore, China alone has 30% growth annually
 India – 78% growth annually
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19. Canada’s Game Industry
Montreal has:
 3D
 +80 game companies
 Infrastructure: localization services, outsourcing
 Affiliate game studios: EA, Ubisoft
Vancouver has:
 +100 game companies
 Strong military connection, casual gaming, closest proximity to Asia
 Strong affiliate studios
Growth of Regional Proficiency Cluster Requires:
 Attraction of like interests in region
 Schools fostering interactive media = Strong employment pool
 Incentive programs for startups: incubators, collaboration programs
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20. For More Information:
Wanda Meloni
President
DFC Intelligence
wmeloni@dfcint.com
(858) 780-9680
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