Video Games are Dead. Long Live Video Games!

But, wait a minute. Is this assessment of the video game industry fair? While it’s true that at GDC 2009 I made the prediction that the retail model of selling video games was going the way of the dinosaur, the fact is that people overall are playing more games. The market is as vibrant as ever. What’s happening is greater video game media fragmentation along with the trend towards digital distribution.

I will be the first to acknowledge that retail gaming is down. People have less discretionary income right now, and as a result are making fewer purchases, including video games and other complementary products. But should retail spending really be the only yardstick used to measure the current health of the video game industry? Perhaps what is happening is the same thing we see for newspapers, magazines, music and shopping in general: digital cannibalization.

Perhaps it’s the method that is dying, and not the medium?

To understand what’s really occurring in the video game industry, we must recognize that there are several trends affecting retail video game sales, including:

• Micro-transaction games
• Subscription-based games
• Ad-sponsored games
• iPhone games
• Digitally downloaded games

Let’s begin by focusing on digital downloads. Recall a year ago when the discussions on the street centered around the question: Would consumers adopt a model of digital delivery for ‘games of size’ (i.e. DVD sized installs, etc)?

To answer this question, consider Steam, by Valve. This free-to-install application allows consumers to shop for retail available games through an easy-to-use interface.

Valve’s ‘Steam’ Digital Delivery Interface

Consumers can purchase complete versions of PC games, new and old and the majority of popular games are available. Recently, I added Bioshock (amazing), Assassins Creed and an older game Silent Hunter III (I like submarine simulations) to my library. I paid the retail price for these games, something I feel is very likely invisible to the research folks examining traditional checkout register receipts.

Digital downloads of games achieve a couple things that retail sales can’t. First, they provide an online social relevance to the game where existing players can communicate the quality and playability to those who haven’t made the purchase yet, thereby driving the second and most powerful aspect: the impulse buy. This doesn’t happen at Gamestop, and you won’t see it happen at Target. But I can guarantee you it happens on Steam. In fact, each game deployed under the Steam framework has the ability to easily communicate with other logged-in Steam users.

Steam, in particular, offers few free games. There are a handful of ad-sponsored, limited feature version games (such as the completely amazing TrackMania), but by and large the games are sold to the consumers. You’ve no doubt heard of Half-Life, Portal and Counterstrike, top selling games that gave Valve the popularity it now enjoys.

A year ago, the concern was that bandwidth and digital purchase hesitation on the part of consumers might curb the adoption of digital downloads. At the time, the Steam application had 11 million users globally (June 2008). Then the recession hits, and presumably digital delivery services will show a pullback just like the retail video game sector – right? Wrong. In June 2009, the number of Steam users had grown 62 percent to more than 18 million. I personally haven’t purchased a game in a store in well over a year, and the last console games I bought for my Wii were Star Wars: The Force Unleashed and Rock Band.

In coming posts, I’ll discuss other emerging areas of video gaming online that are slowly eating away at the classic retail video game model. I’ll also discuss dollar-to-eyeball conversion, where consumer spending on games can effectively be replaced by display advertising.

Game on!