Research Roundup: Game Forecasts Get Very Bullish

Electronic Gaming Business, June 30, 2004

Even as several middle-tier publishers like Eidos, Midway, and Interplay seemed to be struggling to make it into the next cycle of gaming this month, a series of new financial and industry analyst reports project continued strong growth in this segment for companies that survive to enjoy the upside.

According to PricewaterhouseCoopers, gaming will see a 20.1% compound annual gain globally by 2008, with a 15.1% expansion in the U.S., bringing worldwide gaming revenue to a staggering $55.6 billion worldwide and $15.1 billion domestically, not including hardware sales. PwC sees fast broadband and wireless expansion in the next few years as foundations for substantial growth in the video game market as these media become important gaming platforms. "It will reflect a major shift in the way entertainment is distributed," says the report, and the Internet and wireless will take evermore market share from standalone console gaming. The European and Middle East as well as Asia-Pacific sectors will enjoy fierce growth (30% ) in response to the next generation of consoles in particular.

French research firm IDATE comes in with a high growth but more conservative forecast in its new and still un-translated "DigiWorld: Jeux Video: Vers Les Consoles Nouvelles Generations!" Pegging 2003 worldwide game software and hardware revenues at about $31 billion, the company sees it mushrooming to over $50 billion by 2008. IDATE and PwC seem to be buying into the industry lines in its figures, and IDATE anticipates substantial drops in console hardware sales and even games sales this year and next but a rapid acceleration in 2006/2007. The transition period will be buttressed, however, by what IDATE sees as an explosion in handheld hardware and games sales starting in 2005.

Demographic Inevitability

In charting the next five years of industry growth, Wedbush Morgan analyst Michael Pachter expands upon his thesis first presented at this year's E3 (EGB 5/19/04), that this transition between console hardware generations in 2006-2008 will be softer and more protracted than previous cycles. The exponentially higher cost of game development for these platforms, as well as a need to continue supporting the much larger installed base of last-gen hardware, will force publishers to limit their launch titles.

EGB has argued repeatedly that next-gen boxes are likely to be a harder sell outside of the gaming core because the technological advantages of the new systems will be more incremental and less apparent early in the cycle than the quantum leap that 128-bit gaming represented in 2000. Moreover, both Nintendo and Sony seem to be rehearsing their new launch model with the PSP and DS, which involves fewer launch titles.

Pachter is totally bullish on gaming ("[we] anticipate unprecedented levels of software sales over the next three to four years") because the demographics in the U.S. point to a steady growth of the addressable games audience. Former core teen gamers are sticking with the hobby as they age, and those teens are being replaced by a baby boom of a decade ago.

"We see a continuation of this demographic trend for at least another 20 years," says Pachter. As a result, Wedbush forecasts that the 128-bit platform will sell 134 million units in the U.S. and Europe by 2006 and achieve a household penetration rate of 52%, up from 38% for the 32/64-bit generation.

Pachter supposes that older gamers with greater disposable income will also spend more on games. We think the actual gaming habits of middle-aged gamers require deeper study because they are bound to be more complex than we suppose. This age group also has less disposable time and/or patience. Just as Japan seems to be facing a kind of gaming ennui (see Data Filter), the U.S. market may have to contend with changing gaming tastes and gamer exhaustion with familiar genres. In fact, we should point out that most of the rosy projections about gaming seem to overlook any creative challenges or push back from audiences over a lack of innovation, the same sorts of taste cycles and creativity droughts that affect film and TV.

Big Boy GameBoys?

Game companies and many analysts continue to bank on the new handhelds to maintain industry revenues during the transition. Jupiter Research is optimistic about the ability of these devices to capture young adult gamers. The company cites a substantial gap between console and handheld ownership that is waiting to be filled in the young adult segment and says that the addressable market of handheld game device owners will grow from 23 million today to 43 million by 2009. Lead analyst Michael Gartenberg says handheld game revenues will track similarly to PC games, but grow faster, at about a 9% annual rate.

On the other hand, recent ePoll data suggests that gown ups have mixed reactions to portables. While 53% of 13- to17-year-olds and 44% of 18- to 24-year-olds say they are "very interested" or "somewhat interested" in purchasing a Sony PSP when it is available, only 28% of 25- to 34-year-olds and 25% of 35-to 50-year-olds fall into that category. Only 16% in the 25-34 segment says they are "very interested" in the platform. Jupiter's figures seem to disagree, as the company claims that 85% of 18-tp-34-year olds are "interested" in portable game devices.