The video game industry is on the verge of another transition. But what looms could be more like an upheaval than the smooth changeovers of the past.
Ever since the Super Nintendo Entertainment System emerged in 1991 to replace the original Nintendo, console game lovers - including owners of Sony PlayStations and Microsoft Xboxes, which came later - have willingly upgraded their gaming systems with each advance of technology.
Along the way, spending on video games has grown from less than $6 billion annually in the early '90s to about $25 billion last year, estimates the Entertainment Software Association.
Nintendo is expected to unveil details and games for its successor to the Nintendo Wii, the Wii U, at the Electronic Entertainment Expo, the video game industry's largest U.S. showcase, which begins Monday in Los Angeles. Yet regardless of its yet-to-be-announced price and release date, the Wii U will arrive at a time of uncertainty for the industry, which has seen much of its recent growth come from beyond the traditional console video game market.
The "free" price tag is the biggest selling point for tens of millions of players who have gravitated to mobile and online games played on smartphones, tablets and Facebook - instead of buying a standalone game console for about $300 plus $50-$60 a pop for games.
Once players sample games such as the Facebook favorite FarmVille and smartphone hit Temple Run, they tend to plunk down a few dollars to get in-game upgrades and perks. That spending added up to nearly $4 billion last year, and could rise 8% this year, according to PricewaterhouseCoopers.
And the ease of play has powered the overall growth of the video game-playing audience. The number of people who say they play games for at least one hour each month has more than doubled to 135 million from 56 million in 2008, according to Parks Associates. The number could grow to as many as 180 million players of all types of games in the U.S. by the end of 2015, forecasts market intelligence firm IDC.
"That (ease) is what is expanding games to a whole new audience, because now there is not a barrier except to press 'Start,' " says Gordon Bellamy, executive director of the International Game Developers Association.
But Nintendo, Microsoft and Sony are facing unprecedented challenges to their console businesses. Traditional game retail sales dropped from about $10 billion in 2009 to $8.8 billion in 2011, according to an analysis by market tracking firm The NPD Group and Ipsos MediaCT for the ESA. About another $6 billion was spent on game consoles and handheld devices.
Despite the arrival of a new Nintendo system, total sales of systems and games will likely decline 4% to 6% in 2012, analysts say.
"Our industry is having a minor identity crisis," says EEDAR analyst Jesse Divnich. At the upcoming E3, "it is imperative" that companies such as Microsoft and Sony "justify why consumers should spend upwards of $60" on traditional disc-based high-definition video games.
Meanwhile, digital sales of games, which increased from $5.4 billion in 2009 to $7.3 billion in 2011, are expected to keep rising. While downloads of traditional video games for consoles and subscriptions to services such as Xbox Live make up part of that growing digital pie, the bulk of it is money spent on smartphone games and purchases inside Facebook games.
For players, that means a variety of games to choose from. "People want to play when they want and where they want and for however much they want," Bellamy says. "That price could be free, it could be a buck, $60 or $100. But there's choice."
And console makers intend to remain part of the mix, too.
Where gaming is headed
As the transition to the next-generation of consoles begins, hardware makers are already showing signs of where the future of home gaming is headed - taking some cues from the upstart mobile and online game world:
•Innovation in game play. The Wii U, first out of the blocks and likely to get the most buzz at E3, has a new wireless tablet-shaped controller with a touchscreen and traditional game controls that allow expanded game-play options. For instance, players can tilt the new motion-sensitive control tablet's screen to make on-screen characters move - just like an iPad.
The tablet, which can also be used as a map for exploring what is on the big screen, will serve as a window to a game world that exists virtually beyond the TV screen - around you and above you. "The focus will be on new ways to play games," says Geoff Keighley, host of Spike's GameTrailers TV.
Like the PlayStation 3 and Xbox 360, Wii U will render games in high definition, an improvement over the current Wii.
The original Wii was an innovator not that long ago. It made motion-sensing games popular, and about two years ago, Sony and Microsoft each released their own gesture-based controllers, the Move for the PS3 and the hands-free Kinect for the Xbox 360.
So you can expect motion to play a part in the next generation of game consoles. But new systems need gotta-have games to drive sales. "What is the Wii Sports or Wii Fit for the Wii U?" Keighley says. "We haven't seen that game that will cross over to the mainstream - and hopefully it will debut at E3."
•Being social and connected. Nintendo also needs to show that the Wii U will keep players linked into social networks such as Facebook and Twitter, as well as serve up additional content such as TV and movies.
Last week Microsoft added Amazon Instant Video to Xbox Live's available apps, including HBO Go and ESPN. The PS3 already had that as well as NFL Sunday Ticket, which costs but gives you viewing access to every game except in your local market. Each has extensive on-demand movie and TV libraries. All three current game systems let users stream Netflix and Hulu videos.
"This generation of consoles has really grown to be the entertainment hubs in the home," says Michael Gallagher, president of the ESA, which operates the E3 convention. "We expect to hear more about further growth in that area, which is a great opportunity to gain the mindshare of most consumers."
Electronic Arts has added social connectivity into games such as Need For Speed, letting players post top scores, videos and challenges to friends. Also in the works, a Battlefield 3 Premium service that gives early access to new multiplayer levels for subscribers and increased customization for online soldiers and platoons - something similar to Activision's Call of Duty Elite service, which has free features and a $50 annual tier, with Facebook and smartphone apps. "Any developer or publisher that isn't thinking about how to incorporate these changes into their games will be left behind," says Laura Miele, group vice president of marketing for the EA Games label.
•Tapping into mobile games. People spend as much or more time playing video games, across all devices, as they do streaming TV, movies and other video to devices, a new PricewaterhouseCoopers survey found. "It has become a pastime and much more mass market," says Lori Driscoll, a director at the consulting firm.
Now that consumers are used to playing games on smartphones and tablets, they want a consistent experience across devices, Driscoll says.
Sony comes closest to accomplishing that today with its MLB 12: The Show baseball game, which can be played and synced on the PS3 and the PlayStation Vita handheld. The evolution of that synergy - Nintendo perhaps using the Wii U and 3DS handheld; Microsoft with new Windows 8 phones - will help drive industry growth, Driscoll says.
Also bringing in more players are new "freemium" games that can be played for free but offer advantages to payees and subscription models - for physical rentals from GameFly to streaming games from new companies such as OnLive. The game industry "is going to explode," she says. "I think we are going to see it go up over time."
Keeping longtimers happy
While the top game companies must give a nod to the newer trends in gaming, they cannot forget the longtime core audience. In the case of Nintendo, it should lean heavily on its strength, "their own intellectual properties such as Mario, Zelda and Donkey Kong," says Divnich. "They really need to convey that if you want the true and unique Nintendo experience, it is only available on their platforms."
Wedbush Securities analyst Michael Pachter agrees that longtime Nintendo supporters should be the target audience for the Wii U. "The Wii U is not likely to generate the same magical response among non-traditional gamers as did the Wii," he says. "These gamers have moved on to social games, tablet and smartphone games, or gave (Wii) up as a fad, and are unlikely to be won back."
Microsoft and Sony are expected to tout new games such as Halo 4 and The Last of Us for the Xbox 360 and PlayStation 3, respectively, rather than announce that new systems are in the works. "They are going to do everything they possibly can do to make you think we are not in a transition," says Morgan Webb, who co-hosts G4's X-Play series.
Free-to-play online and mobile game developers and companies will have a major presence at E3 for the first time. Zynga will be there, as will social game network GREE, which last month acquired the mobile game studio Funzio (Kingdom Age, Crime City and Modern War). Wargaming.net (World of Tanks) will be showing off upcoming free-to-play games World of Tanks and World of Battleships.
Having those mobile and online games under the same roof at the L.A. Convention Center will only make clear that not all games are created equal, says Jack Tretton, president of Sony Computer Entertainment America. "These aren't your fly-by-night, soon-to-be-on-smartphone games. These are $40 million, two-years-in-the-making games. Everything is not becoming Angry Birds."
By Mike Snider