Downloads stoking game-industry growth for next decade - Analyst

The last 10 years have seen a tremendous amount of change in the gaming industry. In 1999, the Dreamcast took console gaming online out of the box for the very first time. The next year, Electronic Arts and The Sims spearheaded a wave of gaming audience expansion that continues to this day. Meanwhile, mobile gaming evolved to mean more than just the Game Boy, with cell phones, iPods, and Sony's PSP all jumping into the mix.

The next 10 years will prove to be equally transformative, if an industry-spanning report from Wedbush Morgan Securities analyst Michael Pachter proves prescient. In particular, Pachter is very bullish on the prospects of digitally distributed games and content, which he expects to grow exponentially.

"In our view, the video game market is likely to grow at or above a 7.2 percent rate for the next 10 years, at least doubling over that time," Pachter said. "We envision digital downloads to account for all of the growth."

A decade from now, Pachter expects the typical console to include a terabyte of storage and suggests that full-game downloads will be the norm (although packaged goods will still make up a majority of the market). The analyst added that publishers who perceive used-game sales as undermining their retail revenues are pushing particularly hard for digital distribution. In the meantime, the emphasis will be placed on digital content and episodic gaming.

"We think that the poster child for this scenario is Grand Theft Auto IV on the Xbox 360, a game first sold in physical form, with additional levels sold periodically thereafter through downloads," Pachter said. "Notably, after a tepid embrace of its first downloadable 'episode,' Take-Two decided to offer the first and second 'episodes' in a combined physical package, with the two episodes allowing full game play without the purchase of the original GTA IV game disc."

Those were by no means the only predictions in the 210-page report. Pachter also said he expects to see Activision Blizzard launch a World of Starcraft massively multiplayer online game by early 2011, preceded by a new version of the Wii hardware capable of displaying high-definition graphics in late 2010. (He dubbed the speculated console 'Wii Plus.')

As for more general trends, Pachter noted that the recent growth in the in-game advertising market has stalled. He also labeled the mobile phone gaming market a fad, saying the increase in the number of games sold thanks to the success of products like Apple's iPhone is being offset by the ever-falling price of such titles. Finally, he took a dim view of mergers and acquisitions in the near term, saying the major media companies are taking a cautious approach to the industry, and there are few attractive candidates in the market outside of Ubisoft.