Analysts: Recession to inhibit game innovation

With Sony slashing jobs, EA slashing jobs, Midway slashing jobs, THQ slashing jobs, and on and on, it's difficult to believe that the global economic crisis is somehow passing over the gaming industry. The full extent of the economic meltdown won't be known for some time, but it's a question DFC Intelligence recently posed to a number of industry insiders and analysts.

David Perry, creator of the Earthworm Jim franchise and founder of GameInvestors and GameConsultants, believes that while the industry will slog through the current crisis along with everyone else, there exists potential for a significant upswing in years to come.

"Long term, there will be very little impact, as we have a wonderful side effect in our industry. In down times, people stay at home and play more video games," said Perry. "Short term, we get strapped into the rollercoaster ride just like everyone else. Luckily our industry has a really good (long-term) trend going on."

Perry also believes that the current economic climate will continue to fuel the industry's move toward consolidation. He added that publishers will be eager to embrace digital distribution so they have instant and reliable sales data, as well as fewer middlemen taking a cut of the sale.

DFC Intelligence's own lead analyst, David Cole, echoed Perry's sentiments but said that smaller game makers will feel a tighter pinch than the top-tier publishers. "I think it makes it much harder for the smaller players to compete," said Cole. "Large publishers are already very conservative with new projects, and the financial situation will probably make them even less willing to take risks. This means even more of an emphasis on sequels and well-known licenses, assuming that is possible. Capital for smaller companies, unproven ideas, and startups is likely to be hard to find."

Colin Sebastian, senior vice president at analyst firm Lazard Capital Markets, believes that the tightening of the belt bodes poorly for third-party investment in games for the next generation of consoles. "It could also mean publishers move less aggressively to prepare for the potential roll-out of next-generation console hardware early next decade," he mused.

DFC also queried its panel of analysts on how consumer spending is expected to change as a result of the economic downturn. According to Perry, online gaming may be in the crosshairs as gamers begin to reevaluate their monthly subscription payouts.

"I think the subscription-based model is going to get a massive squeeze. For some time we have been concerned about just how many $14.95 subscriptions the average player will be able to handle," said Perry. "So we expect a lot of innovation in how to 'find' other revenue sources. In-game advertising and microtransactions are obvious choices, but in Asia concepts like the in-game treasure chest have literally doubled game revenue, so I think Western designers will be forced to discover new revenue techniques when the 'easy' routes like subscriptions begin to dry up."

Providing the last word, Cole said that while the game industry could defy the recession, industry stratification will ultimately lead to the big-name publishers reaping any potential boon.

"I agree with the basic assessment that games provide a lot of bang for the buck and thus overall spending could actually increase during a recession," said Cole. "However, it will clearly not benefit all companies equally. Mediocre products that are license driven tend to appeal to a less savvy consumer that is more likely to cut back on spending. Publishers that don't have a strong product portfolio could be in real trouble. I think it is likely that we could see a major publisher go belly up in the next year or so."