2011: The Road Ahead
Analysts Douglas Creutz, Jesse Divnich, and Michael Pachter lay down their big predictions for the coming year, which may yield more than a few surprises.
Nobody can say that 2010 was an uneventful year for the game industry. Highs included the launches of the Kinect and PlayStation Move and Call of Duty: Black Ops minting $1 billion. Among the lows were the potentially fatal woes of Bizarre Creations, not to mention the increasingly nasty legal war between Activision, ex-Infinity Ward heads Jason West and Vince Zampella, and now Electronic Arts.
What does 2011 have in store for the industry? Several major developments are already known, foremost among them the launch of the 3DS in March. Many of the year's major game releases have also been announced, from Dragon Age II and Killzone 3 in the beginning of the year to Gears of War 3 and Mass Effect 3 at its end.
However, much of next year is shrouded in uncertainty. Will it hold more and more months of sales declines? How will the new motion systems fare during the first year of their life cycles? Will the PSP2 launch next holiday season, as is rumored? To help dispel the mists shrouding next year in mystery, GameSpot caught up with three leading game analysts--Douglas Creutz, Jesse Divnich, and Michael Pachter--and asked them to offer up some predictions for 2011.
Douglas Creutz--Vice President, Cowen and Company
Retail software sales declines finally abate. US console/handheld software sales grow slightly in 2011 after two consecutive years of declines. With the music bubble fully deflated, Wii software sales already well off their peak, and handheld sales reinvigorated by the 3DS, continued growth in PS3/Xbox 360 software sales is enough to tip total packaged good software growth back into positive territory.
Call of Duty sets another record; Activision begins offering subscription service. The 2011 version of Call of Duty continues the franchise's number-one streak with another record-setting performance. Continued growth in the PS3/Xbox 360 hardware installed base drives an increase in total sales vs. Black Ops as the power of the Call of Duty brand more than offsets any issues with last year's personnel turnover at Infinity Ward. Additionally, Activision debuts a subscription service for Call of Duty that offers "all-you-can-eat" downloadable content plus an even broader online play experience (even more MMOG-like), without changing the basic play experience that has historically been included with the retail purchase.
Nintendo continues to play coy about Wii successor despite falling to number two in console hardware sales. In 2011, sales of Xbox 360 hardware edge out the Wii as Microsoft matches Nintendo's midyear $50 price cut (to $149) with one of its own. Nintendo continues to downplay speculation about a new console, however, preferring to stay on-message about its lead in the overall installed base and the strong initial performance of the 3DS.
Money continues to pour into social/casual gaming, but economics worsen. Companies building games for newer platforms such as Facebook and the iPhone/iPad receive significant venture funding in 2011 as the space continues to be perceived as high-growth, and several significant merger and acquisition transactions take place. However, low barriers to entry drive increasing competition, with lots of "copycat" titles flooding the marketplace. As a result, marketing costs start increasing significantly as companies strive to differentiate their product, while increasing monetization for social/casual games continues to remain somewhat elusive. As a result, there is at least one high-profile writedown/failure in the space in the second half of the year.
Some AAA titles released at lower retail price points…with a catch. Several major PS3/Xbox 360 titles are released at $40-$50 price points vs. the normal $60 but have significant and critical content available at launch only through digital downloads, with gamers enticed into spending an extra $20-$30 to enjoy the full game experience. Gamers grumble about being nickeled-and-dimed by the publishers but spend the money anyway, to the benefit of the publishers.
Jesse Divnich--Vice President, Capital Research and Communications, Electronic Entertainment Design and Research (EEDAR)
Console manufacturers: In 2011, the industry will see console manufacturers continue to increase the value of their hardware by adding additional hardware components (bigger hard drives) and launching new digital services and partnerships. This does not necessarily mean price cuts are coming. As we've seen over the last 12 months, the console manufacturers are attempting to elongate the current cycle, and each round of price cuts only shortens a console's life span.
Nintendo, Microsoft, and Sony cannot maintain the profitability of their businesses with the consoles at lower price points (below $150), and anytime a console breaches the $200 mark, it typically spells the end of a cycle within 24 months. And while many continue to demand hardware price cuts, we sometimes forget that each price cut puts us closer to the end of the cycle, and last time I checked, our industry has a notorious track record for cycle transitions.
Continued growth: The video game industry has experienced fragmentation over the past two years, and we should expect this to grow further in 2011. Over the past two years, investment flow into mobile and social network gaming has increased substantially, and we should expect this trend, along with further experimentation, to continue. We should also note that it has been historically difficult to track these numbers, but as further investment in these areas increases, monitoring and analysis will become more in-depth and transparent.
Although traditional console sales have declined in 2010, interactive entertainment grew roughly 5 to 10 percent. While tracking and monitoring sales from these satellite markets is an ongoing challenge, we have no doubt that the industry will grow in 2011 as the industry continues to experiment in both established and emerging markets. The question is, however, will the traditional publishers drive this growth or will new organizations (such as Zynga in 2010) emerge as new market leaders, forcing traditional publishers to acquire their way into these markets.
Dance games: 2010 will be the peak year for dance titles. Beginning in late 2011 we will see a decline in revenues in the dance genre. Mainstream consumers act differently than core gamers such that brand stamina is much lower. If there is anything we learned from the success of Guitar Hero, it is that the casual and mainstream base gets their fill on these types of products much quicker than a core consumer. The question becomes, if dance replaced music, what will replace dance? While I have the highest hopes for Move and Kinect becoming established peripherals, it does scare me when I begin to think about the next big "thing" that will drive casual and mainstream consumers to retail in the 2011 holiday season.
Michael Pachter--Managing Director, Equity Research, Wedbush Securities
I think that the biggest trend to watch for in 2011 is premium multiplayer services. I expect the publishers to follow the free-to-play precedent by offering a host of virtual items for sale and think that you will see virtual goods combined with DLC offerings in an attempt to maximize profit. I also think that we may see hosted tournaments on the consoles in exchange for modest entry fees, with virtual goods or DLC as prizes. Offering virtual items for money allows advertisers to sponsor different items, keeping the cost low for the gamer and generating revenue for the publisher.
On the hardware side, I think Nintendo will introduce a console that is HD and that has a faster CPU than the Wii. However, I don't think that they will put a CPU or GPU in there that is more expensive than current commodity CPU/GPU combinations, so don't expect them to spend more than $100 or so on the processors. It's just not like them to build a $350-$400 console, and that's what it would take for them to advance the technology beyond the current capabilities of the PS3. I don't expect them to lose money on the launch, and I think they will price it at $250 or so.
I don't expect anything new from Microsoft or Sony on the console side and am as curious about the PSP2 as anybody. If Sony packs it full of features and prices it competitively, it has a chance, but they haven't launched anything at a competitive price since the PS2.