E3 06: Analysts offer mixed view of future

LOS ANGELES--E3 is best known for the gaming frenzy that fills the show floor, but that's only part of the story. There's also a three-day program of conference sessions and panels, where some of the game industry's best-known figures dish the dirt and share their insider perspectives.

One of the most interesting entries in this year's conference program was yesterday's roundtable discussion titled "World view: Analysts take measure of the global marketplace." Publishers and developers packed the house, eager to hear six equities analysts discuss global-gaming prospects for the next few years.

Oft-quoted game equities analyst Michael Pachter of Wedbush Morgan Securities served as the roundtable's master of ceremonies. He took the conversation to Europe first, asking David MacQueen of Screen Digest to describe the market and share his forecast. MacQueen described a market with strong regional differences between its component countries and annual software sales expected to hit $7 billion this year. As he noted, that figure would make the European market two and a half times larger than the Japanese market and almost as large as the US.

MacQueen said that the European market peaked in 2004, driven by the maturing PlayStation 2 console, before slumping in 2005. He predicts that handhelds will play a key role in driving the market to the $7 billion mark in 2006, erasing last year's decline and matching the peak seen in 2004.

According to MacQueen, the Xbox 360 stumbled in its European launch. In fact, the PS2 outsold the 360 in the first quarter of 2006, partially due to the chronic shortages that also affected the US. Expanding on his theme that "Xbox could do better," he quipped "in Japan you can see why it's called the 360--I think that's the number of units that were sold."

Nonetheless, MacQueen expects European sales during the next-gen console cycle to hit a higher peak than current-gen sales. He believes the market will be worth $9 billion in 2007, partially thanks to strong growth in casual, online, and mobile gaming.

Anita Frazier of market research firm The NPD Group took the mike next. She grabbed the audience's attention by describing the current state of the US market in unabashedly negative terms, saying "the sky is falling."

Despite an installed base of over 100 million current and next-gen systems, total sales of PC games and console hardware and software have been flat over the last four years. Moreover, because of a high incidence of dual-console ownership, game-console penetration in US households is lower than the large installed base suggests: Frazier estimates penetration of less than 40 percent of US households.

Though Frazier takes a negative view of the current state of the market here in the US, she's optimistic for the future. She notes that female gamers and cell-phone games represent largely untapped markets, and more parents of gamers are also likely to be converted as the industry moves into the next generation of hardware.

Hiroshi Kamide of KBC Securities followed Frazier with another gloomy assessment--this time of the Japanese gaming market. In his view, "traditional" gaming is struggling in Japan. Kamide is not the only person holding this opinion: a respected Japanese developer said the same thing in a different workshop earlier this week, going so far as to say that he feared for the continued existence of the industry in Japan.

Kamide, however, is not quite that negative. He believes that Nintendo's deployment of the DS and Wii in an effort to attract noncore gamers is exactly the right move, the "saving grace for Japan."

He looks to Wii to perform "much better" than the GameCube, and notes that while it's always possible to cater to the core gamers, which is the approach of most Japanese game firms, targeting the broader casual market is the best way to guarantee growth.

After Japan, the conversation turned to the other key East Asian markets, China and Korea. Lisa Hanson of Niko Partners shared her thoughts on China, while Antonio Tambunan of Bear Stearns Asia spoke on both countries, supplementing market statistics with qualitative data garnered from his Korea-based 2,000-member online gaming guild.

In a nutshell, China is a challenging but high-growth market, while the mature Korean market is facing much slower growth. Because the market in Korea is saturated, most growth is the result of cannibalization, and Tambunan believes that 2006 will see many gamers drop longtime favorites for newer titles. Games like Lineage and Ragnarok Online, which ignited the Korean MMORPG boom, are getting long in the tooth (in fact, Lineage has 2D graphics), and he believes that account holders are ready to switch to new games offering better graphics and improved gameplay. Bottom line? He believes the population of online gamers in Korea will increase incrementally in the next few years, from 16 million in 2004 to 20 million in 2007.

Tambunan's forecast for China over the same period is much rosier. He sees the market increasing from 20 million online gamers in 2004 to 36 million in 2007--almost doubling in just two years. But Tambunan also warns that the extremely high rate of piracy poses a challenge for publishers.

Hanson of Niko Partners agreed with Tambunan's warning. She illustrated the depth of the problem by noting that China's top-selling PC game in 2002 was Half-Life: Counter Strike, with 450,000 copies sold. But last year, the top seller sold just 50,000 copies: the rest of the market vanished, lost to pirates. Another challenge is China's regulatory maze--foreign publishers struggle to gain entry to the market. Still, Hanson believes the potential payoff is worth it: her data shows that the Chinese gamer population will grow from 27 million in 2005 to 63 million in 2010, with a majority playing online games.

Not only is the market primed for growth, it is also very fluid. In Hanson's estimation, there is no truly "world-class" domestic game firm blazing a trail for other firms to follow. As a result, the market is very dynamic, and it's easier for a new entrant to gain market share than in a more established market.

The upshot? For a company eyeing a move into Asian markets, China looks like the most interesting bet. Game regulation and unbridled piracy pose steep challenges, but the potential payoff is worth it. Meanwhile, the European and US markets are also likely to grow, albeit at a lower rate than China. The next-gen consoles, especially the Wii, are the key to unlocking that growth, most of which is expected to come from expanding the audience beyond the traditional hardcore gaming demographic.

LOS ANGELES--E3 is best known for the gaming frenzy that fills the show floor, but that's only part of the story. There's also a three-day program of conferences, at which some of the game industry's best-known figures dish the dirt and share their insider perspectives.

One of the most interesting entries in this year's conference session was yesterday's roundtable discussion entitled "World view: Analysts take measure of the global marketplace." Publishers and developers packed the house, eager to hear six equities analysts discuss global gaming prospects for the next few years.

Oft-quoted game equities analyst Michael Pachter of Wedbush Morgan Securities served as the roundtable's master of ceremonies. He took the conversation to Europe first, asking David MacQueen of Screen Digest to describe the market and share his forecast. MacQueen described a market with strong regional differences between its component countries and annual software sales expected to hit $7 billion this year. As he noted, that figure would make the European market two and a half times larger than the Japanese market, and almost as large as the U.S.

MacQueen said that the European market peaked in 2004, driven by the maturing PS2 console, before slumping in 2005. He predicts that handhelds will play a key role in driving the market to the $7 billion mark in 2006, erasing last year's decline and matching the peak seen in 2004.

According to MacQueen, the Xbox 360 stumbled in its European launch. In fact, the PS2 outsold the 360 in the first quarter of 2006, partially due to the chronic shortages that also affected the US. Expanding on his theme that "Xbox could do better," he quipped "in Japan you can see why it's called the 360--I think that's the number of units that were sold."

Nonetheless, MacQueen expects European sales during the next-gen console cycle to hit a higher peak than current-gen sales. He believes the market will be worth $9 billion in 2007, partially thanks to strong growth in casual, online and mobile gaming.

Anita Frazier of market research firm The NPD Group took the mike next. She grabbed the audience's attention by describing the current state of the US market in unabashedly negative terms, saying "the sky is falling."

Despite an installed base of over 100 million current and next-gen systems, total sales of PC games and console hardware and software have been flat over the last four years. Moreover, because of a high incidence of dual console ownership, game console penetration in US households is lower than the large installed base suggests: Frazier estimates penetration of less than 40 percent of US households.

Though Frazier takes a negative view of the current state of the market here in the US, she's optimistic for the future. She notes that female gamers and cell phone games represent largely untapped markets, and more parents of gamers are also likely to be converted as the industry moves into the next generation of hardware.

Hiroshi Kamide of KBC Securities followed Frazier with another gloomy assessment--this time of the Japanese gaming market. In his view, "traditional" gaming is struggling in Japan. Kamide is not the only person holding this opinion: a respected Japanese developer said the same thing in a different workshop earlier this week, going so far as to say that he feared for the continued existence of the industry in Japan.

Kamide, however, is not quite that negative. He believes that Nintendo's deployment of the DS and Wii in an effort to attract non-core gamers is exactly the right move, the "saving grace for Japan."

He looks to Wii to perform "much better" than the GameCube, and notes that while it's always possible to cater to the core gamers, which is the approach of most Japanese game firms, targeting the broader casual market is the best way to guarantee growth.

After Japan, the conversation turned to the other key East Asian markets, China and Korea. Lisa Hanson of Niko Partners shared her thoughts on China, while Antonio Tambunan of Bear Stearns Asia spoke on both countries, supplementing market statistics with qualitative data garnered from his Korea-based 2,000-member online gaming guild.

In a nutshell, China is a challenging but high-growth market, while the mature Korean market is facing much slower growth. Because the market in Korea is saturated, most growth is the result of cannibalization, and Tambunan believes that 2006 will see many gamers drop long-time favorites for newer titles. Games like Lineage and Ragnarok Online, which ignited the Korean MMORPG boom, are getting long in the tooth (in fact, Lineage has 2D graphics) ,and he believes that account holders are ready to switch to new games offering better graphics and improved gameplay. Bottom line? He believes the population of online gamers in Korea will increase incrementally in the next few years, from 16 million in 2004 to 20 million in 2007.

Tambunan's forecast for China over the same period is much rosier. He sees the market increasing from 20 million online gamers in 2004 to 36 million in 2007--almost doubling in just two years. But Tambunan also warns that the extremely high rate of piracy poses a challenge for publishers.

Hanson of Niko Partners agreed with Tambunan's warning. She illustrated the depth of the problem by noting that China's top-selling PC game in 2002 was Half-Life: Counter Strike, with 450,000 copies sold. But last year, the top seller sold just 50,000 copies: the rest of the market vanished, lost to pirates. Another challenge is China's regulatory maze--foreign publishers struggle to gain entry to the market. Still, Hanson believes the potential payoff is worth it: her data shows that the Chinese gamer population will grow from 27 million in 2005 to 63 million in 2010, with a majority playing online games.

Not only is the market primed for growth, it is also very fluid. In Hanson's estimation, there is no truly "world-class" domestic game firm blazing a trail for other firms to follow. As a result, the market is very dynamic, and it's easier for a new entrant to gain market share than in a more established market.

The upshot? For a company eyeing a move into Asian markets, China looks like the most interesting bet. Game regulation and unbridled piracy pose steep challenges, but the potential payoff is worth it. Meanwhile, the European and US markets are also likely to grow, albeit at a lower rate than China. The next-gen consoles, especially the Wii, are the key to unlocking that growth, most of which is expected to come from expanding the audience beyond the traditional hard-core gaming demographic.