The DeanBeat: The pace of disruption from physical to digital gaming

We’ve seen several rounds of disruption come and go in the video game business. Not every great idea has taken hold and changed the industry as we know it. OnLive, the promising cloud-gaming startup that raised $200 million and then cratered, was a prime example of a company that tried to disrupt the traditional game retail business and rushed too fast. Startups and traditional game companies have to not only understand disruption, but also how fast to execute it. That was the topic of discussion at the keynote panel I recently moderated at the Login conference in San Francisco. We had five leaders of the modern gaming business talk about the pace of change in gaming, and the perspectives they offered were enlightening. (See part two here).

The view of disruption depended on where you sat. Karl Mehta (pictured second from left), the founder of PlaySpan, which was acquired by Visa, said that the change from physical to digital was happening super fast. Online, mobile, and social are the future, he said.

“[Look] at every other form of media, starting with books,” he said. “We’ve seen music go the same way. Video’s going that way. Games are going the same way. There’s also the revolution around multiple devices in multiple places. Users want to play their games across multiple devices, and they want not just a time shift, but also a place shift. They want to play in different places. The mobile devices are becoming the prime gaming consoles. If you spend as much time as I do in Asia. … There are about two and a half billion people there, and that’s what the market is if you look at the economic growth activity. The device they have is a mobile phone. They don’t have PCs. They leapfrogged over consoles, which most of them can’t afford anyway. I could go out and predict that in the next 10 years, the console business will be dead.” Mehta added that his family just wasn’t playing console games anymore.

That was a nice little cannonade to get the conversation going. Chris Early (pictured second from right), the head of the digital business at Ubisoft, replied, “Thank goodness we have a few customers who aren’t like you, Karl.” He said that Ubisoft is still investing in console games that people buy for $60, but it is also making downloadable content and companion games on new platforms. Roughly 25 percent of Ubisoft’s staff is working on digital-only games. (He wouldn’t say if it disclosed 25 percent of revenue).

Chris Petrovic (pictured at far right), the head of GameStop Digital Ventures, the digital arm of the 6,000-plus store chain GameStop, chimed in to note that there is no longer a one-size-fits-all gaming experience for users. He says free-to-play, virtual goods-based games are not cannibalizing the $60 console game.

“What we’re seeing is that a rising tide is floating all boats here,” said Petrovic. “We’re introducing new people to gaming. Now, we’re not looking to boil the ocean and have everybody as a customer. What we have is a very targeted audience of passionate gamers who enjoy quality and aren’t afraid to pay for it. Whether that’s a tablet game for $9.99, a console game for $60 dollars, or a monetizing free-to-play game on a smartphone or on Kongregate — an online gaming site now owned by GameStop. What we’re seeing is that they’re spending more time gaming. They’re not making choices around gaming here or gaming there. What that’s impacting is other discretionary activities that they were doing before a wider variety of gaming came along. It’s what’s led us to selling Apple devices and Android tablets in our stores. We built a wireless gaming controller to support gaming on Android.”

GameStop has a $500 million digital business today, and it plans to triple that in a few years. But Petrovic wouldn’t say at what pace GameStop will shut down physical stores (that’s not his department). But he says it’s easy to forget that GameStop has tight relationships with the biggest “whales of gaming,” or the people who are like “gamer hobbyists” and spend the most on games. About 500 million of those walk into GameStop stores every year. GameStop has begun pitching digital games to those whales, and they’re far more likely to bite than the average online gamer.

“We have to be careful about these very linear, binary predictions,” where everyone says physical is doomed and digital will win, said Petrovic. “One answer doesn’t [work] for everyone.”

Anil Dharni (pictured third from right), the senior vice president of studio operations at Gree International (the international division of Japan’s Gree mobile social networking company), said that the cycle for social gaming is changing about every three months, particularly on Facebook, iPhone, and Android. Dharni has watched the change occur at Storm8, Funzio, and Gree.

“The teams and organizations you need to build have to be very capable and very flexible to adapt to a constantly changing platform,” he said. “And it’s not just the platform that’s changing. The flavor of the month is changing. The flavor of the quarter is changing. How you think about game design and game mechanics, that changes rapidly. The technology, the graphics quality — all the good stuff keeps evolving and rapidly moving. I feel like, looking back, Facebook evolution in social gaming is a lot slower than what I see on mobile.”

Dharni believes the oft-made prediction that mobile gaming in the U.S. will follow the pattern in Japan, where mobile game companies Gree and DeNA have created a $5 billion market. Mehta agreed that the U.S. will follow suit. If Japan is logically only 10 percent of the world market, then it follows that mobile games will be a $50 billion worldwide market — some day.

“We look at Japan and discard a lot of those trends by saying that they’re culturally very different, or they travel by train so that’s why they use mobile phones so much,” said Mehta. “They’re all superfluous, stupid arguments to me. Take out all that stuff and look at the underlying human behavior. The human need for entertainment is the same. If we ignore all these trends in Japan, if we’re not working on it now, then we’re going to miss the bus. This is a huge inflection point, and we have to be paying attention to this. ”

Mehta said, “It’s not a matter of whether it will happen or not. It’s a matter of time. In the next 10 years, mobile-social games could become a $50 billion dollar market and will exceed consoles worldwide.”

Dharni says Gree is encouraged that what worked in Japan is starting to work here. Japanese-style role-playing games are starting to take off in the U.S. But Petrovic hinted that Gree might be spending a little too much acquiring new users, based on its belief that mobile gaming nirvana is at hand.

Kevin Chou, the chief executive of hardcore social and mobile gaming firm Kabam, is pivoting quickly from a social gaming company to a mobile-first multiplatform game company. A year ago, 100 percent of the company’s revenues (it closed 2011 with $100 million in revenue) was based on Facebook games. Today, that number is less than 30 percent, and mobile gaming is growing fast.

Disagreeing with Petrovic, Chou said, “The change of pace is not necessarily linear. Looking at it exponentially doesn’t do it justice, either. It’s really a step-ise function as far as how fast change can happen. A lot of gameplay is tied to devices. Looking at device sales is an important leading indicator for understanding where gameplay may happen in the future. At the same time, looking at device sales and trying to predict device sales in more traditional gaming categories. … It’s an interesting picture.”

Kabam looked at making games for the PlayStation Vita or the Nintendo 3DS. To him, it didn’t make sense since Android devices are selling at a rate of 1.3 million units a day. He noted that mobile devices such as the iPhone 5 are going through massive technological advancements every year. As gaming platforms, they are growing up rapidly, compared to the stagnant consoles.

Just a couple of years ago, everybody thought that Facebook on PCs would take a huge chunk of the gaming market. But now mobile is surpassing it, and Zynga’s social gaming revenues are starting to slow down. Petrovic says that Facebook wasn’t authentic enough as a gaming platform to hang on to the most rabid game fans, who are now moving on to other things. Early said, “There have certainly been some fads on the platform side.”

He added, “You look at the casual games market, which five or 10 years ago consisted of $20 downloadable games on the PC. There was a time when the sudden new thing there was hidden-object games. We’ve seen that come across again in social games, and it’s creeping now into tablet gaming, as well. In many cases, that content follows along and becomes the trend on new hardware platforms. In other cases, the content itself tends to die out. We all saw Guitar Hero and Rock Band and the music games that were hot and did huge business for a number of years. They’ve significantly declined since then. We’re enjoying the dance phenomenon right now. We expect that will end sometime. Hopefully, not before Just Dance 9 or 10 or whatever.”

We’ll continue with part two of the discussion on Saturday.