Game industry chief says free games aren’t disrupting game publishers

The video game industry’s E3 Expo starts on Monday morning in Los Angeles. This is the conference where all of the cool new games of 2011 and beyond will be announced. While the industry was hurting in the past because of the recession, it’s not in such a bad state today as profits return and game publishers reap new revenues from digital distribution and social and mobile games. Last year’s show drew about 45,000 people, and this one should do so as well. You can expect a blitzkrieg of announcements from game companies and lots of attempts to get attention in the spotlight. As we did last year and in 2009, we talked about the conference and industry issues with Mike Gallagher, president and chief executive of the Entertainment Software Association, the trade association that puts on E3.

VB: It’s that time of year.

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MG: It’s becoming a ritual to have this conversation.

VB: Yeah.

MG: But that’s about the only thing that stays the same — that we have this conversation. We have always been talking about new things because this industry is so dynamic.

VB: So what’s on your mind? What is the show is going to be all about?

MG: I think as always, E3 is a gathering place for the video game industry where we send messages worldwide to the consuming public, to retailers, to investors, everyone who has an interest in media or entertainment. It’s about what’s coming next. E3 defines what’s coming next and I hope you saw the slogan for the show that says “Exceeding Your Imagination.” The meaning really captures what E3 is all about.

VB: And how many people are you expecting at the show?

MG: One thing that we found — and you’ve walked this path with me over a number of years now — is we are very focused on the quality of the experience of E3 as opposed to the quantity of the experience. We are going to look to replicate the success of the past two years, which means an attendance figure right around 45,000 through turnstiles. But those aren’t the only numbers that are worth paying attention to. We have over 200 companies that are going to be present and exhibiting at the show. That’s a continued escalation in terms of the number of exhibitors. The number of foreign media and foreign retailers has continued to climb from the very high levels of last year because of the international reach and importance of E3. We see very strong returns there.

And then you have got some other numbers. We are by far the most visual show. This makes me smile and helps me appreciate the electric effect of our show. There are more than 35,000 video monitors that are going to be used at the show.

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VB: That’s insane.

MG: That was a stunning number. That’s like one display for everybody that comes through the turnstiles. It just reflects the vitality and the energy and the health of the industry and of the trade show.

VB: It looks like there will still be plenty of blockbusters that are going to be unveiled next week. It’s a show that’s still about a lot of the biggest blockbuster games?

MG: Yes, I think you can say the industry is firing on all cylinders and that obviously includes the blockbusters that are traditional mainstay of E3. But now we are running on a V12 engine as opposed to maybe a V6, because we have so many other areas where we are able to reach the consumer, whether it’s through a handheld device like a mobile phone or whether it’s on a tablet or a PC or on the plasma in the family home. Wherever there is a screen, our industry is connected with the game player.

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VB: Do you think the industry is adjusting to this change well as far as making the games go out onto the new platforms?

MG: I think our industry is leading the way amongst all the forms of media on how to successfully make the digital transformation. If you take music, music is 50 percent of the size of the industry it was 10 years ago. Movies are desperately seeking to stay ahead of the threat from piracy and the ability of consumers in a click of a mouse and perhaps a pause, a little bit of a wait for a broadband, to download a pirated movie. … In our industry, we are finding the path forward with a much faster and much greater likelihood of success, when you compare it to other forms of media.

So I am very encouraged. That’s not to say it’s clean; it’s certainly very messy at times, and it can be disruptive. But our industry is managing it the best of all forms of entertainment.

VB: What are some of the trends that are interesting to you right now, and what are you looking forward to seeing next week?

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MG: I will give you a personal reflection on that and I will give you a broader business report. The personal reflection is that one of the funniest part of E3 is the unexpected surprise that it brings. All of the companies are bringing their A game. They take their best stuff and put it all under the roof and you see remarkable innovations happening across the entirety of the LA convention center. And so going in with a fresh set of eyes, going in with a sense of wonder, you really experience the most our industry has to offer. Our trade show is different from other shows like CTIA or NAB or CES where there is a theme going in. They will say, “Oh it’s the year of the green gear”, or they will say, “It’s the year of 3D” or something. Our industry doesn’t stay on the script, and that’s part of the magic of E3 for me, on the personal front.

Now on the rest of it, the larger trends, you are going to see everything that is cutting edge in the digital space on display at E3. You will see (stereoscopic) 3D, which is redefining the motion picture experience in the theaters as well as the viewing experience in the home or television. You are going to see digital downloads which are redefining games just like they are redefining the book industry. The book industry has a renewed sense of life. Amazon.com recently reported that it sold more digital books than paper books — hardback and paperback combined. We are riding that trend as aggressively, if not more so, as any other industry. If you want things in HD and surround sound, you come to E3. The interactive component is unique to our industry.

So not only are we seeing remarkable innovation in the core of the industry, we are seeing it extend to where literally everyone in the United States is a gamer on any device where there is a screen. They are playing games, whether social, casual, or traditional games. They are fully engaged, and that’s a very exciting market place to be in and innovate with it.

VB: There is some kind of threat there. Some fear that free games on the iPhone or cheap games on Facebook could in some way undercut the core of the industry. How are you looking at that?

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MG: I will give you two responses on that. One: YouTube is not a threat to Lord of the Rings in the theater, right? YouTube is free, YouTube is quick, YouTube is easy. It satisfies an experience that obviously scores of millions of Americans enjoy everyday. There are aspects of our industry that are now as acceptable as YouTube and they are priced in that same range.

Two: our industry has a pathway to monetize that YouTube effect that others do not because of the success of micro-transactions, episodic content, and downloadable content. We have a way as an industry of moving that to a profit-generating, revenue-generating business that other industries have struggled with. So I see optimism. Maybe it’s disruptive, but the core industry certainly has an opportunity within that disruption.

And then I would argue that we are extending the marketplace. Traditionally in our industry, a console sold one million copies and that was a success. If it sold 5 million, it was a blockbuster. Now our industry has the ability to reach tens of millions or scores of millions of consumers in a month. Some companies are much more dedicated online and can do these big numbers in a week. And we are seeing the success of that all across the industry.

VB: How do you look at the next-generation technology and the talk about when it will come? Like the Wii 2 and the NGP?

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MG: If I look at it in the context of a remarkably innovative industry, it’s always coming. Last year it was the 3DS that was new at the show. We have Kinect and PlayStation Move. Those redefined the interface between humans and machines. If you really look at it on a deeper level, you have 3D coming. You can use it with the glasses in theaters or without glasses on the handheld. You saw that first at E3. It’s very immersive and attractive to consumers. I look at what we did last year and I look at what is coming this year and it is another step in the progression of innovation that exceeds our imagination.

VB: I suppose it is fun to see the console cycle starting all over again.

MG: I don’t think this is starting all over again. Starting all over again mean you tear it up, you throw it away or you ignore what’s happened in the past. Perhaps you are going to run away from it. I see it as building upon the legacy of what’s gone before. Like one example of that — and I think it’s an important one — is that all of the current editions are compatible with what has come before. Through digital downloads, you can now play all of your old favorite games or download new ones. We’re extending, not starting over.

VB: So are you anxiously awaiting the ruling from the U.S. Supreme Court on whether California’s video game violence law is unconstitutional or not?

MG: Well, I would not say anxiously, but we are certainly waiting, and the waiting time is ever narrowing. Right now, today, there are four dates the court has identified as a possible announcement of its decision: next Monday and the following three Mondays after that. So we’re ready to go; we have our response plan and all of the related activities that we would undertake to lead the industry’s response. We will have that ready to go, and it’s simply a matter of getting the decision from the court, putting it through the legal filters and making sure that we fully understand what it says and then moving down the path that leads us to.

VB: If you were giving a state-of-the-industry speech, what issues would you raise?

MG: One issue is the importance of making sure we are accurately reporting the revenue of our industry because it is a critical part of our story that was not being told. You might recall that I raved about that with a particular level of energy and I would say that we are seeing progress in measuring digital revenues in addition to physical store revenues, but we haven’t arrived at the goal yet. And so we continue to need further efforts and greater success in catering the digital growth of our industry and integrating that into the fabric and identity of who we are. We can see how we are competing with other forms of entertainment. I think that those are linked and that we have made a lot of progress in the last year but have not arrived at our destination.

I would say the Supreme Court decision obviously is something we have a very keen interest in and that will have an impact on the industry. The industry has been very prepared for that. I praise the leadership of the industry and the ESA’s board of directors for their foresight and their trust of ESA to develop the response plan. Everybody is ready to go, and that is obviously going to be an important category of work.

Another issue is that game piracy continues to be a very persistent threat to the well-being of the industry. We have made great strides as an industry in combating it much better than other forms of entertainment, but it remains a very consistent threat, and we have to be vigilant in making sure that we are combating it with sophistication.

VB: Do you hear of anything unusual planned for next week? Are there things that will make amuse people and make them laugh?

MG: Not that I can talk about (laughs). But it’s fun to look at our fact sheet about E3. We will have five miles of duct tape on the show floor among all of the exhibitors. There will be 10 miles of extension cords. That gives you an idea of how big the show is.