From Kinect to Angry Birds — the biggest video game stories of 2010

During 2010, we wrote about 1,100 stories on the video game industry — and the year isn’t over yet. But here’s a look back at what we thought were the biggest stories of the year. For fun, here’s a link to our story from a year ago, when we deemed that the biggest story of 2009 was that the industry discovered that video games weren’t recession proof.

The big deals of last year were also big deals this year, including the rise of virtual goods business models, Zynga’s financial juggernaut, the rise of the iPhone, the triumph of Call of Duty and the struggles of the industry to adapt to the disruptions of digital online businesses.Without further ado, here are our top stories:

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1. The core video game industry is shrinking — or is it?

For much of the year, sales in 2010 were down 8 percent for the core console game industry in the U.S. One theory is that the recession turned consumers off to $60 games and the arrival of iPhone games and Facebook games have disrupted the hardcore game industry.

But in November, sales saw a strong spurt. By comparison, in 2009, the console game industry in the U.S. shrank 8.6 percent to $20.2 billion, according to market researcher NPD. To hit that number again, the industry will have to have a whale of a December. More likely, NPD predicts sales will come in at $18.8 billion to $19.6 billion for the year, or down 3 percent to 7 percent.

To muddy the waters even more, NPD is in the midst of changing the way it measures game industry sales. It notes that its current physical-retail-only numbers don’t capture about 30 percent of revenues associated with the sale of used games, online games, social networking games, and mobile games. While the core games may be flat or shrinking, the overall game business is growing.

December looks like it will be a strong month for the core games, given good physical retail sales for the overall U.S. and strong online sales as well. But the real point is that with games such as Red Dead Redemption and Call of Duty: Black Ops and World of Warcraft: Cataclysm, the core industry isn’t in such bad shape after all. Strauss Zelnick, chairman of Take-Two Interactive, observed that music games have become tired and handheld games have become disrupted, but the rest of the industry is in good shape.

Overall, gamers still seem very receptive to high-quality $60 video games. In 2011, there are lots of big titles coming, from L.A. Noire to Mass Effect 3. Another Call of Duty game should hit next fall. And somewhere out there on the horizon is Grand Theft Auto V.

2. U.S. Supreme Court justices hear video game violence arguments — and appear to favor the video game industry.

It’s hard to read the tea leaves of the U.S. Supreme Court, which decided to hear an appeal from the state of California on its violent video game law.

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The state law argued that violent video games can be as harmful to children as porn or illegal drugs. The law criminalized selling mature-rated titles to minors. The video game industry argued that the law infringed on free speech and unfairly singled out the game industry for scrutiny while leaving other works of art unregulated.

Justices Antonin Scalia and other raked the state’s lawyer over the coals on issues such as whether California would set up an official office of censorship. They asked why comic books — or the sometimes gory Grimm’s Fairy Tales — weren’t given the same scrutiny. But if the justices were so against the law, it’s not clear why they decided to hear the appeal in the first place. If the video game industry loses this case, it could have a big effect on the kind of content that makes it into stores and gets commissioned in the first place.

3. Angry Birds is downloaded 50 million times.

Sony PlayStation Portable sales dried up this year. And Nintendo had to revise its profit forecasts downward because of slowing sales of its DS handheld game player. Blame Angry Birds, the hit iPhone game from Rovio that has dominated the App Store and Android Market. Angry Birds is the first real hit in smartphone games. It’s one of the big reasons Apple’s iPhone, iPod Touch and iPad products are making such big inroads into the traditional handheld gaming space.

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Peter Vesterbacka, who goes by the title Mighty Eagle at Rovio, says the small Finnish mobile game developer worked on more than 50 games before it got the cute little angry characters in Angry Birds right. In the game, evil green pigs steal the birds’ eggs, making the birds seek revenge. You slingshot the birds at the fortresses of the pigs. It is thoroughly satisfying to see those pigs fall. Who would have thought that such a game would become a cultural phenomenon? But it probably ranks right up there with Halo: Reach and Call of Duty Black Ops in terms of awareness in the public mind.

It has been fun to see Rovio run with this killer app for the iPhone, coming up with updates to extend the game. It has licensed plush toys and is talking about making a cartoon movie based on the characters. It’s like watching the franchise strategy from video games of the past unfold on a brand new platform. For developers of $40 million games, it’s a reminder that anyone can create a hit game that can take attention away from your blockbuster. As we noted when we selected Angry Birds as one of the three best games of the year, this moment is a like the time when YouTube took off after kids started creating silly eruptions by combining Diet Coke and Mentos.

4. Game streaming services invades digital distribution

Digital distribution made a lot of headway in 2010, with Valve’s Steam expanding on digital downloads and downloadable content getting lots of traction on the consoles. But the streaming games-on-demand service from OnLive could prove to be the most disruptive of all. At a steady clip, OnLive rolled out news. It launched in June, dropped its subscription fee, expanded to worldwide service and added Wi-Fi and mobile coverage. In November, it launched its MicroConsole so it could stream games to big-screen TVs and announced an all-you-can eat $9.99 a month fee for its older library of games. Next year, it plans to add movie services.

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That’s an impressive wave of introductions, and it’s no surprise the company was valued at $1.1 billion as it raised another $60 million in funding. But it has competitors in rivals such as Gaikai, Otoy, Playcast and Spoon, which are all tapping the same kind of cloud-based gaming technology to deliver games to just about any platform. OnLive says it has a fundamental patent on the technology, but that may not foreclose all competition. Each system needs more games, but that will improve with time.

All of these rivals have a chance to disrupt the likes of Steam and game retailers. They will help ease the transition to digital online businesses by keeping publishers in control of their content. For consumers, the benefits are building. Much like Netflix has made watching movies more convenient, the same could happen with buying games online. No longer do you have to wait for downloads, update your game, or play it only on one machine. That’s the promise. And hopefully these companies will deliver on it even more in 2011.

5. Microsoft and Sony join the motion-control party.

Consumers have voted and motion control is here to stay. The Wii introduced us to the notion of motion-sensing controllers in 2006. Now, Sony has joined the party with its Move controller, which is more precise as a wand-like device for controlling games. Microsoft also has a hit on its hands with Kinect, which is a hands-free motion-control system that has sold through more than 2.5 million units since November. Sony says it has shipped 4.1 million Move units.

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While Wii Sports was an instant hit on the Wii, it isn’t clear what will really take off on Kinect and Move. Those platforms still need their killer apps, such as Angry Birds on the iPhone. Dance Central isn’t bad on Kinect and it clearly shows the benefits of having no controller at all. But it would be nice to see some addictive hardcore games that draw in the most enthusiastic gamers. For sure, the systems aren’t perfect.

The motion-control systems are so popular they will allow the console makers to extend the lives of their consoles and delay the introduction of next-generation devices. Nintendo is under the most pressure to upgrade its system. But if motion control proves to be extremely popular, it could create a new wave of profits for the game companies and give them more time to prepare their next consoles.

6. Zynga goes big, and launches the fastest-growing game in history.

In 2010, Zynga showed how much further it could pull away from the pack. The spring was a disaster for everyone in social games, as Facebook cracked down on game spam, effectively eliminating viral distribution on its platform. Zynga lost tens of millions of users, but so did lots of rivals.

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That taught Zynga that it was time to diversify. Zynga took FarmVille to the web, on FarmVille.com, and launched it on the iPhone as well. It raised $150 million from SoftBank and launched its first mobile social games in Japan. It also launched its poker game in Taiwan. The company also went on an acquisition spree, buying a new game studio every month. Zynga internationalized its game development, launching CityVille in multiple languages. A sign of Zynga’s growing brand awareness came with partnerships with 7-Eleven and American Express.

Zynga also doubled down on game development. With game design veterans leading the way, it launched original titles with FrontierVille and CityVille. CityVille should surpass FarmVille as the biggest game on Facebook any day now. On the secondary market, employees were selling shares at prices that suggest a valuation of $5.6 billion, a number that surpassed the valuation for video game mainstay Electronic Arts. Venture capital’s über investor John Doerr said Zynga was the company’s best investment ever.

If Zynga can live up to that, it will be impressive indeed. But there are lots of rivals, from DeNA in Japan to Tencent in China. And companies with big brands such as EA and Disney are now attacking Zynga’s core market on Facebook. In games, this is going to be the fight of the century.

7. Acquisition fever hits social and mobile games.

In 2009, the social and mobile game companies started getting traction. In 2010, the acquisition binge hit the emerging market. Disney bought Playdom for up to $763.2 million, as Mickey Mouse set his sights on getting a foothold in Facebook games. Then DeNA bought mobile game publisher Ngmoco for $403 million, a price that amounted to 13 times revenues. (Ngmoco’s celebration party is pictured right).

By comparison, GameStop paid a much smaller multiple when it acquired Kongregate. And for much of the year, both Playdom and Zynga picked up game studios for prices that were so small they didn’t disclose the amounts. The reason for the difference in valuations has to do with what the aim of the acquisition will be. To enter the online game market, the price is relatively small. But going head-to-head with Zynga — as both DeNA and Disney want to do — pumps up the valuation.

Can we expect more of this to come? You can bet on that, particularly if trends such as “gamificaiton,” where companies make non-game apps and web sites more game-like to boost engagement, take off. Everybody will want to grab a game studio to start gamification. And some of the largest players in games still haven’t done much to adapt to the popularity of social and mobile games. I also wouldn’t be surprised to see one of the new upstarts purchase a traditional console game publisher.

8. Game companies raised $1.05 billion in 2010

Alongside the acquisition fever trend is startup fever. Big name venture capitalists such as Sequoia Capital and Kleiner Perkins invested their money into the next Zyngas of the game industry. Some 91 game companies raised $1.05 billion in 2010, up 58 percent from a year earlier. Zynga itself scored a big $150 million round from SoftBank, and ZeniMax Media got a $150 million round from a private equity company. The money mostly went into game companies in the social, mobile, digital distribution, casual and online massively multiplayer online segments. Very little went into console games.

The big fundings — and acquisitions — for startups in games suggest there has never been a better time to start a game company. It’s also a great time for innovation in the industry, with big changes in everything from motion control to web-based game streaming. Virtual goods has become the most popular business model, with U.S. virtual goods sales expected to hit $1.6 billion for the year.

9. Infinity Ward falls apart, but Call of Duty Black Ops breaks game sales records

One of the saddest game stories of the year was the unmaking of Infinity Ward. Activision Blizzard chief executive Bobby Kotick fired the founders of the Call of Duty game studio after discovering they were allegedly plotting to start their own game studio while still working for Activision Blizzard. Vince Zampella and Jason West sued back, saying Kotick was cheating them out of $36 million in royalties due from the giant success of Call of Duty Modern Warfare 2. The litigation is perhaps the messiest divorce in video game history and there are lots of dollars at stake.

Meanwhile, sister studio Treyarch stepped out of its second-string role and created Call of Duty Black Ops, which launched on Nov. 9 and shows all the signs of breaking the records set by Modern Warfare 2. Sales have already topped $1 billion, and multiplayer engagement numbers suggest this one will be more popular. When all is said and done, Black Ops could sell 20 million units and generate more than $1.2 billion in revenues for Activision Blizzard. It’s just like the movies, where viewers don’t care who the director of the movie is. As long as they get their next Call of Duty game, gamers may not care who makes it.

10. Gamification catches some buzz

The idea of gamification has been around for a while, and the mini-industry finally seems to have settled on its appropriate buzzword. “Gamification” means adding game-like features to non-game apps in order to boost the user interest in the apps. Companies such as Bunchball have been offering white-label gamification services, which includes adding leaderboards and achievements to consumer internet sites. Jesse Schell, a professor at Carnegie Mellon University, gave an inspiring and funny talk on the concept and what it could mean for everyday life.

In 2010, we saw a new wave of startups and some actual interest by venture capitalists such as Tim Chang of Norwest Venture Partners and Glenn Entis of VanEdge Capital. Gabe Zichermann, the author of one of several books on the subject, has started a Gamification Summit with a number of leading visionaries on the subject. So the idea gathered a lot of steam this year and will either score big or flame out. It’s worth noting that most games are duds, so adding game features doesn’t guarantee success. In fact, gamification will likely have a high number of duds for the few hits as well.

If and when it takes off, gamification’s reach could be very broad and far-reaching. That’s why it’s worth following, even if it seems like small beans today.

11. Nintendo unveils and then postpones the 3DS handheld

Nintendo had a chance to shake up the handheld game industry when it announced its 3DS device at E3 in June. Enabling 3D stereoscopic viewing without the need for glasses, the technology was innovative and earned it the “best of show” votes from critics. It seemed to be the right answer to the constant erosion of handheld gaming by iPhone and iPad games.

But then Nintendo said the design wasn’t quite finished and it would delay the launch until March in the U.S. That allowed Apple’s devices to go unchallenged in the critical holiday season, and it also led to a big drop in sales for handheld game devices as users decided to wait for the 3DS.

Perhaps the delay is a good thing, as it will give Nintendo a chance to create a more polished device and will let third-party publishers finish their games. But Nintendo is the only major console maker to show up without a new device for the holiday season. The Wii console is showing its age, now that Kinect and Move are on the market.

Alternate choices

Some other candidates for the top game stories of the year include Blizzard’s big launches (StarCraft II and World of Warcraft: Cataclysm), the crash of virtual worlds, and the major shift of publishers from physical goods to digital online games. Please take our poll and vote for what you thought was the most important game story of the year. Please leave a comment explaining your vote.

Online Surveys – Zoomerang.com