Most companies are aware of the rapidly changing state of games distribution, enabled and driven on by the penetration of broadband access technologies and resultant uptake of connected devices and online platforms. This dynamic has resulted in a substantial shift of power in the games content value chain away from publishers and their retail partner gatekeepers and placed that power more directly into the hands of small content creators and start ups enabled by cheap distribution and the ability to connect directly with the many users of their games.
While this transition opens up opportunities for self-publishing, this change also brings with it challenges for the traditional games industry and new market entrants alike. On a simple level, traditional companies are actively realigning their strategies with the growing digital and mobile opportunity, not an easy task for companies with heavy infrastructures siloed to produce large and expensive packaged games. This is the process that Disney's games business has gone through in recent weeks. Following the acquisition of Playdom, the social network game company, Disney has made a concerted decision to downsize its console and PC game-based publishing business and invest more heavily in a streamlined online opportunity. It saw the company shed around 200 staff in the process.
Digital and mobile game start-ups and independents face other challenges including monetisation of the audience, hyper competition, very fast evolving markets, copycat content, discoverability challenges and increasing costs in areas such as customer acquisition, central services (which will grow as sectors mature), content creation and billing and payment to name a few. While there are certainly profits to be made, first movers are generally better positioned to compete, and the many moving parts to consider when tackling these digital opportunities make business execution a difficult science. On the flip side, this sort of business environment promotes innovation.
There are at least three different dimensions to the process of realignment for traditional publishers, which gives us a good indication of how changes may impact the shape and size of the overall industry. First, due to the fragmented nature of the digital and mobile opportunity, which is made up of many different slices of market (MMOG, PC casual, social network games, Games on Demand, console downloads, mobile apps etc) and the actual sizes of these many slices, delivering comparable scale for larger companies will be a challenge for the foreseeable future. This means that publishers will need to examine their fixed costs closely and will be forced, like Disney, to eject some of these costs to make profitable inroads into the digital opportunity.
Secondly, publishers that want to maintain their scale as much as possible will have to manage a two-speed business: one that serves the declining packaged console and PC game business on one hand and one that is streamlined and built for the digital markets on the other. There remains a substantial hurdle around this aspect of the transition for these companies. As traditional publishing is a scale business we assume there comes a point through the transition when the scale of revenue is such that it is unable to support the traditional publishing functions of the company profitably. How this process is managed is key to the future of the companies going through this change. For a company such as Disney this is less of an issue - it is not a pure play publisher, is a much larger overall concern and it does not have much more than mid-tier exposure to console and PC game publishing. For pure play publishers such as EA, Ubisoft, Activision Blizzard and THQ the challenge is more significant.
Thirdly, traditional publishers have to reinvent their business to compete with nimble start-ups and independents in the digital and mobile space. Acquisition of existing companies helps, but these must be aligned to changes in skills, reorganisation of centralised services and speed of development.
Overall then, the industry is going through unprecedented and accelerated change, which is throwing up solid profitable opportunities but also many challenges. One aspect that is clear though is that as we move to a leaner and streamlined form of games business, that the industry as a whole is likely to become less centralised, more dispersed and fragmented. We will see jobs lost in formalised roles within publishers, while start-ups and independents will multiply. This has implications for the make-up of the industry workforce with the likelihood that it will become smaller, certainly in the short and medium timeframe.
Find Out More > iSuppli | Screen Digest Games Intelligence