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November - 2002 - issue > Cover Feature
The (r)evolution of Videogames
Richard Ridlen
Sunday, October 27, 2002
AS VIDEOGAMES TOOK THEIR FIRST FEW steps on Earth, they were emerging from garages, basements, and rooms occupied by a few guys on computers. They didn't take much to make and they didn't make much either. Their market was small, mostly kids and teenagers, and the resources they needed to come into creation were few because what they were capable of becoming was simplistic. Not to mention that their distribution was limited and their profit margin was nothing to get excited about. It would have been easy to dismiss the industry, based on its surface, as kid's stuff.

Now fast forward twenty years to the present day and behold an industry's sales that, last year, surpassed the motion picture industry in North America. It was a record year for both industries and, according to the research company, NPD Group, the motion picture industry generated sales of $8.35 billion, and the videogame industry, $9.4 billion. It's estimated that by 2005, videogames will generate $30 billion globally. Now call it kid's stuff. You can't.

Its market no longer consists only of kids and teenagers, though they still comprise a large part of sales, but now the same youngsters from twenty years ago are adults with careers and money of their own. And many of them are still spending money on videogames. More significantly, women and minorities have now come into the demographic, and make up a fast growing segment of videogame players.

The industry's resources have expanded to encompass state-of-the-art technologies, which give it the capability to produce games with 128-bit graphics, complex gameplay, original orchestral sound tracks or exclusive music from popular bands, and the ability to tell a story that is just as compelling as any movie.

Its distribution has become unlimited. The core markets are the United States, Europe, and Japan, but they are quickly expanding to new global markets. Last year Sony launched their older console, PlayStation I, in India and, according to Teruo Ishii, the managing director of Sony India, videogames in India are expected to grow into a billion dollar industry in the next three years.

Videogames have become an important tool in the marketing and advertising of television shows, movies, books, professional sports teams and players, as well as for consumer goods. They show no signs of slowing down their infiltration and attachment to every other existing market, either. Videogame companies are out to make money, and if last fiscal year's profits are any indication of what is to come, they could quite possibly evolve to be the biggest players in the entertainment industry.

It is important to take into consideration that this past fiscal year is not the steady income level for the industry: it was the spike in its five-year cycle. Two very anticipated consoles were released, Nintendo's GameCube and Microsoft's Xbox. The year prior to that, Sony released the undisputed titan of all gaming consoles, the PlayStation II. This release of new consoles is the energy that drives the industry, and sets into motion the five-year cycle in which videogame development and publishing companies thrive and sales soar high and stay high for the next few years. Then they begin to drop until the next generation of consoles is released, and it begins again.

Even with that, it was still a very good year for games.

All Grown Up

The companies that have made the videogame industry, or interactive entertainment industry (its grown-up name), so lucrative could never have produced such profits if they didn't grow up, not just as game companies, but as companies. As the production costs of videogames began to climb into the range of hundreds of thousands of dollars, and then the millions as it is today, companies realized that they had to change their business practices. They couldn't base games on what they thought would be cool or what they guessed people would buy (as most companies had been doing before); the risks were just too high. One three million dollar game that tanks at Christmas time could close down a small development company.

So instead, one by one, they took the route of every other type of company that have a drive to be a contender in their industry-they put on a tie and cracked open the books. They began making games based on P&L statements, focus groups, and surveys. They began using market research to discover what the market wanted, and implementing usability testing to tailor it to its specific demographic.

Along with a change in business models, came a change in the production lifecycle. Strict budgets and development schedules, constant meetings, and middle management became attached to each project to ensure its quality and success. What was once a team with one or two management types, a few coders, and maybe an audio or graphics person, became teams of over a hundred specialized people that could quite possibly work on the same game for three to five years. The interactive entertainment industry became, and is still becoming, closer in structure to the motion picture industry-large teams of individuals, with a very large budget, each with a separate purpose that work cooperatively to create an entirely new and profitable experience.

Of course, that's not how every interactive entertainment company works, but for the industry's leading players, it is.

Goliath and the Guerrillas: Industry Players

There are many players in the interactive entertainment industry, all scrambling for a piece of the ten billion dollar pie, but there is one that, as of now, has the biggest slice: the long-time juggernaut of the industry, Electronic Arts (EA). Though it began over two decades ago with a handful of people in a small California office space, EA is now the largest developer and publisher of interactive entertainment software in the world. It generated $1.56 billion in revenues for 2001, has locations across the globe, employs thousands of people and, according to the global equity research of UBS Warburg in 2002, is also one of the safest, most lucrative companies to invest in. There are other players in the industry: Nintendo, Activision, Sony, Acclaim, Sega, Take Two Interactive and Midway to name a few, but none of them hold the consistent profitability and solid successful game-making ability of EA.

Electronic Arts has created some of the best-selling and most well-known videogames ever made. Madden Football, SimCity, the Sims (the best selling PC game of all time), Medal of Honor, Command & Conquer, Ultima Online. What's more, the James Bond, Harry Potter, and The Lord of The Rings game franchises all have the EA stamp.

The husky voice saying, “EA Sports: It's in the game,” is recognized by those that don't even play videogames. Their logos are displayed on the fences of PacBell Park, on the back of Lennox Lewis' fighting trunks and on all NASCAR racecars. No other game company comes close to the brand recognition that EA has built for itself.

Still, there are guerillas in the industry that are quickly gaining ground. Take, for instance, Take Two Interactive, which last year published one of the best selling console games of all time, Grand Theft Auto III. It gained a lot of media attention for its graphic violence, but it didn't garner “Game of the Year” awards internationally and failed to become the best selling game of 2001 simply because it had blood and cuss words. It had a dynamic storyline of the Sopranos/Usual Suspects variety with gameplay that was so rich that you could enjoy the game for hours without playing the actual storyline. EA would never make a game like Grand Theft Auto III because that's just not their style. But Take Two Interactive saw a niche in the industry that had yet to be filled, a niche that, besides making for a compelling game, they knew would sell. To date, it has made over $100 million dollars, and its much-anticipated counterpart, Grand Theft Auto: Vice City, is expected to do the same.

There is a lot of room for competition and innovation-a lot of pieces of that ten billion dollar (and growing) pie to be taken, and much of that depends on what the people that create them are not able to do. And what they cannot do is reliant upon the available technology.

What Makes Videogames Go

Videogames are only limited by the technology that confines them. The CPU, the BUS, and the memory: these are the obstacles to game creation and innovation. There is no limit to the gameplay, the art, and the sound that the game designers can dream up and create, and no limit to the money that's behind it and that it can garner. However, there is a limit on how much of all of this can be packed into one game.

A quick 101. Videogames use a combination of C++, DirectX, and Open GL for writing the code. 3D Studio Max or Maya (though the trend is Maya) and Photoshop are used for the art and Pro Tools and Qbase for the sound. A game's engine and the “tools” that are created specifically for each game are written in C++. They create the framework for the game objects, telling the art and audio pieces how to work together. DirectX links the game to the computer (or console), and you are linked to the console. And believe it or not, all of these tasks, save the audio design, are done on PCs.

Think of it like this: you press a button to move your spaceship. The button completes a circuit and sends the data to the console. The controller chip in the console processes this information and sends it to the engine, which utilizes the tools to determine what should happen in the game at this point (move the spaceship). The engine takes in all of the separate factors that it has been instructed to think about at this juncture (walls, lighting, camera angle, collision models, etc.) and works the data to render the artwork and cue the audio so that, to you, the spaceship moves. So that's how the spaceship moves, but how will the industry move?

Future Game

The buzz in the corridors of the industry is online. This has been the buzz for years, yet no one has really been able to capture a mainstream audience that is willing to pay a monthly subscription fee for a game. Massively multiplayer online games of the fantasy variety (i.e. Everquest and Ultima Online) have been very successful, earning $259 million in 2001, but any other genre of online game falls short. Electronic Arts has pumped more money than any other interactive entertainment company into online gaming research, but their output has generally failed. They're not alone in failure. But this year, EA is taking the best-selling PC game of all time, the Sims, and bringing it online. Although the idea is well-received, there is still resistance to paying a monthly fee. And that's the egg to crack, getting the mainstream hooked on paying a monthly fee. That's the next goldmine.

One of the problems in convincing people to commit to an online game contract is that the gameplay is reliant on connection speed. Many users still use dial-up and usually experience lag or are dropped in the middle of gameplay because of it. Varying connection speeds are also a factor in the slow pace of the online move for consoles. All three consoles are doing it. GameCube and PlayStation 2 are selling Ethernet and dial-up ports as accessories, and pushing all of the online responsibility onto the game publishers and existing ISPs. Microsoft has a different take for the Xbox. Microsoft requires an already existing broadband connection and a subscription to a Microsoft-run closed Internet service. Xbox Live, as it's being called, will launch on November 15th.

A pie chart from an IDSA annual consumer survey is divided into seven pieces. They each represent the most popular household activities. “Reading Books,” “Going to the Movies,” and “Watching TV” are some of the categories. But there is one that has twice the percentage as any of the rest: “Playing Video/Computer Games.” The videogame industry is a large pie, indeed, and it's only getting sweeter.

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