Voices From E3: A Look at the Financial Future of Gaming

Supreme Court

While the world economy is rocky at the moment, there are specific issues at play for companies in the game industry including unending spread of piracy, to the absence of compensation for game makers on used game sales, to possible government regulation coming from the California case going to the Supreme Court. I asked notable execs in the game industry which of these are the biggest threat to gaming's financial future.

Ben Feder, CEO, Take-Two Interactive:

Every industry has its issues that it deals with. Piracy has been issue, but I think Microsoft and Sony did a pretty job of containing it on the consoles. On the console side it's been okay--not great, but okay--but much, much better than what we've seen on handhelds. Piracy will always be an issue. As for used games--I've heard a lot of talk this E3 about companies wanting to be cut into the revenue streams. The guestimates are $3 billion in used game sales. That's a lot of money and I think developers are right to demand a piece of the action.

I think our core business is creating great games that are innovative, creative, and that really delight the consumer. We think consumers ultimately come out for the games, regardless of piracy, regardless of used games. The best protection a company can have is to have great content, and we have some of the best content on the planet. Do you lose some sales? Yes. Some sales have fallen off due to piracy, but nothing compares to having a great game. Definitely, you can have your piece of used games, you can have solved piracy, but if you don't have a great game, you'll still are going to be over. We think Take-Two is healthy, it has a healthy balance sheet and financial future, primarily resting on the quality of the games.

Reggie Fils-Aime, President and CEO, Nintendo of America:

I would argue, as an industry, the biggest threat is this case in front of the Supreme Court. The reason for that is, if this industry is not treated like other artistic industries with freedom of speech guarantees, that this industry will have a problem in terms of regulations, in terms of the complexities put out there--which will make it difficult for our consumers to navigate choice. That is really the biggest issue we face as an industry. That's not to diminish piracy--piracy is an issue. I would argue it's not an industry issue. We have a need from a technology standpoint to take some steps, we have a need to work with some of the Internet providers so that they have to take some action in limiting piracy, and thirdly, we need to educate consumers. I think if consumers really understood that the only way content can be created is if the content creators get their financial due, I think that would go a long way.

Nick Earl, Senior VP and Group GM, Electronic Arts:

These are all tangible, real issues. As a company we work with any body we need to express ourselves. For example, with the rating system and the ESRB, we are full believers in that. We think long and hard when we make a game what rating we are aiming for and we try to be strategic about that. My group tends to make Mature-rated games--Dead Space is the poster child for that. The piracy thing, that is generally going to go away as we go online and gaming becomes a service-oriented business; there's just no question. That is going to be a strong means to eliminating piracy.

We don't really think about used games so much. If we can deliver value-added content, there is a way to deliver that content and for people to opt-in and pay for that content if they feel the value is there. And it's our job to create that value. And once we have that relationship with the customers, that's the way we can elongate the bringing of content and the expansion of that content to the community. It's not just the means to battle used games--I think the interest is generally moving to a place where everything is becoming a service. John Riccitiello, our CEO, to say he is religious about this is an understatement--he's so bullish for a digital future and everyone gets it and everyone supports it. And we back it up with actions. Whether it's Pogo, or mobile phone, or Playfish, or the Star Wars MMO--the community orientation and the social networking side of things, that is the future. Selling discs is a way to get the content out there, but that is just the beginning. Five years ago, getting the disc was the end. That's a really big shift in the industry and I don't think its lost on anyone at EA.

Marc Whitten, General Manager of Xbox Live, Microsoft:

Regulations are always something you have to think about. I look at it differently. I don't sit around and think, Wow, what a bummer of a time to be alive in the games industry. Don Mattrick [Microsoft's senior vp of Interactive Entertainment] was saying the other day that the next 20 years in the game industry will be the most transformative 20 years ever. It's really about two things. First off, entertainment is a universal need that everybody loves, being social and entertained, and being connected with people. Secondly, business models will shift and change, typically that unlocks value, unlocks potential to get access to people to try your product. The world shifts; sometimes its model one, sometimes its model two. I think we'll continue to see that. I think it is an incredibly healthy time. None of those trends really bother me, or they are counterbalanced by all the amazing things going on.

Joseph Olin, President, Academy of Interactive Arts & Sciences:

The case before the Supreme Court will have far-reaching consequences should it strike-down the two lower court's rulings that found the Yee Bill to be unconstitutional. The difficulty is calibrating what these effects might be, should this happen. The bill aims to have the government regulate the content within games and then criminalize the act should an "underage" player purchase a game that is rated M or T [Mature or Teen]. The retailer bears the burden of this penalty. The Entertainment Software Associations defense against this bill's enactment details the rationale of why this is unconstitutional: it's difficulty to enforce, as well as with the cooperation of the retail and publishing communities, it is not necessary.

If the bill is upheld, it is conceivable that major retailers will cease to carry anything other than E-rated games [Everyone, the equivalent to G-rated films], rather than risk penalty. Game prices may rise because of the cost of enforcing this legislation--at least in California--along with other states that may now feel emboldened to pass similar laws. Without access to the broad market of adult game players, publishers and their creative studios will be discouraged from creating the tent-pole epic games like Bioshock, or Red Dead Redemption, or Modern Warfare--all fabulous examples of immersive adult-driven game experiences. The Academy is proud to stand with the ESA and EMA in their defense of game makers rights, as artists and creators, and expects to be able to provide ample evidence as to why this group of interactive entertainers deserve the same rights and treatment as their artistic colleagues in film, music, and print.

Laurent Detoc, North America president, Ubisoft:

I think the number one issue we have right now, is a simple matter of P&L. As producers continue to raise the rate for making the best content, we've had a difficult time to keeping the right balance between our costs and our revenues. I think its something that can be corrected, something that game producers are correcting. Could that have been avoided? Maybe. Why did it happen? I think it started because of outside factors, in particular, the downturn in consumption. Which has proven that it is not whether games are recession proof or not recession proof, it's that when there is less money there is less consumption in general.

There is still an argument for being recession proof in our industry. I think that argument can come from the fact that the cycle of the game industry is still stronger than the cycle of the economy. When the economy goes down, and the cycle of the industry in the uptrend, it compensates for that. It doesn't mean that we don't suffer from the economic cycle. But, if you were to adjust the game industry's growth prior to the boom of music products, and if you were to adjust for the decline of the music category, you see over time the gaming business is still a great business. It just went up very fast, and then it went down not as fast. If you adjust for these events, you realize the game industry continues to grow, and it has been doing so for 20 years now.

What do you think is a threat to the future of gaming? And how can companies react to it?

Stay tuned for more interviews from E3.

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