In a sea of economic woes, the U.S. video game industry is thriving. Every record analysts track seems to have been broken in 2007 as consumers flocked to new systems from Nintendo (NTDOY), Microsoft (MSFT), and Sony (SNE). Overall sales—of hardware as well as games and accessories—ballooned to nearly $18 billion last year, a 43% increase from 2006 according to industry analyst NPD Group.
Even an economic downturn that promises to dampen consumer spending has done little to temper forecasters' expectations. "Sales typically track more to the life cycles of the hardware systems, not macroeconomic trends," says Michael Pachter, an analyst with Wedbush Morgan Securities. Microsoft, Nintendo, and Sony released their newest systems relatively recently (Xbox in 2005, Wii, and PS3 in 2006). In other words, interest and demand remain high. So far this year sales have outpaced 2007 by 28%, notes Anita Frazier, an analyst with NPD.
Gaming Boom Feeds M&A Fever
Many of the major trends that made 2007 a milestone year are likely to be amplified or come into full flower in 2008. On the business side, merger fever is unlikely to abate, says David Perry, a widely respected gaming entrepreneur and former game designer. "We're in the boom part of the cycle," he says. "Games companies have been growing rapidly and are rationalizing acquisitions as a way to continue strengthening themselves."
Indeed, the chaos on Wall Street has done little to hamper a string of megadeals that is actively reshaping the industry landscape. In December, Activision (ATVI) announced an $18.9 billion merger with World of Warcraft owner Vivendi Universal (VIVEF) that will close later this year (BusinessWeek.com, 4/12/07). And, high on a string of acquisitions of its own throughout 2006 and 2007, Electronic Arts (ERTS) is now making a hostile $2.1 billion bid for Take-Two Interactive (TTWO) (BusinessWeek.com, 2/25/08), publisher of the upcoming blockbuster Grand Theft Auto IV.
Perry says he expects this kind of activity to continue as major media companies also invest in gaming outfits. Disney (DIS), for one, has committed $100 million to building 10 virtual game worlds based on its film properties. Likewise, MTV Networks' Nickelodeon Div. announced earlier this month that it would add 1,600 casual games to its various Web sites as part of a $100 million gaming investment. "We could also see some major foreign companies investing in U.S. ventures," Perry adds of Chinese companies eyeing the American gaming market.
Free-to-Play Comes West
Companies operating in this world will likely be searching for new revenue models as well. Jeremy Liew, a general partner of the Menlo Park (Calif.) venture capital firm Lightspeed Venture Partners, says the so-called free-to-play model is finally due to make an impact in the West. Popular throughout Asia, free-to-play titles have little or no up-front costs for gamers, who instead pay subsequent charges for in-game digital goods such as clothes for an avatar or access to special features and levels.