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Taking the Video Games Market to the Next Level

Like every other recorded media entertainment sector, the video games market is ultimately a function of its content.

As install base growth continues for Sony’s PlayStation 2, Microsoft’s Xbox, and Nintendo’s GameCube and portable Game Boy Advance, a surge in new titles for these platforms as well as PCs could see video game software not only surpass 2002’s $7 billion sales performance, but finally amass enough revenue to challenge the motion picture box office, DVD-Video, or recorded music as home entertainment’s most valuable market.

Arguably, video games are already the best consumer value around. While the record industry has been beleaguered with gripes about its CD prices, video game publishers have always enjoyed a relatively stable, multi-tiered price range of $20 to $60 for titles. “Video games are a pretty good investment,” opines industry analyst Richard Ow of the NPD Group. “Play time could be as much as 50 to 100 hours spent from beginning to end.”

This year’s video game software boom will draw much of its strength from the release of long-anticipated sequels of classic game titles, like iD Software’s Doom III. But evoking recurring dreams of media convergence, cross-industry collaborations are producing record-setting games titles that could take the entire market “to the next level.”

This month, Enter the Matrix is expected to redefine the cross-licensing trend itself as well as set a new benchmark for sales. Released for PS2, Xbox, GameCube and PC day-and-date with the theatrical premiere of The Matrix: Reloaded May 15, Enter the Matrix purports to be the most intensive collaboration to date between a video game developer (Shiny Entertainment) and a movie studio (Warner). Produced, directed and written by the Wachowski brothers, writers and directors of The Matrix film trilogy, the new game features hours of additional film footage and “cineractives” shot exclusively for the game, starring the film’s cast.

“Over two years ago, Joel Silver, the producer of The Matrix trilogy, and the Wachowski brothers envisioned a new way that Hollywood and the video game industry could work together,” said Shiny president David Perry. “Their concept required Shiny to build a video game containing every single element of the Matrix experience, and it was essential that the game be delivered on time with their movie, so Matrix fans could experience it all at once.”

The new synergies between Hollywood studios and game developers, Ow says, “are phenomenal. The games literally look like videos. This year, you’re going to [several other] movies trying the same thing-The Lord of the Rings (with the last film in the trilogy, The Return of the King), The Hulk, T3. All these tremendously recognized brands are going to be out there.”

Recorded music is also playing a more integral role in games than ever before. Last year’s top-selling title, Rockstar Games’ 1980s glam-inspired Grand Theft Auto: Vice City, completely subsumed the recorded music experience, featuring a tunable six-band car radio in the game that played dozens of original ’80s rock, hip-hop and dance hits. The PS2 game, released last October, spawned a seven-CD boxed soundtrack (available also on individual volumes) on Sony’s Epic Records.

The trend continued in March with Electronic Arts’ Def Jam Vendetta, which features 12 top Def Jam artists like DMX, Ludacris and Method Man as playable characters in a no-holds-barred fight club. The PS2/GameCube title contains 18 Def Jam tracks, a mix of new songs exclusive to the game and catalog hits. Vendetta held the No. 6 spot on NPD’s top-selling games for March.

Video games have long vowed to surpass in size the incumbent entertainment media markets. But even with solid growth and price points holding steady, software sales still finished last in 2002 in terms of units sold and dollar value.

Computer and video game software sales grew 8 percent in 2002 to $6.9 billion, according to the Interactive Digital Software Association (IDSA), which hosts the industry’s annual E3 Expo. Of that figure, $5.5 billion is console software sales (including portables, like Game Boy Advance), with computer games making up the $1.4 billion balance. Game software moved 221.7 million units in 2002-162.8 million for consoles, 58.9 million for computers.

In comparison, consumers spent $8.7 billion at retail on DVDs in 2002, and $9.3 billion at the theatrical box office, according to the DVD Entertainment Group. And according to data from Nielsen SoundScan, 681 million music albums were sold in the U.S. last year. (At $14.99 per unit, that’s a dollar value over $10 billion.)

In the year between the first PS2 shipments in late 2000, and the launches of Xbox and GameCube in late 2001, the industry held a heady vision of where it would be two years into its latest hardware generation. At 2001’s hardware-dominated E3, the IDSA quoted IDC projections of computer and video game sales topping $16.9 billion in 2003, with an additional $1.1 billion in online game sales. Video games, IDSA president Douglas Lowenstein then remarked, would “soon, once and for all, leave the motion picture box office behind for good.”

Sony had outlined its mission to make PS2 into a broadband entertainment hub for the home, with the new console featuring a built-in modem, DVD-Video playback capability, and Internet media compatibility with the likes of Macromedia and Real. Microsoft also included DVD-Video playback and Internet media capabilities in its console.

Both consoles have meant a windfall of proprietary game DVD disc replication for a few select companies, chiefly Sony Disc Manufacturing for PS2 and Technicolor for Xbox. (The billion-dollar-and-growing computer games replication business remains more up for grabs for independent plants.) But their marginal existence as DVD players to date has dashed the hopes of some home video executives that the would-be hardware convergence would simply translate into even more demand for DVD video product.

Likewise, the consoles’ online components are shaping up nicely, but within the sphere of games only. NPD Group data has online multiplayer gaming (for both consoles and computers) representing 15 percent of software dollars from August to December of 2002. “The online game markets are solid, and likely to grow significantly in the next two to three years,” the IDSA’s Lowenstein told Medialine last month. “But as it always is with games, the rate of growth for online games on all platforms is directly related to the quality of the games themselves, and whether they offer a sufficiently unique experience to convince players to pay to play them.”

When Sony, Microsoft and Nintendo consoles all dropped last year to nearly one-third of their original prices, it precipitated a 10 percent increase in hardware unit sales, but a 4 percent decrease in revenue, according to NPD.

That’s not to say the current generation is past its prime. Software by and large has yet to take full advantage of the consoles’ capabilities, and, it has yet to largely exploit the potential of cross-industry title development.

According to NPD’s Ow, continued dollar growth this year is “a strong possibility, seeing the software lineup. [Response to new titles] at E3 is going to be a key component of it.

“The full power of the current generation of hardware is still unrealized,” he continues, adding that today’s consoles could have several years left in their life cycle. “There is a barrage of new game software launches that will appeal widely to new video gamers, both old and young, expanding the software-to-hardware tie ratios of the previous generation.”

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