Panelists billed as the world's foremost experts on funding, buying and selling game companies have a view of gaming's future that's likely to be controversial to those working in traditional development.
In a panel at GDC 2010, Northwest Ventures' Tim Chang, Trinity Ventures' Gus Tai, Pacific Crest analyst Evan Wilson and Making Fun and Minor Studios CEO John Welch discussed what companies and products will get funded today -- and according to them, it's not triple-A.
Gaming is still a highly active arena for venture capitalists, says Chang -- and yet every news broadcast on the industry shows the console games business contracting, presenting a paradox of an industry that's "screwed yet growing," he says.
Chang, whose firm has backed Ngmoco and Playdom, says the shift in the games business is a mirror of what has happened in the music industry as much of it goes digital. Now, time and attention is shifting to the online space and the social players that are growing the existing game audience.
Developers' attention is best served thinking about "how to use all of your expertise to create this engaging, interesting flow that could lead to a proposition where you can make money," suggested Tai of Trinity Ventures, which has invested in Trion and Playfirst.
"The industry is in huge disarray," agrees Pacific Crest's Wilson, who believes console game developers are "in denial." The evolving blend between gaming and media is "scary," he admits.
"It was easier ten years ago... when you'd just ship a great product and the users pay you up front," Wilson says. "Those days are over."
From there, he raises a controversial question: "How important is game development when you have poor quality free social games generating these kinds of numbers?"
Media companies only care about daily average uniques, Wilson continues. "The industry has been moving in that direction rapidly and it's accelerating and it's scary," he adds. "It is a big, big issue when some of the leading social gaming companies can get over 20 million players on a game in nine days," he adds -- even the best AAA titles can't pull those numbers.
The investors on the panel believe that the traditional gaming industry might have seen its peak volume in 2008 thanks to the influence of the Wii and the Guitar Hero phenomena, both of which, strictly by the dollars, are beginning to decline this year. But the industry is still paying too much attention to the bottom line, they agreed.
Thanks to current-generation consoles, it's now three times more expensive to develop a video game than it was in 2005. But even the most optimistic industry growth forecasts don't call for three times more revenue, even in the next decade, thanks to changing distribution models.
So where are the opportunities for new companies? According to the panelists, look to premium social gaming. Thanks to tech like Unity's development platform, which lets developers create lightweight and browser-based 3D games, users will be playing online and social games for longer and be more engaged with them.
New ways of looking at design mechanics are also necessary, say the panelists. Examples like Foursquare, a social app with game-like qualities, are part of the investors' future forecast.
The era where profitability on a packaged goods item was the main goal is over, they say. Today's environment has number of users and playtime as the ultimate metric -- and given that many of them will never spend money to play with the product, user acquisition must be the ultimate and primary goal for game developers.
And with huge social gaming companies like Zynga, Playdom and Playfish already in the pole position, virality's the word for any new company that hopes to compete. "If you're not working for a Zynga, you have to think of how to get users to be viral," says Wilson.
One thing the panelists say they've yet to see accomplished is a major game that's inherently viral by the nature of its mechanics -- not a game that spams friends or is Facebook oriented, but makes users require their friends' involvement in order to play, and requires or results in the accumulation of a community. That way, userbases rise simply as a consequence of the game mechanics.
"Focus on one thing," advises Wilson: "The cost of customer acquisition, and how do you build that into the design of the game?"