Analyze This: The Current State of the PC Game Business

By Howard Wen

They are the professional analysts whose job it is to research, keep track of, advise their clients, and opine to the media about the gaming business. Analyze This cuts right to the chase: Rather than reporting on a subject, and throwing in quotes by analysts to support or refute a point, Gamasutra offers up a timely question pertaining to the business side of the video game industry and simply lets the analysts offer their thoughts directly to you.

Each person's opinion is his or her own and will (probably) not necessarily agree with their fellow colleagues' This month's 'Analyze This' column discusses the state of the PC game market with Wedbush Morgan's Michael Pachter, Screen Digest's Ed Barton, and DFC Intelligence's David Cole.

Question: What is your general take on the PC games market? Is it healthy, in trouble, becoming irrelevant to the bigger picture of the gaming industry, or flat-out confused right now? For example, there seems to be growing interest by PC game developers for online content distribution (a la Valve's Steam) and MMOs -- essentially leaning away from selling a boxed product.

There has been recent hubbub by some PC game developers that one of the reasons why they are interested in developing for the consoles is to stave losses from piracy. Is piracy truly a big problem for growth in the PC gaming sector?

Valve's Half-Life 2: Episode One, the first part of a downloadable sequel trilogy.

What do you make of Microsoft's move to emphasize more the gaming aspects of Windows Vista? Is it just a cynical ploy to keep gamers from ever completely switching to Mac or Linux? Or does the PC games market really need Microsoft's support now?


Michael Pachter, Wedbush Morgan Securities

[On the state of the PC game biz]: "The PC games market is becoming a niche, substantial in size, but a niche nonetheless. There will always be PC games, and the MMOs are likely going to remain PC-based because of the required Internet connection. There are also games that just make sense on a PC, like RPG, RTS and certain puzzle games. I think that the popularity of celebrities like Jonathan Wendel could give a boost to PC games over the short run, and think that the relatively high costs of developing console games could keep a steady supply of PC games coming as a low-cost alternative (to produce).

"The digital distribution model is probably going to be extremely limited, and packaged products will likely rule for a long time. Digital downloads are not portable (you can't take [them] over to your friend's house), can't be sold at garage sales, are limited to broadband households, and take up a disproportionate amount of disk space. I think that this will not approach more than 20% of the market for the next ten years or so.

Blizzard's worldwide sensation of an MMO, World of Warcraft.

[On piracy]: "The piracy issue is probably a real one, and the fact that console games are written in proprietary languages and that the consoles themselves have chips to recognize pirated copies will continue to help prevent piracy of console games. However, the flip side is that console games carry a heavy manufacturer's royalty, while PC games do not. To answer your question, yes, piracy is a problem that will limit the growth of PC game sales.

[On Windows Vista]: "Microsoft is trying to make it easy to develop games for the PC and easy to port to the Xbox 360. Vista seems intended to be a tool to facilitate this, and I think that it will help PC game development.

"Ultimately, I think that the PC games market stays about the same size, while console/handheld game sales grow by around 50%. That's still a $3 billion global market. MMOs could expand the market, but the revenues will go to the guys who run the server network, not the PC game developers."


Ed Barton, Screen Digest

[On the state of the PC game biz]: "Retail spending on packaged PC games will decline to 2010 for a host of factors which have combined to erode the appeal of PC gaming to consumers: PC gaming has relatively complex compatibility and configuration issues; subscription-based games [are] absorbing spending power as well as time to play non-subscription based games.

"These factors have encouraged PC gamers to shift towards console gaming and have also led to a decline in the quality and exposure of packaged PC games in the retail sales channel. Increasing levels of digital distribution of PC games is of significant interest to developers: Revenue from online distribution can be up to five times that of retail, often more than 50% of sales revenues generated. The challenge is to identify appropriate digital distribution platforms.

[On piracy]: "There are few digital delivery channels which have scale and penetration comparable to retail, especially those targeting hardcore (as opposed to casual) gamers. Steam and Xbox Live (although currently only compatible with Xbox and Xbox 360 consoles, Microsoft have confirmed that Vista users will also be able to use Live) are prominent exceptions. Both have demonstrated the viability of supplying in-game content via micro-transactions, and the episodic gaming model.

"A natural evolution of [this business] model, popular with Asian game makers, is to rely completely on micro-transactions for revenue. In Asia where PC software piracy rates are historically very high, client software is often distributed at nil cost with revenues generated by payments for game time or in-game objects.

Ninja Bee-developed, Manifesto Games distributed casual strategy game, Outpost Kaloki.

"Greg Costikyan's Manifesto Games initiative is interesting for its championing of the independent developer game download model. Its progress will certainly be one which we watch closely.

[On Windows Vista]: "I do not believe this is a cynical ploy by Microsoft. Increasingly sophisticated games drive demand for more powerful PCs, and the PC hardware upgrade cycle is an essential component of Microsoft's business model. It is commercially sensible for Microsoft to encourage this process, which it is doing through a number of interesting initiatives: the functionality of Xbox Live from a Vista-enabled PC, which will ship with Live Anywhere pre-installed; XNA offering developer tools intended to reduce complexity and cost in PC and Xbox game development; attempting to standardize the end-user experience of PC gaming through the 'Games for Windows' initiative.

"The reward for developing games with these qualities is Microsoft's support in marketing the accredited titles, as another console platform in the retail channel, including in-store kiosks and 'Games for Windows' branded retail display units. Given the long-time reputation PC gaming has endured as the poor cousin of its console counterparts, this is potentially a hugely positive move for PC gaming.


David Cole, DFC Intelligence

[On the state of the PC game biz]: "The PC game business more than ever is an essential part of the overall game industry. It is at the cutting edge of new trends and has a very diversified consumer base. Unfortunately, being at the cutting edge is not always the most profitable place to be.

"When I first started covering the game industry back in 1994, the general consensus was PC games would dominate the market and console systems were doomed. DFC had a very contrarian opinion and we argued the console systems would do better. I remember being asked how much we were being paid by Nintendo and Sega to say this stuff. Our argument was simply that the hardware manufacturers spend billions to develop, market and manage a platform that helps create a steady consumer base. The PC game market was flooded with incompatible products, a constant need to upgrade, and thousands of products and companies trying to enter the market. In the late 1990s, many companies and products failed and the PC game market lost much of its luster. Meanwhile the console business continued to grow.

"In recent years, we have seen fewer [PC games] at retail, but also the rise of online games and more people playing MMOGs, casual games and all types of games online via the PC. We have seen the rise of a PC game business in Korea and China. Even console-centric Japan is getting online via PCs.

Korean MMO, Granado Espada.

[On piracy]: "Piracy is a big problem. There has been no legitimate console business in much of Asia because of piracy problems. Over in those markets it was the PC game companies that were the ones that found a way around the piracy issue [through MMOGs].

"However, our core concerns from over a decade ago remain. The PC game market lacks a true market maker to promote and stabilize the platform. There are all kinds of different distribution options and business model possibilities. Consumers also tend to get confused by too many choices. The closest the PC market had to such a market maker was Microsoft.

[On Windows Vista]: "In recent years Microsoft moved away from PC games with the slight distraction of the Xbox. Now Microsoft has Vista to promote. A cynical view would be that Microsoft wants to promote games to promote Vista. Maybe that is true. Microsoft spending money to promote PC games, no matter what the motivation, is best seen as the rising tide that can lift all boats.

Got a business-related question concerning the games industry that you would like to suggest for discussion in Analyze This? Are you a professional analyst who covers the market and would like to take part in this column? Feel free to send an email to howardhwen@gmail.com.

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