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Analyze This: Advice on Investing in Game Development
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Analyze This: Advice on Investing in Game Development

April 8, 2009 Article Start Previous Page 3 of 4 Next

Doug Creutz, Cowen and Company

Investing in developing casual games or Triple-A games...

If you have the capital and an experienced development team with a successful track record, I think AAA is a safer bet. There is a fairly high correlation between game quality and sales success for AAA titles, and the rewards are enormous for a multi-million unit selling title, let alone a multi-title franchise. It's high risk but potentially high return.

On the other hand, it's a lot easier to get into the casual game business as the barriers to entry are considerably lower.

Development costs are lower and less money is at risk. Casual games are more of a commodity-driven market, with lower average returns.

The question comes down to: are you more interested in minimizing the chance that you lose your money, or maximizing your expected profits?

Opinion of investing in game development for each platform...

The choice here is really between investing for the Xbox 360 and PS3 -- since their capabilities are fairly similar -- or the Wii. I would caution investors and developers that the larger installed base of the Wii is really a bit of a red herring.

In the U.S., there is a 19-million unit installed base for the Wii versus 22-million units combined for the 360 and PS3. Assuming some overlap in the 360/PS3 installed bases, they're roughly equivalent.

In addition, Nintendo is the dominant publisher on the Wii with over one-third of software market share on its platform. Guitar Hero and Rock Band account for one-sixth of sales.

So the addressable market for third-party Wii titles is only about half of what the installed base would imply. The situation on the 360/PS3 is less daunting, with less than a quarter of software dollar share going to first-party publishers and Guitar Hero/Rock Band.

Activision/Neversoft's Guitar Hero: World Tour

The other issue is that the 360 and PS3 are AAA-oriented platforms, while the Wii is casual-oriented. There is a very clear correlation between game quality and unit sales on the 360/PS3, while there is very little correlation on the Wii, at least for third-party games.

Thus, in some sense you have more control over your fate on the 360/PS3 if you can come up with a high-quality game. Whereas on the Wii, it's a bit of a crapshoot for what works and what doesn't.

I think the Wii installed base represents, to a certain extent, fool's gold for someone looking to invest in video game development. You're rolling the dice on succeeding in a market which has proved very resistant to generating meaningful hits away from Nintendo titles and the music genre.

In contrast, I think the Nintendo DS can actually be an attractive platform, if only because the development costs are so low: hundreds of thousands of dollars verses millions for a Wii title. Ubisoft is a great example of a publisher that has built a very nice business on low-cost DS product.

Investing in game development for any of the mobile platforms...

Mobile games tend to feature less attractive economics, because mobile gaming is such a commoditized market and success is really driven by licensing, which tends to be expensive.

However, the iPhone has the potential to be more like the DS, due to its unique interface. But it is still a bit early to tell if it can be economically viable on a wide scale.

Article Start Previous Page 3 of 4 Next

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