State of the Game Industry 2008

DFC INTELLIGENCE P R O P R I E T A R Y

State of the Game Industry 2008

GameOn Finance Conference- October 2008 -

Wanda MeloniPresident

DFC IntelligenceSan Diego, CA


The Interactive Entertainment Industry

Total Worldwide Market - $47 Billion in 2008 Console Games: $27 billion in 2008

Older systems still make up a large part of market - PS2,Xbox and GameCube account for about $15 billion inrevenue but that is getting ready to decline becauseindustry is going into a 5 year transition period

PC Games: $9.5 billion in 2008 with the majority comingfrom online games/MMOGs

Portable Games: $8.5 billion for 2008 projected to growto about $10 billion by 2012

Emerging markets: more portable devices, connectedconsoles, online distribution, micro-transactions, user-generated content, gaming with social component

- 3 - DFC INTELLIGENCE P R O P R I E T A R Y

Total Worldwide Interactive Entertainment Industry

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Console Online

PC Online

PC Games

Portable Software

Portable Hardware

Console Software

Console Hardware


The Console Market Lose Money on Hardware, Make Money on Software

Microsoft and Sony have been willing to take a hardware loss of $100+ per unit

Hardware manufacturers receive royalties based on every software unitmanufactured Amounts to about 15% of retail price, it puts all the risk is on third-party developers

A single title can change it all A single hit title can secure a system

Microsoft ambitious but remains weak in Asia Recent moves are designed to shore up its chances but still no guarantee

Early start, strong online and more Japan developers

When will Microsoft make money?

Nintendo doing better than expected For the first time consumers that grew up with Nintendo will be buying systems for their

children

Could be a strong second system and do well with 25-35% share

Sony has a lot to lose because it will be very unlikely that they can maintain their67% market share Still likely to maintain 40-50% market share

PS3 not expected to break-even


PC vs. Console Market Consoles are bigger market overall no matter which way you slice it

except for… MMOGs, casual games, and advergaming

The console market and PC market are not mutually exclusive domains They are each unique domains of specific types of gamers and gamer behaviors

(e.g. modding, MMOGs are PC, fighting games are console)

Where PC gaming and console gaming was mutually exclusive was in the domainof retailer and publisher allocation of limited resources

PCs have until now not been living room devices HDTV changes that a bit but the future of media center PCs and gaming isn’t

certain

PC gamers are older, more affluent, and tend to focus on a few big titlesthat they play religiously

The PC is always a center for innovation and that is what keeps it alive Consoles are gaining on areas that have been exclusive domains of PCs

Wireless and home networks coupled with user created content may eventually fusethe world of PCs and consoles together


Total PC Games: Retail Plus Online

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

2004 2005 2006 2007 2008 2009 2010

Asia/ROW

Europe

NA

Total Worldwide PC Sales by Region: 2004 - 2010


PC Game Play Expands Beyond Retail Retail Sales of PC Games Have Declined but the Overall

Market is Stronger then Ever New Models Dominate

Online Games: $6.5 billion in PC online games in 2008

Subscriptions: Games like Everquest, World of Warcraft and City ofHeroes get $50 at retail + $15 a month

World of Warcraft: worldwide success with over 11 million users

Digital Distribution: growing download option for games

Advergaming: Top free casual game sites attract 200,000+simultaneous users

Top PC games like The Sims series and Half-Life can have retailsales similar to top console games.

Similar Trends are Likely to Occur as Console and PortableSystems go Online


Content is King

Content, Content, Content: Franchised/Branded

Original

User-Generated

Major Trends: Game content is “interactive” unlike film content which is linear

Game content needs to be real-time, created with real-time tools

and open platforms

Move towards use of procedural content, in combination with hand-generated content

The tools are changing – more middleware is being used

Mod tools and easy-to-use consumer level tools necessary


Online Game Markets Worldwide Forecast

Total Market - $7.6 Billion in 2008 Forecasted to reach $13 billion by

2012

This market is fragmented amongmany companies and markets

Compare with Nintendo and Sonywho have total combined gamerelated revenue of $10-15 billion ayear

Much of online game revenue andplay is still from single player games

Even digital distribution can still havea strong physical retail component

Worldwide Online Game

Revenue: 2001-2012

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$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

in m

illi

on

s

PC Online Console Online


Online MMOGsTotal Market - $3.5 Billion in 2008 Massively Multiplayer Online Games

(MMOGs) have been dominant revenuegenerator via subscription model

A handful of successful games with bigfocus on Fantasy Role-Playing (MMORPG) Western markets: Big growth started

with Ultima Online (1997) andEverQuest (1999), average subscriptioncosts rise from $10-15 a month

East Asian markets: Pay-per-usemodels and games like Lineage, Mu,Legend of Mir, Fantasy WestwardJourney

Top games can last 5-10 years World of Warcraft was first big international

hit with over $300 million in revenue firstyear

MMOGs could come to consoles, FinalFantasy XI is already a success

More niche MMOGs: Runescape, EVEOnline, Puzzle Pirates

Potential to add digital distribution modelsto traditional subscription model

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$1,000

$2,000

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$6,000

in m

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s20

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

12

Worldwide MMOG Revenue:

2001-2012

MMOG Revenue


Casual GamesTotal Market - $1.5 Billion in 2008

True mass market products withsome portals reaching over 20 millionusers

Casual Games have broadened thedemographics, especially olderwomen and working adults

Some big name products like Tetrisand Bejeweled, and star developerslike BigFish ($100 million in revenue2008) and PopCap

Model was free advertising supportedbut is going towards adding digitaldistribution and subscription

Digital distribution model is “trybefore you buy” 1% conversion rates mean 1 million

downloads to break even $20 price point is probably too high

Emerging revenue opportunities: Console systems (Xbox Live Arcade) Skilled games Mobile games

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

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2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Worldwide Casual Online Game

Revenue: 2001-2012

Casual Game Revenue


Genre ComparisonCasual Games Team: 25 members Cost: $75k - $300k Production Time: 6 months Platform: PC primarily, some console starting

AAA Games Team: 100 members Cost: $15 - $30 million to produce + $40 million for marketing Production Time: 24 – 36 months Platforms: Multiple necessary - Consoles, PC, Online

MMOGs Team: starts with 100 members and can move up to 450 by launch Cost: $15 - $25 million for high-end + $500,000 annually for servicing Production Time: 3 – 5 years Platform: PC


Business Models are Changing…

Free to play: big trend in Asia Advertising in games: $937 million by 2012

Advertising on casual game sites

Corporate sponsored games

Product placement in games

In-game advertising in high-end retail titles with online connection

Digital Distribution: $5.6 billion by 2012 Has become a key model in Asia to avoid piracy problems. In Western markets it

has been mainly used for casual games (with small file size) and products that cannot get retail distribution

Great supplement to retail, makes it model of choice for retail games with freeonline play

Will not eliminate traditional retail for full games except in rare cases (Valve)

Update/add-on/extra, user created content: mods/Sims 2, virtual items

More subscriptions Micro-transactions


Emerging Trends

Households that play games on multiple systems A single consumer plays games on the PC, console and

portable system and exchanges information betweenplatforms

Game systems are always connected which expandsbusiness models, distribution and consumption choiceswhich may start to shakeup established industry structure

Large scale success requires diversity: of platforms,products, markets and business models

A truly global business Asian business models go to the West

Console systems and Western brands start to penetrate Asia

Both large global brands and solid niche markets


Regional Tastes…

Key Lesson: Each market has its own idiosyncrasies

North America: Strong diversity, sports titles critical, largest market,emphasis on realism and first-person perspectives and action titles.

Europe: More like N. America than Japan. More cost conscious,traditionally last market to get console. PC gaming is strongespecially in Germany.

Japan: Size of console and Japanese oriented content is critical,cuter more abstract titles are big deals, and Japanese companysupport.

Korea & China: MMOGs especially because they avoid piracyissues. Real-time strategy in Korea as well. RPGs in China.

Mobile Phones: Much bigger in Korea, Japan, and Europe than U.S.


Game Industry Sales by Region

North America: Clearly thekey market.

Europe: High prices havelimited sales.

Japan: Declining inimportance, but PC, onlineand portable are becomingmore important.

ROW: Asia is exploding onPC online game side andcould become important forconsole systems.

44%

33%

13%

10%

N. America

Europe

Japan

ROW

Game Sales in 2004

37%

34%

13%

16%

N. America

Europe

Japan

ROW

Game Sales in 2010


Game Industry Forecasts by Region

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$5,000

$10,000

$15,000

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$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

2004 2005 2006 2007 2008 2009 2010

Asia/ROW PC

Eur PC

NA PC

ROW VG

Jap VG

Eur VG

NA VG

Total Worldwide Entertainment Market by Region - 2004 to 2010


Think Globally – Act RegionallyU.S.A. - “Regional Proficiency Clusters” San Francisco – platforms: PC, Sony, Nintendo, new technology, funding opportunities Seattle – casual games, Microsoft San Diego – affiliate studios, online gaming Los Angeles – movie franchises, branded content, Japanese subsidiaries Raleigh/Durham – middleware, online gaming Austin – Audio and music, online gaming New York, Boston – starting to see more growth in these regions

Australia Brisbane – strong academic influence, regional gov’t. provides incubatator program

Scandinavia Norway Sweden

Emerging Countries Asia – Korea, Singapore, China alone has 30% growth annually India – 78% growth annually


Canada’s Game IndustryMontreal has: 3D +80 game companies Infrastructure: localization services, outsourcing Affiliate game studios: EA, Ubisoft

Vancouver has: +100 game companies Strong military connection, casual gaming, closest proximity to Asia Strong affiliate studios

Growth of Regional Proficiency Cluster Requires: Attraction of like interests in region Schools fostering interactive media = Strong employment pool Incentive programs for startups: incubators, collaboration programs


For More Information:

Wanda MeloniPresident

DFC Intelligence

[email protected](858) 780-9680

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State of the Game Industry 2008