With consumer spending on entertainment slowing down, consumers will happily spend more to improve their at-home entertainment experience instead of splurging on outings to restaurants, movies, and weekend getaways. That means bigger TV screens to connect to video game consoles. People have been investing in bringing these screens into their homes for years, but very few of them are fully gamed up and games are a way to get extra entertainment mileage out of those screens at very low cost.
Tight budgets also will foster the proliferation of free or low-cost mobile-phone applications. Case in point: Apple's iPhone App Store on iTunes, where most applications are free and those that aren't usually sell for $10 or less. Consumers also can get cheap online software for Research In Motion's BlackBerry and phones running the various mobile operating systems. In terms of innovation and investment and purchase, we look for applications that take advantage of the mobile revolution to be very big in 2009.
According to Forrester research, four out of five U.S. households have a PC, but most consumers spend $50 or less each year on software. Free software bundled with new PCs, as well as free and open source software and web-based applications, have made it much more difficult to sell consumers packaged software. Despite the plethora of free applications available, most consumers still want to purchase commercial software, but they find the prices to be prohibitive. Data analytics can help product strategists and marketers identify the segments most likely to purchase software. A consumer software subscription (CSS) sales model will help lower the barriers to entry for consumers — and will also provide vendors with a more predictable revenue stream.
Having said that, Microsoft is altering the face of the consumer security market, having announced in November that it is changing its strategy for offering PC antivirus software, with plans to discontinue its subscription-based consumer security suite and instead offer individuals free software to protect their PCs. Code-named Morro, the new offering will be available in the second half of 2009 and will protect against viruses, spyware, rootkits, and Trojans, the company said. Microsoft decided to switch to a free product because there are still so many PCs out there that lack any antivirus software. Because they're not concerned about malware, the number of people who don't have antivirus software or don't keep it up to date exceeds 50 percent in developed markets, and it's worse in emerging markets.
Gaming
The tail end of 2008 has shown a recession-resilient gaming industry take some parting shots. Although overall industry sales for the month were up 10% and consecutive year-to-year sales are up 22% (Source: NPD Group), much of that growth happened earlier in the year. The latter half of the year has been peppered with news of layoffs, falling revenue and EBITDA, and the decline of consumer spending. Particularly traditional establishments, outlined by our peer group of public companies, in the gaming world are feeling the pinch due to a huge drop in consumers. Heading into 2009, the dynamics of the gaming industry are starting to shift and companies are seeing more opportunities to either consolidate or split from traditional business models.
Consumer spending hit a major decline in the second half of this year and is expected to be down around 0.3% in 2009 (Source: CES 2009), and is stated to be one of the worst years in terms of spending. As a result, leaders in the industry have been busy cutting costs and insulating themselves for the coming year. EA and THQ have reduced staff and consolidated facilities; EA in particular increased their proposed staff reduction to 1,000 employees, or 10% of its total by the end of Q1:09. Electronic giant Sony is due to go under a massive restructuring of the company that plans to cut ‘unprofitable or non-core businesses’. Troubled publisher Midway is now on the brink of collapse after its sale by Sumner Redstone’s National Amusements at huge losses. But perhaps the most telling of the times are the rumors from Redmond that Microsoft is planning it’s first-ever layoffs in mid-January. Even though the market seems to be taking a downturn, it is also offering an opportunity for companies to reinvent themselves and change the dynamics of the gaming world. These opportunities will materialize in three ways: Consolidation, Encroachment, and Split.
Consolidation within industry: Mergers and Acquisitions have always been the fastest way for a company to expand and continue its profit margins. Thinning margins will have many CEOs looking at alternatives besides their usual business model. The wave of innovation created by casual games developers has been attractive for publishers. Smaller developers are being approached by larger companies looking to acquire their IP and talent to keep their own portfolios fresh. The popularity of casual games, which have put many smaller development studios in the spotlight, has caught the attention of major publishers. EA’s acquisition of J2MSoft and Activision’s acquisition of FreeStyleGames are just a couple examples that come to mind.
Encroachment by Media Companies: With a chance of an increase in consolidation in the gaming world, media companies that were outsiders to the profitable industry could potentially be looking to invest heavily or acquire some of their own companies. Although the industry has been rife with interest by media companies, many fear the lack of experience or resources to successfully deploy products in the retail channel would impact them negatively, so only a few have made a solid acquisition in the space. Companies such as MTV had the capital to buy Harmonix, but they did not have the resources or expertise to deploy their product, which led to an MTV/EA partnership on Rockband. Likewise, big media companies like Vivendi opted to let Activision handle the deployment of the games; their main concern was about maximizing their own profitability of Vivendi assets. Other companies like Time Warner are taking another route, opting to slowly invest money into SCi and figuring out where they can gain most.
Split from the traditional publisher/developer relationships: As the economy changes so do business models and trends. Although publishers are first to capitalize on new revenue streams, smaller development studios that don’t have the capital for AAA titles are still getting in front of thousands of people via casual games. The shorter release cycles, lower development costs, and simple delivery models have created a flexible environment in which developers can react quickly to consumer demands. The surprise hits World of Goo and Braid are a testament to the allure and marketability of casual games and has opened innovative ways to market and sell games. Advertising is still the number one revenue stream, but companies are diversifying through new trends such as micro-transactions and selling virtual goods for casual MMOs. That isn’t to say everything will change overnight. Developers will still need to rely on publishers to fund licenses, marketing and production costs, but with the advent of casual games we see companies diversifying themselves from the traditional model.
There will be some shifting of the video game industry in 2009. Companies will focus on safe-bet titles; innovation will still thrive, however, even with increasing consolidation. Leaders in the industry know that innovation is one of the key features that drive video game sales, and they will be on the prowl to acquire talented development studios. Casual games have opened a whole new channel for developers to showcase their talent and content. The downturn in the economy also points more companies to focus on casual gaming as a more serious revenue stream. Low production costs and easy deployment on platforms or the web have brought innovative business trends that companies are beginning to capitalize on. In regards to M&A, companies with the right combination of content, audience, and profitability will be attractive M&A targets for publishers or media companies wanting to expand their influence in the sector.