When E3, the videogame industry’s annual extravaganza, presses play on June 10 in Los Angeles, many will be looking for signs of how the beleaguered games sector plans to cope with the tectonic shifts that are disrupting the $78 billion global business. Among the forces hitting the market:
New console cycle: With the new Xbox One and PlayStation 4 expected to hit shelves in time for Christmas, gamers have been postponing purchases of both games and consoles. This drags down sales–at least temporarily. It’s unclear how much money consumers will uncork once the new systems are out, however. The latest Nintendo Wii U console, released last November, has sold only 3.5 million units through March 31, causing major game publishers like Electronic Arts to stop developing titles for the platform and casting serious doubts about the Wii U’s future.
Shift to mobile: Many would argue that tablets and smartphones like the iPad and Nexus have become the dominant gaming platforms. Spending on mobile games in the United States has grown from virtually nothing five years ago to an estimated $2 billion this year, according to Wedbush Securities. As the app economy flourished, U.S. console game sales have suffered, dropping from $8.7 billion in 2007 to $6.7 billion in 2012, according to NPD Group.
Shift to digital: Music veterans may be intimately familiar with the erosion of packaged disc sales, but for games it has only just begun. Digital distribution of full games is revving up, thanks to widespread broadband and new compression algorithms. Valve’s Steam service, for example, sold about $1 billion worth of game downloads last year, according to Wedbush estimates. So far, the uptick in digital hasn’t been large enough to offset the decline in physical retail sales. The U.S. gaming business, including digital and mobile sales, declined in 2012 to $19.2 billion, down from $22.2 billion in 2011, according to NPD.
Fewer console titles, smaller budgets: The gaming industry is releasing fewer big-budget console titles. Instead, development resources are being poured into two buckets: a handful of top franchises like “Halo,” “Battlefield” and “Gran Turismo,” and a large number of mobile games with much smaller budgets.
As one can expect, the net effect on music licensing is grim. The volume of big-budget titles that build in money for music licensing and orchestral scoring is declining. The rise in snack-sized games as free-to-play apps or downloadable content, on the other hand, means growth is happening in the part of the gaming business that’s least likely to splurge on a music license or a major artist tie-in, such as Jay-Z’s involvement in scoring the soundtrack for last year’s “NBA 2K13.” There are potential opportunities in developing cross-media apps that combine a music experience with, say, an interactive book. But this is a very early trend. Most apps, even those made by major publishers, must operate on shoestring budgets in order to make the economics work.
Still, there are glimmers of hope. The dance genre, which licenses top 40 tracks, continues to sell, pulling in $282 million last year, compared with $41 million for music games, according to NPD. And game consoles themselves have evolved into all-in-one entertainment platforms that sell (or stream) all manner of digital content in the living room. That, at least, opens up new channels of music distribution.
Though turbulent, it’s hardly game over for the interactive entertainment business–or for the music that remains a vital component to an immersive experience. Instead, it’s more that gaming has entered a new level, one that has a lot more obstacles and tougher adversaries to conquer.