January 5, 2010
By Wanda Meloni

Year in Review
There were definitely some highs and lows over the past year. At M2 Research, we've tried to encapsulate the major themes that emerged as well as outline some key trends we see going into 2010.

Layoffs Killed the Party
M2 Research estimates that the final count for layoffs since the economic meltdown in late 2008 reached 11,488 worldwide, with the majority of the losses coming in 2009. All the major publishers were impacted by the layoffs: EA, THQ, Activision, Sega, SCEA, Midway, Disney, Eidos, and Lucas Arts.

The larger publishers were not alone in their need for cost-cutting measures. Smaller studios were also impacted. Some of the smaller studios with layoffs included:

• Harmonix - 39 laid off
• Smith & Tinker - 15 laid off
• Slipgate Ironworks - 50 laid off
• Sulake - 40 laid off
• Idol Minds - 50 laid off
• Heavy Iron - 65 laid off

In fact, the majority of the layoffs came from the studio level, with the total company count coming from more than 95 companies worldwide. Over half, or 55% (52 studios), were from the US.

Looking at the data on a regional basis, the US represents the bulk of the layoffs at 71% of the total. Europe was second hardest hit with 13% of which the UK made up 81% of that region's loss. Japan was hardest hit in Asia, while Canadian and Australian layoffs remained minimal overall.

CHART: GAME STUDIO LAYOFFS - WORLDWIDE BREAKDOWN

There were some specific trends found in the data. For example, many of the layoffs were in QA departments, and from a cost-cutting measure that seems like an understandable strategy. QA tends to be something that is becoming more of an outsourced service for many companies.

The other large number of layoffs seems to have come from projects and companies that had difficulty "retooling" for 7th generation consoles. Aside from the cost of retooling, others were so focused on their retooling efforts they weren't able to see the changes in the market and the impact things like digital distribution, casual, and social gaming was starting to have on the market.

In addition to the layoffs, there were a record number of studio closures in 2009 including 3D REALMS, ACES, Midway, Disney's Avalanche Studios, and Pandemic Studios. In total there were over 18 studio closures with a number of others either filing for bankruptcy or going up for sale.

The Flipside - 2010 and New Hires
On the flip side there are many companies ramping up. In 2009 Big Fish Games opened a studio in Vancouver, Canada that will employ 50+, as well as its European office and localization facility in Cork, Ireland, with another 100 positions. Zynga opened an office in Baltimore.

Ubisoft announced a huge deal with the Ontario government to build a major studio that will employ 800. In Montreal Ubisoft already has 2200 employees. Longtail Studios announced in November it was opening a studio in Halifax, Nova Scotia that will employ 60. Also in Montreal, Funcom announced it will be setting up a studio. Earlier in the year they announced they laid off up to 75% of their staff in Durham, SC, so this appears to be more of a cost-saving move on their part.

We believe the worst is over in terms of layoffs and there is definitely growth and new hires out there. Stay tuned.

ROI is King
At a development level the video game industry has been in shakeup mode for some time, which is what ultimately triggered these layoffs. The overall cost of developing games for the current generation of hardware has become increasingly difficult to maintain, leaving most traditional game developers and publishers stretched well beyond their means.

Prior console generations had development costs ranging between $3-5 million per platform. M2 Research estimates more recent development costs for these 7th generation consoles to have soared, with the average costs running $10 million for one platform and $18-$28 million for multiple platforms.

Casual and social games on the other hand can range from $30k - $300k, taking only 6 months to develop. Since these games are online, they also don't incur the heavy costs associated with packaging and marketing materials that are necessary to reach the retail channels.

Mobile and iPhone games have much less production costs associated with them, ranging from $5k - $20K per title. Chris Ulm, CEO of Appy Entertainment, acknowledges, "Mobile game budgets depend on the game and the developers that are putting it together. The budget for a game can go from $5k to $100k. To put it in perspective, ports for full fledged iPhone games (like FaceFighter) can run anywhere from $15K to $22K. The average development time for a game like Zombie Pizza is about 4 months."

Microtransactions and Virtual Goods
2009 was the year that microtransactions took off. Games are consumable entertainment that are dynamic in nature. At Playdom for example, a game might only launch with 10% of its overall content, but new content is updated on a daily or weekly basis. This kind of business model is dramatically different from the traditional and static retail model.

For many companies, the retail chain is broken and no longer seen as an effective sales channel. Companies are opting to create direct-to-consumer channels that in the end are far more valuable. The key going forward will be how much will it cost companies to maintain their customers. What is the long-term ROI?

Consider Playfish, who in 2008 raised $4 million in seed funding and was acquired in November for $300m. That is a pretty nice return on a 1 year investment for Accel Partners. Zynga, who secured $28 million in VC funding in mid-2008, earlier in December received an equity investment by Russian company, Digital Sky Technologies, for $180 million. And in November Playdom received $43 million in VC funding on valuation of $260 million.

Expect more growth coming from:

• Browser based
• Casual
• Online

At the same time, microtransactions might not be the best business model for every type of game play. For example, EA's recent announcement that STAR WARS: Old Republic was not going to be a subscription game but rather something based more on microtransactions has many die-hard fans up in arms before the game has even been released.

The key then for developers and publishers moving forward, is to look at each game and determine the best business model for that gamer profile.

Warning: Mass Market Larger Than it Appears
There has been talk in the industry that casual and free-to-play games have cannibalized the core game industry, however I would have to disagree with this assessment. If anything, casual and free-to-play games have helped to expand the market by including a broader demographic.

The following data shows the current breakdown of game consoles compared to PC gaming. M2 Research estimates women currently represent over 45% of the total PC gaming market. In casual and social gaming the percentage is quite a bit higher, ranging anywhere from 55% - 80%, depending on the company and games. Many of these consumers are new entrants into gaming, and fall outside the core market for the time being.

CHART: GAMING PLATFORMS - GENDER BREAKDOWN

That's not to say girls and women are solely playing casual and social games. As more and more of them get exposed to console game play there are many that consider themselves core players.

We'll have more data on this growing trend in an upcoming issue of THE BRIEF.

Middleware Continues to be Under Valued
With ROI continuing to be the key driving factor in 2010, companies large and small are looking for ways to drive down their development costs. Yes, this past year has seen many project cancellations, leaving many middleware providers high-and dry. But as I've said for some time, middleware is a good alternative for many companies. As more developers and publishers move to online, browser based games with microtransaction strategies, middleware providers will have to incorporate these trends into their tool support.

One such company is Wild Pockets, a relative newcomer to the middleware market. Wild Pockets has done a phenomenal job with Indie game developers. They are unique in that they not only offer developers a complete suite of free development tools that includes a 3D game engine, they also have built-in microtransaction capabilities, hosting services and game analytics. In addition to all that, in early 2010 they will also have real-time collaboration support for remote team development.

Shanna Tellerman, CEO of Wild Pockets' explains, "With our built-in Virtual Currency for microtransactions, a developer can easily drop the tags right into their game code. Then it's up to them to figure out how much they want to charge for different items. And with our analytics and metrics tools a developer can track the success of each game, analyze what users are doing with your content, and what areas of the game they like."

Unity also continued to make progress in 2009, increasing its user base to over 33,500 registered users. In October they announced VC investment from Sequoia for $5.5 million.

Of course Epic remains a key force in this space and earlier in December demoed the Unreal Engine 3 working on mobile devices: iPod Touch, iPhone, and 3GS. Expect to see more at CES this week. Back in November the company announced they were making the Unreal Development Kit available for free. That move alone brought 50,000 users to download the toolkit in the first week, showing us that the demand is there.

The Tech Trends of 2010
There are of course several technology trends that I love in theory. The reality is I question the success of their overall adoption any time soon simply given the current trends in development and continued consumer malaise.

3D in the Home
I love the idea of 3D and the 3D movies this year have been impressive. Expect Sony and several other companies to start their big push for stereoscopic 3D in homes this year at CES, which starts tomorrow.

At the same time I question the success of 3D in the home. There are several factors I see that may hinder success. First is the fact that families are not going to be in a position to throw out their newly acquired flat screens to incorporate 3D capabilities into their home.

Secondly, and more importantly, I don't see where the added ROI is for content providers, at least not for another 3 - 4 years. Recouping the added cost for 3D development is going to take time, especially in this environment. Sony themselves recently announced production plans that include half of all its TV sales will be 3D by 2013, which they estimate will give them 20% market share. However, they don't plan to break even on their sales until at least 2014.

Motion Controllers
Microsoft's Natal and Sony's wand are sure to inject some excitement into the 2010 game line up. And there will be some new and unique games that support these peripherals. Sony already has at least 13 games in its upcoming lineup. Are they the next big thing? Well, in terms of technical trends - Yes.

The key factor here is what do they represent to developers? Developers will be looking hard at any additional development costs and resources. If they can't see any added value in terms of return on investment they will be unlikely to support any extra peripherals.

Cloud Formation
While 2009 was the year of cloud computing alternatives with the launch of both OnLive and GaiKai, 2010 will be the year that these gaming platform alternatives will be put to the test. They now need to show progress both in the form of consumer adoption and extensive partnership agreements. There are long-term opportunities for the small developers but given the impact of 2009 economics, there is even less wiggle room for developers to devout to risk.

OnLive has recently been showing access via cell phones, but again it boils down to getting the developers on board to support the platform and then getting consumers to branch out beyond their current gaming comfort zone.

Final Thoughts
So overall, the layoffs seem to have shaken things up, which was obliviously necessary given some the shifting trends. The U.S., while taking the brunt of the layoffs, was not alone and most regions felt the impact of these changing times. On a positive note, it looks like the worst might be over and we can settle in for a more stable year ahead.

In 2010, studios will be spending more time getting creative with development pipelines and tools, online distribution models and the use of microtransactions.

At the same time consumers will be looking for more.... More content, more direct access, more social connections, all on more platforms. Easy, right?

On the technology side, as I have said, I think 3D, motion controllers and cloud computing are all immensely exciting. This is immersive entertainment, something that was close to fiction just 15 years ago, when I first started tracking 3D technology. Virtual Reality was the thing of an Avatar movie. Now, the technology is close to reaching mass market, albeit in a slightly different vein. The key is going to be content and developer support.

How will all of these new technologies impact us going into a new decade? Whatever the case, it is going to make for some exciting and trailblazing times ahead. – WM.

M2 Research is a market research and consulting firm covering:

• Gaming
• Interactive media
• Entertainment

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