via BBC

It's larger than Hollywood, its virtual stars may live happily on a diet of bits and bytes, but the video games industry has not been able to insulate itself from upheaval.

Yes, gamers are snapping up the new generation of games consoles - Microsoft's Xbox 360, Nintendo's Wii, and Sony's Playstation 3 [PS3], but at huge cost to the industry.

Hardware makers are losing hundreds of dollars on every console sold, and games publishers face an "increasingly difficult environment, as rising development costs and small user bases [mean] that return on investment in next generation games development is unlikely to be achieved before 2008," according to media analysts Screen Digest.

More importantly, though, the video games publishers are facing a revolution of their business model.

'Volatile' industry

Not every video game sees arrests as peaceful as this one

Even the industry's undisputed giant, Electronic Arts (EA), is not immune from turmoil.

It's a "volatile" industry, acknowledges Gerhard Florin, executive vice president at EA and the general manager of its international publishing business.

More than double the size of its nearest competitor, the Redwood City, California, based company employs 7,200 people; 5,200 of them work on games development.

Titles like Fifa Soccer, Need for Speed, The Sims, and Command and Conquer games underpin the company's success.

The sequel syndrome

"Scale does matter" in this industry, says Mr Florin, because "the more complex games become" the more tools are needed "to keep costs under control".

VIDEO GAMES SALES
Consoles games
2006: $11.2bn
2007: $12.2bn
PC games
2006: $3.9bn
2007: $3.7bn


And selling software in a shrink-wrapped package just doesn't bring in enough money anymore.

The market for computer games is stagnating. Screen Digest predicts their sales to fall to $3.7bn this year - although they at least provide a stable stream of income, says Mr Florin.

The real money spinners are console games, but subject to the ups and downs of the hardware cycle as consoles launch or go out of fashion.

To ensure steady revenues, says Mr Florin, games publishers therefore have to build strong brands.


Franchises like Fifa Soccer are mainstays of EA's business

It may not be original, but no video games executive has yet been sacked for commissioning the annual upgrade to popular franchises like Fifa Soccer or Madden NFL.

Ed Barton, games analyst at Screen Digest, calls it "a common syndrome in the video games industry".

"Wonderful innovative titles are sometimes ignored [by consumers], while some repetitive titles with minor improvements in game play and graphics provide much better returns to the games publishers," he says.

He compares it to music publishers, who have Madonna or Elvis Presley "to keep the home fires burning," but also invest to freshen up the catalogue.

The next generation

The new generation of consoles is a prime opportunity for innovation, but have not made life easier for developers.

ELECTRONIC ARTS
Founded in 1982
HQ: Redwood City, California
Revenue: $2.9bn (2006)
Staff: 7,200
Main studios: Redwood Shores, Los Angeles, Orlando, Vancouver, Warrington

Right now video games use probably 30-40% of the power of the new hardware, says Mr Florin.

"You only learn what you can do with these platforms over time, and as a result using 100% of Playstation 2 [PS2] is nearly as good as today's starting point of PS3 games," says Mr Florin.

"We haven't even started to see PS3's power, it will take the longest to exploit in full," says Mr Florin.

Games publishers face a dilemma, though. To reduce cost, they would love to put their games on as many platforms as possible.

It used to be relatively easy to port a game from one console to the next. Nintendo's "Gamecube, the Xbox and PS2 were much more alike," says Mr Florin.

Next generation platforms are different, he says: "Now we have to have very distinctive games for each machine and can't port that much."

That plays into the hands of the console makers, who want exclusive games to lure gamers to their platform.

See the market share of competing video games consoles
Standing on five legs

The critics of video games are modern book burners

Gerhard Florin

"Development times, team sizes and complexity have been exacerbated by increasingly demanding next generation games," says Ed Barton at Screen Digest.

He predicts that "only a tiny proportion of next generation titles are likely to achieve profitability in the near future".

To survive and expand, says Mr Florin, publishers have to move beyond console and computer games, and stand on three additional legs:

Handheld games;
mobile phones, which are "up and coming"; and
the "fifth leg, online communities".
Mr Barton calls it the industry's "risk reduction strategy" - a combination of outsourcing, releasing games on as many platforms as possible and "making sequels to popular titles and producing games based on popular movies".

Going online

The biggest driver for change in the industry, however, is the internet .

Gamers are now "getting connected to the internet at a large scale," says Mr Barton. "We have only seen the beginning of this."

Here Microsoft is way ahead with its Xbox Live service. Sony's online gaming ...