2005 State of the Industry Address
President of the Entertainment Software Association
Good morning. Welcome to the 11th Electronic Entertainment Expo, and our ninth here in Los Angeles.
For historical purposes, can I see a show of hands of how many have attended every E3 since the first one in 1995? I'd like to pay a special thanks to all of you for your long-term support of this event.
I want to spend most of this morning talking about the future, not the past or present. Before I do, another survey:
How many of you have written at any time that the video game industry is bigger than Hollywood, or have heard someone in the industry make such a claim?
Let's set the record straight once and for all: it is simply not true -- yet.
It has never been true. Yes, when you add video game hardware sales and software sales together, you come up with a figure which exceeds the total box office take of the film industry. But including hardware sales in the figure skews the comparison. Why not include the sales of DVD players? And even if you think it is valid to include console, handheld and related hardware sales in the calculation, it fails to account for the streams of additional revenue produced by Hollywood, from DVD and VCR rental and sales to syndication of films for broadcast and cable TV. In truth, the worldwide film industry stands at about $45 billion and the worldwide video game industry checks in at around $28 billion.
Nonetheless, the software sales to box office comparison is not without its benefits. It does dramatize for the uninitiated how big the video game industry has become. Furthermore, with mobile and online game revenue growing, and with console games on the verge of another sharp uptick, retail game software sales may, in fact, surpass movie box office in the near future. But it hasn't happened yet.
Before I leave industry comparisons, it should be noted that the game industry is, in fact, poised to surge past the music industry in terms of global revenue. Price Waterhouse Coopers reported last year that video games will eclipse music as the second most popular form of entertainment by 2008, with worldwide consumer spending on video games hitting $55 billion compared to $33 billion for recorded music.
Now, $28 billion in global revenue isn't too shabby for a 30 year old industry, and the outlook for continued growth is extremely rosy, especially if piracy can be cracked, thus opening huge new markets like China, Russia, and South America.
I gave a version of this talk to some people yesterday and one of them said it sounded like I was putting down our industry instead of being it's cheerleader in residence. Let me be clear: I am not negative about our industry, I am proud and excited to be a part of it, and I think we have a great future ahead of us. Rather than putting down the game industry, the point of my earlier comments is to inject a note of reality into the discussion of where video games actually belong in our entertainment pantheon, and to create a context for what I want to discuss this morning -- what will it take for the game industry to be as big or bigger than the film industry at some point in the future?
In thinking about this, I believe there are six fundamental issues the video game industry needs to address to become the dominant form of entertainment in the 21st Century. Let's take them one by one.
First, we need to continue to broaden the game audience by making more games with mass-market appeal.
In the last decade, since the launch of the original PlayStation, video games have grown up from being the sole province of teenage boys to being embraced by a far wider universe of consumers. It is by now old news that the average gamer is 30 and that a majority are adults. But that does not tell the whole story, or even the most important part of the story. The Yankee Group reported last year that 52 million Americans between 13-34 play video games. Further, it estimated that anywhere from a third to two-fifths of the 147 million Americans between 35-50 play video games, adding another 56 million players to the pool.
ESA's annual consumer research reports that 66% of gamers between 18 and 25 have been playing games for at least ten years, and nearly 100% of gamers between 12 and 17 have been playing since age 2. Furthermore, the average gamer of all ages has been playing for 9.5 years, and gamers over 18 have been playing an average of 12 years.
Equally revealing, 41% of the most frequent game players say they are playing more now than three years ago, and 54% report that their passion for video games comes mainly at the expense of TV.
All of this sounds pretty good. It's the glass half full perspective. But if we take a glass half empty perspective, these numbers can be viewed a bit more ominously. Video games have been around 30 years and penetration remains far below that of competing media like film and TV. What do they have that we don't?
A partial answer is they have done a better job developing products that have truly mass market appeal at mass market prices. That is not to say they create better entertainment necessarily. It suggests, instead, that they are better at creating content with wider appeal. Say what you want about The Passion of the Christ but the fact remains it was the 3rd biggest money maker of all-time, generating $612 million worldwide, and $371 million in the US. Assuming $10 a ticket in the US, that's an astonishing 37 million people who saw the film. The film revealed something Hollywood was missing -that there is an audience that had been largely unseen or ignored who would swarm to cineplexes if they featured movies of particular interest to them, in this case with openly religious themes.
The question for the game industry is what are we doing to create content these and other specialized audiences feel drawn to? This is not an appeal to make religious games, though that would be welcome. I mention Passion of The Christ as an example of the powerful market expanding potential inherent in making games for less traditional audiences than we're accustomed to.
There is another major and well-known gap in market penetration for the video game industry: women. It's true that ESA data shows that women make up a third of the console gaming community and 40% of the PC community but we also know that many of these women are casual gamers who might invest more time and dollars into this form of entertainment if we produced content they could more easily embrace.
But it is more than just content with cross gender appeal that's necessary. We need a cultural shift so that young girls and women feel that playing games is not a testosterone monopolized hobby reserved for their boyfriends and husbands.
Last February, a woman gamer writing under the name Fizgig on the site womengamers.com asked, "Why do my mom and I lower our voices when she wants to tell me about the new level she just finished with her Amazon in Diablo II? Why don't I tell people at the university where I work that I play videogames?" The reason, she posited, is that women like her have a sense of "gamer shame." "Gamer shame," she wrote, "is a powerful social convention and the gaming industry really isn't doing a very good job of combating it."
It's hard to argue with her complaint that our own industry, mainly through our marketing practices, reinforces the stereotype that most gamers are men. Our challenge as an industry is to break down the social conventions she described if we are to truly create, again in Fizgig's words, "a gender neutral inclusive gaming community�[in which my daughter] could proclaim her love of games to the world without any shame at all."
We also need more games that are socially and politically relevant. If we can make games about terrorism, why can't we make compelling games about politics or global warming? Why can't there be games which force players to struggle with weighty moral and ethical issues within compelling game worlds?
Finally, one of the pitfalls we need to avoid is the Mature-rated game trap. The message of GTA San Andreas and Halo 2 is not that the sole pathway to blockbuster nirvana is making M rated games. True, great M games can be chart toppers. And M rated games have and will continue to produce some of the finest and most advanced interactive entertainment experiences. We have no reason to shy away from this segment of the market. But we misread the market if we think only M games have that potential. If we want to broaden the market, it's critical that industry continue making a full spectrum of content. Just because the market is aging does not mean older players won't play compelling Teen and Everyone-rated games. In fact, of games released in 2004, the average E title sold 534,300 units, the average Teen title sold 265,800 units, and the average M title, not including San Andreas and Halo 2, sold 150,200 units. Draw your own conclusions.
So the key to broadening the market even further is to make our Passions of the Christ, our chick flicks, and our socially relevant games, to shatter negative stereotypes and finally, to resist the temptation to narrowly target the growing Mature segment of the gaming audience. When and if we accomplish all this we will, in the words of that great video game company, the Department of Defense, be all that we can be.
Ok, that was a long opening point but I'll cover the other five more quickly. The second issue we need to address is creating more complete game experiences. Keita Takahashi, creator of the game Katamari Damacy for Namco, which sold 120,000 units in 2004 and won both the Academy of Interactive Arts and Sciences Interactive Achievement Award and an IGDA Gamer's Choice Award for innovative game design, said at GDC that games should "be a happy part of life. I want to try to represent the feelings of love or of being young." How many games do you know that do that? And how many more people would play games, of all ages, if they did?
So we need games with more emotional impact. But it's about much more than the old "we need games that make people cry" nonsense. Games already do trigger a myriad of emotional responses including excitement, fear, gratification, success, pride, triumph, and more. But the Holy Grail for game designers should not be making games that do everything movies do. If that is our ultimate aspiration, we cannot lay claim to being the entertainment media of the 21st Century. But we do need to move past the conventions of the present.
We need games with better stories, more interesting and complex characters, games that keep you up in the middle of the night wrestling with whether you made the right ethical or moral choices, games that stay with you when you're done with them, games that make you happy when you play them, and afterwards.
Many of today's games are amazing creative and artistic accomplishments, and many are incredibly fun and absorbing. But we have only scratched the surface of what games can be. We cannot let the lure of onrushing technology blind us to the essence of what makes great entertainment. Great entertainment - whether books, film, or games, must engage us at some emotional level. If video games aspire to movie-like status, then games need to become topics of conversation at dinner parties and happy hours and they won't ever achieve that if they are mainly the province of an elite few who speak their own language, congregate in chat rooms and LAN centers, and have an endless amount of time on their hands.
Third, we need to make games more accessible and easier to play. It is an inescapable fact that many potential gamers are either intimidated by the technology itself - call it the "I can't even program my VCR syndrome" - or they actually make a stab at playing and after a few minutes throw up their hands hopelessly confused and discouraged. A basic principle of marketing is to draw the consumer in and keep them. Really great games should give the player a thrill from achieving success which, in turn, will make them want to play more. But too often in games, we make it a grueling and ultimately unsatisfying experience for newcomers, driving them away from our products, rather than capturing their loyalty. Let's be honest: no one likes to die over and over. For God's sake, we are the only entertainment industry which has spawned a collateral book publishing business which puts out 200 page guides so people can figure out how to play our games.
It seems so obvious that more games should be simple and easily understood. But with each generation, they get more complex. We need to find a happy balance between making a game appealing to the hard core but equally appealing to the newbie. However, this does not mean we should subdivide the gaming audience into two separate but unequal classes. Yes, it's fine to have casual games and complex games. But we also need games that work for both casual and intense users - games you can quickly enter and enjoy and play for 30 minutes or 30 hours.
And what if more games were shorter and thus less expensive? What if you could buy games for $49 if you wanted 150 hours of game play or games for $10 if you wanted 10 hours of game play? And if the development costs for these shorter games was correspondingly lower, imagine the potential to sell far more units at this lower price point. In fact, ESA's research found that 60% of Americans and 57% of gamers said they would be more likely to buy more games if they were considerably shorter in length and priced significantly lower.
Of course, part of the problem is that the inbred game culture itself will look down its nose at such games. Game reviewers will likely ignore such offerings as limited, simple, or shallow. Ah, but that is the point: we need games that are limited and simple and shallow, just like we need movies that don't tax our intellect and psyche but do provide a few hours of forgettable pleasure.
Fourth, we may need new financing models. Today, games are made in one of two ways: publishers fund internal development or they selectively fund external development. But the key word in that sentence is "publishers." As a practical matter, no one else funds game development.
It's hard to argue with this model. A doubling in the market in just over five years is pretty compelling. But if we are going to equal or surpass the film industry, I suspect we will need to find new sources of financing. Faced with development budgets of $10 million and growing, and with a hits dominated market where most games do not make back their R&D outlays, publishers are understandably selective about where they put their dollars. That means funds go either to internal teams with proven track records likely doing either licensed games or sequels, or it means funds go to external developers with a proven track record of delivering commercially successful products. Some of these development dollars do fund truly breakthrough games, and will continue to do so. I totally reject the view that publishers have some form of innovation phobia.
But ideally, we still need new sources of capital to fund game development, especially games that would be regarded as risky and outside the box. I think that money will be out there eventually. Just as the migration of the video game generation into the political and media elite will over time largely end attacks on the industry, their simultaneous emergence as an economic power will create new sources of capital. A few decades ago, kids dreamed of being movie producers. I think it is quite likely that a new generation may dream of being video game producers, the faceless folks with the names you never heard of that flash up on the opening credits of a movie. But instead of movies, these modern day financiers will look at video games as an outlet for some of their investment capital because unlike a prior generation, video games are what they grew up with.
Fifth, we must continue to develop emerging platforms, specifically online and mobile. Both remain niche markets where only a fraction of their potential has been realized. But both have the potential to power the video game industry past the film industry.
In the film industry, the focus remains on theatrical and DVD releases, with online seen as a secondary platform. But the video game industry has embraced online games as a primary platform. In a world where people are increasingly untethered from the couch, our industry is uniquely positioned to deliver content through online platforms, giving us a huge advantage relative to our film industry brethren.
We know that online games are huge in Korea. In China, the biggest growth market for all entertainment industries, our industry is better positioned to grow there than anyone else. Already, game companies are building successful online game business, focusing less for now on the piracy-riddled hard goods market. We can do it because we've integrated online games into our core business. Neither the film or music industry can say that. What's the potential? According to Niko Consulting, there will be an estimated 103 million Internet users in China by year end, and broadband penetration in major cities is a staggering 31%. Ours is only entertainment sector even capable of capitalizing on this market trend.
Here in North America, the potential of online games can be seen in numerous ways: take a look at how the developer Bioware, maker of hit games like Jade Empire and Neverwinter Nights has linked people with common interests and passions together in a growing virtual community, or how gamers flock to Everquest, or how Sims fans created hundreds of customized web sites, or how millions have embraced online console gaming. All of this bears witness to our industry's unique ability to connect people through community. We need to continue to exploit this competitive advantage over the film industry.
Mobile phones also offer the game industry unique advantages over the film industry. To date, the game industry has not created games that exploit the mobile handsets. In part, that is a function of the carriers and the network. Payment plans are confusing and costly, the phones themselves are often complicated to use, screen resolution is improving but not yet high end game quality, 3G service is being introduced painfully slowly in the US. But this market is developing. Screen Digest in the UK reported that the mobile games market attracted about $193 million of venture capital in 2004 alone. So the market is there for the taking, and when the video game industry figures it out, this will be a major growth driver I doubt the film industry can equal.
Sixth, and last, we need to overcome cultural resistance and fear.
The writer Steven Johnson, author of "Everything Bad Is Good for You: How Today's Popular Culture Is Actually Making Us Smarter" muses on his website about what the reaction to books would have been from parents, teachers, and other self appointed cultural guardians had they emerged as an art form years after video games. He imagines their comments would have sounded something like this:
"Reading books chronically understimulates the senses. Unlike the longstanding tradition of game playing -- which engages the child in a vivid, 3D world filled with moving images and musical soundscapes, navigated and controlled with complex muscular movements - books are simply a barren string of words on the page. Only a small portion of the brain devoted to processing written language is activated during reading, while games engage the full range of sensory and motor cortices.
"Books are also tragically isolating. While games have for many years engaged the young in complex social relationships with their peers, building and exploring worlds together, books force the child to sequester him or herself in a quiet space shut off from interaction with other children."
But books did not post date video games so books have an exalted cultural status. Meanwhile, as I stand here today, video games are under attack by politicians in states across the country. True, some of these politicians are certifiably extreme; some have their own ideological agendas; some are cynically exploiting media violence concerns for political gain, some are trying to curry favor with parents worried about raising their children. But all of these proposals to ban game sales are unjustified, unnecessary, unconstitutional and, ultimately most importantly, they're ineffective - they will never be enacted and they won't do a single thing to really help parents raise their kids safely.
But you don't have to be a cynical politician or a cultural extremist to raise questions about video game content. There are many thoughtful, rational people who share the concerns. And we ignore them at our own peril - they are the Moms and Dads who buy games and increasingly, play them. Disrespecting their concerns is dangerous indeed.
We can use things like the American Constitution's guarantee of free speech as a shield to legitimize virtually any content. Indeed, the very essence of art is that it has no boundaries, and the critical acclaim accorded various paintings, photographs, or books attests to that. But I submit to you it is one thing to say a product is protected speech, which it is, or that it is rated and parents need to accept responsibility for what their kids play, which they do. But it is quite another thing to say we have no larger responsibility for shaping the quality and values of the culture we live in.
We've all seen games that depict content which is constitutionally protected artistic expression and yet which also raises the question of whether it really was necessary to realize the designer's artistic vision. That's not a call for censorship or government intrusion into video game sales. But it is meant to say that it is fair for critics, and us, to ask whether everything that is cool and pushes the envelope is, in fact, creatively necessary.
Long time game developer Ernest Adams says the industry needs "cultural cred." He's right. Acceptance in the culture is the key to legitimacy. None of us were alive when film first came on the scene but historians will tell you it was not regarded with great and instant acclaim. Our industry is just thirty years old and has produced more than its fair share of classics. No doubt, many more will come. But if we as an industry aspire to the same cultural and artistic credibility and stature achieved by other major forms of entertainment, our creative community and our publishers will have to eschew some of the historically easy and successful formulas for commercial success and draw consumers into some new kinds of interactive entertainment experiences that more often ennoble our industry.
Things like The Serious Games Movement and The Education Arcade are an important part of that. The fact that the Federation of American Scientists whose Board is populated by Nobel Prize winners is developing video games, funded by a grant from no less a symbol of America's intellectual might than the National Academy of Sciences, is evidence of the growing sense beyond our industry of the potential for video games beyond the living room.
Similarly, the recent Harvard Business School Press book "Got Game" further validated the legitimacy of video games in the culture by reporting that by playing games, new entrants into the work force of today and tomorrow are bold but prudent risk takers, have a strong ability to multitask, have strong leadership skills, are more sociable, are more creative and have better problem solving skills, and are less easily discouraged.
In the end, cultural cred will come as the video game generation itself grows into positions of power and influence over politics and culture, as today's GTA fans become tomorrow's Senators and editors. But in this period where we are no longer cultural outsiders, but rather are at the center of defining and creating the culture, some self criticism and self examination is healthy. Burying our heads in the sands or adopting a bunker mentality is an immature response.
So there you have it - broaden the market, create more complete games, make games that are easier to play, evolve new financing models, exploit emerging platforms, and solidify cultural credibility -- six easy steps to world dominance. Can we do it? Absolutely. Will we do it? Speaking of matters somewhat more profound than video games, Robert Kennedy said that the "future does not belong to those who are content with today."