And how their absence may bring about an industry collapse

Last week saw the downfall of Lucas Arts. Sadly this was not an isolated incident but rather another example of a videogame company shuttering its doors. Lucas Arts now joins the company of THQ, Zipper Interactive, 3D Realms, Pandemic, Silicon Knights and Infogrames/Atari in the failed videogame companies category. Even more illuminating is this thread on NeoGAF, which listed every studio that has closed since 2006. Many of these Publishers/Developers were mid-sized companies that produced modest selling games and were neither giant video game companies nor small indie studios; a middle class if you will.

When looking at the videogames marketplace as a whole, there are roughly 8-10 major video companies in the industry. These are your multibillion dollar companies; Activision Blizzard, Electronic Arts, Bandi Namco, etc... Conversely, there has been a major increase in the number of small indie game studios who focus on mobile, downloadable or PC platforms. Studios that only hold anywhere from five to thirty employees at most, and can end just as quickly as they begin. If you apply the videogames industry to basic economics, we have a clearly defined upper, middle and lower class in terms of revenue when it comes to video game companies. The problem is that these middle class companies, as described above, are disappearing at an accelerating rate. Basic economics tells us that an economy cannot sustain itself without a strong middle class, let alone no middle class at all.

This is a very alarming problem for the video games industry. Just as a three legged stool cannot stand, the videogames industry it is setting itself up for long-term unsustainability. The absence of strong middle class companies means that revenue has to be made up between indie developers and the major video game companies. Think of the middle class as a balance protection for the industry, one that help indie developers grow and kept major publishers in check from becoming too big. Without this failsafe system, the industry could go into downward tailspin. Without this middle class, the indie and mega companies may succumb to their own inherent challenges.

Indie game companies don’t typically make money, risking large sums of money to hopefully break even. Costs add up quickly, as the company has to provide salaries for its employees, healthcare benefits, computers, dev kits, etc.. These costs mean the game has to sell in order for a studio to even get back the cost it took to produce it. Game Dev Story is not an accurate depiction of the stress and risks involved for indie developers. Even when a game does very well, both critically and commercially, it does not mean a company can sustain itself. Jonathan Blow’s Braid was a smash success and it would be very easy to assume that his future looks very bright. However, just to even make his next game, Blow had to put all of the money he made from Braid into his next title ‘The Witness’. If ‘The Witness’ is a sales flop, that means we may never see another game from Jonathon Blow.

Indie developers in the mobile and tablet marketplace face and even more challenges. Angry Birds exploded on to the mobile scene and virtually printed money for developer Rovio and this gave a great confidence in the market, and many developers jumped in head first with their games to get in on the profit. What they didn’t realize, is that there is a very real problem with pricing of mobile games right now as it relates to development. Mobile pricing is set at $0.99 for an app and in some cases the games are free. Think about that from a numbers perspective; if a $0.99 app sells 100,000 copies it can maybe pay the salaries of two to three employees for one year. Those meager returns are earned only if you are charging for your apps. Not to mention that the mobile games space is incredibly sporadic and unpredictable. People pick up games just as fast as they stop playing them, so unless your game is Angry Birds, free to play apps cannot generate the revenue need to keep indie developers in business.

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While indie develops problems lie in trying to get big enough to achieve sustainability, on the opposite side of the coin large video game companies face the problem of getting so big that they can no longer sustain themselves. The declining videogame middle class should systems last year as developers released 1/3rd fewer games than a year ago and in December game sales fell 26% across the board. Yet in this weakened marketplace, the upper class of video game companies are making more than ever. CNBC reports that:

“It's increasingly a hit driven business, with the top ten titles generating a larger share of game sales—12 percentage points more—than a year-ago December.

NPD said one reason the sale of games declined was the fact that there were simply fewer new releases—29 percent fewer new titles across the industry.”

The results are clear; the bigger titles are earning more money than ever before. Call of Duty: Black Ops 2 was the best selling game last year and made $13.26 billion dollars. The lack of middle class competition means that the upper class is earning more than they ever have, but this comes with a heavy cost to publicly traded companies. Shareholders expect videogame companies not just make the same amount but to earn more money from year to year. So in order to ensure they hit their numbers more sequels are invested in, new IP’s are less common and sales goals continue to go up to the point where they cannot possibly be met. We live in a world where a game like Square Enix’s Tomb Raider sold 3.4 million copies but was considered a failure. For a middles class game company, selling 3.4 million copies would be a success. For the upper class, this means laying off studios, firing CEO’s and putting larger sales goals on other titles in hopes of making revenue to show to their shareholders.

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Nothing last forever, and as THQ proved upper class gaming companies can fall. However, there will be no bailout for these large publishers. In a healthy marketplace, when one of the big videogame companies would fail, it would make an opportunity for a mid-level studio to move up in their place. In a world without a videogame middle class, when a giant falls, no one replaces it and the industry shrinks. When these companies fall, people will lose their jobs and games won’t be made.

The gaming middle class helps set consumer expectation when it comes to price. It gives money to small indie games to make them bigger and help them reach more audiences. It helps drive innovation by developing new ideas outside of sequel driving releases of big publishers. A video game industry without a middle class, is one where it is crushed under the weight of the big studios, and unable to thrive under indie only development. We are not there quite yet and it is too early to declare it so, but if a world without a videogame middle class is the disease, we are showing the symptoms.

DanimalCart’s Soapbox: 04/10/13