Digital Downloads Threaten Video Game Store Biz
Are
digital downloads about to do the same to video games as they’ve done to
music CDs and will it mean the end of video games sold in stores?
Today,
digital downloads remain a relatively small portion of the overall video
gaming market with roughly 17 percent of sales in 2008, based on research
from NPD Group. According to the research firm, about 18 percent of Xbox
360 users who have a "Gold" membership regularly download from
the Xbox Live Arcade. Around 10 percent of PlayStation 3 users buy downloads
from the Sony PlayStation Network.
Wedbush Morgan Securities analyst
Michael Pachter told Reuters, "Downloads
will become 20 percent of the market within five years, and probably peak
at around 50 percent of the overall market in 10 years."
Not
all are ready to hop on the digital download bandwagon and a number of
major chains, notably Wal-Mart Stores and Target, are not involved in game
downloads at this point.
One
of the major advantages of digital downloads is the ability to update and
upgrade games almost instantly.
Doug
Lombardi, VP of marketing at Valve Software, told Reuters, "Now
that games can be connected to their
audience, they will last and grow well beyond their traditional 6-month
to 1-year sales cycle."
Discussion Question:
Will downloads kill the video game store business? What should stores
be doing now to address the small but growing demand for digital downloads?
I can’t say for certain that video games will follow the same pattern as music or movies but I would predict that digital downloads will increase significantly. The concept of downloaded add-ons for certain games is lengthening the life span of current titles. Rather than updated sequels every 6 months, developers can now get 12 months out of a tile by providing a downloaded add on for a price…and game players will buy them.
The gaming market lends itself more to a hybrid approach than other digital media. While you can download games to something like a PS3, it’s a hack to create a backup, so you’re basically betting your gaming investment on the strength of the hard drive. There are still some reasons why having the disc is better. However, add-ons, features, extensions, etc. as noted can extend the life of those discs significantly. As a result, I don’t think digital games will approach the level of digital music or even books, at least not until the bandwidth and storage is good enough to support digital movies. And while that’s getting closer every day, it’s still got a ways to go.
The ability to download provides benefits to both the people buying/upgrading their game and the people writing the software. The gamers get faster access to the newer versions (not having to wait for all the issues the come along with marketing and distribution of a physical product). The software producers lower the cost of getting their new game into the markets and, as pointed out in the article, this provides the opportunity to extend the life cycle of the game. There is not doubt that this practice will continue to grow. The only question is the rate.
I suspect this will take longer than analysts expect. After all, this trend has been declared inevitable in music and movies for well about 15 years now. While it finally did happen in music, it still hasn’t happened in movies (think about what has hurt Blockbuster–digital downloads aren’t in the top two reasons). In the end, of course, digital will dominate.
For the retail stores to survive, they need to recreate themselves to be more of a destination, and offer something that gamers can’t get online. They should host monthly tournaments for local players, with annual championships. Create more of a community around their stores as opposed to simply retailing. The stores need to work with the game developers and create exclusive offers that can only be obtained at store level. For example, the retailers can create a mash-up machine that would allow users to create their own games by utilizing characters from one game, and moving them to another.
The retailers need to get creative, and really look at how the shipping “experience” in a brick and mortar store can be significantly different and better than what a gamer might find online. The music business did not do this and it was a huge mistake in strategy. The game industry can’t and shouldn’t make the same mistake.
I wasn’t going to comment, but these responses seem to miss the key point of network-based game delivery: COMPETITION. By delivering a game over the network, the host can support multiple players in various geographic locations all competing against one another. Just as poker sites support remote users, virtual Wii competitions will develop over the Internet. Yes, this will take some time for the network to build out a little more, but with fiber replacing coax and the stimulus money being dedicated to broadband expansion, it will be coming sooner than many expect.
Downloads will be the vast majority of the business for all product categories where it is possible to do so, within ten years. If I’m wrong, feel free to mark your calendars for ten years from now and send me a letter via snail mail. (By which time most people under 25 may not even know what a stamp is.)
Bill, networked play is equally possible with a disc-based game as long as it is written properly and the console is connected to the network. I do think that unless there are tangible benefits to physical distribution, the road ahead leads inexorably toward online distribution of digital media. Music and games delivered online still provide lower quality (regardless of whether most people perceive a difference) than their disc-based counterparts, and it’s possible that the highest-res graphics will only be available on games delivered on physical media. But that advantage will be reduced if not eliminated over time.
Al, I agree with you 100%.
I’ll go so far as to suggest that at least 75% of all PC games and well over 50% of all console games will be downloaded within 10 years.
There are multiple drivers:
1. Over the next 10 years most new people gaming will have grown up with downloadable games. This will be seen as a normal channel, not just a a “new thing”. It will be the default way to acquire new games.
2. Content delivery solutions like Impulse have started to understand and trust gamers and revolutionized digital rights management in a new and good way. Being able to download a game and then play it on any computer you own without having to have the disk is a significant advancement from having to have a copy of the disk. And what if that disk gets scratched?
3. Digital downloads are more environmentally friendly. No printing of manuals, boxing of product and no shipping costs.
4. Through digital download you will be able to get almost any game you want. Most stores have a very limited supply. This is especially true when stores focus on carrying only big titles beyond the first month or so after the release (because most titles sell 80% of all they will ever sell during the first 2-3 weeks after release).
5. You can get instantaneous satisfaction with a download as opposed to having to wait to get to a store – and hope it is in stock – or ordering it for delivery.
6. The move to cloud computing will affect many people. The ideas around thin client, low system requirement gaming promised by OnLive and the AMD Fusion Render Cloud will even remove the need to download games at all – just log in and play since all the graphics horsepower will come at the cloud end.
7. You can already download additional content for blu-ray video and audio titles. I believe we’ll start to see significant blurring of the lines between different media.
I suspect there are more things I could list, but I’d suggest a different question. “During the next 10 years, what do retailers and game distributors need to do to manage an ongoing B2B relationship so that costs are kept in line with the uncertain-in-timing but surely to happen decline in the physical supply chain?”
For those retailers that need to address digital sales reporting, the key will be to tie that reporting into traditional B2B mechanisms. Whether the products were virtual/digital or physical, you need to tie the total sales together and provide different channel reporting to brand owners and publishers.
Digital downloads will threaten the video game store business and result in a change in business model as soon as consumers have greater confidence in their storage devices and publishers provide a digital receipt for re-installs in cases of hardware failure. We know that some of the largest publishers are already moving this direction–like Microsoft who has said in the next 12-18 months they will eliminate all CDs and printed materials. The role of the local video game store needs to transition to be more focused on service (knowledge of titles, peripherals…) community (events, forums…) and trends (new titles, comparisons) etc. the same fate may soon be on libraries and book stores as well.
Digital downloads are the wave of the future. Brick and mortar solutions, to retail digital content of any type (CDs, DVDs, Games, music, movies, etc.) is absurdly outdated considering the shift and support to do all of this online. Each year the online downloading community only gets larger. This is the precursor to the future. Either these retailers establish themselves as a strong online presence now, while phasing out their on-ground presence, or they will be phased out. Adapt or perish!