Is corporate greed crippling the video games market?

Japanese videogame developer, publisher and distribution company Square Enix – chiefly of Final Fantasy, Dragon Quest and Kingdom Hearts recently announced net losses for this financial year of £87.6 million. That’s a lot of money! And was a significantly larger loss than the company expected, following a large and costly restructure earlier this year and also after three of their big hitters Tomb Raider, Sleeping Dogs and Hitman: Absolution all fell short of sales targets – despite selling around nine million copies between them.

Square had expected losses of around £64 million due to the expensive restructure but obviously their losses were much higher. I think their explanation for these losses is very interesting, Square Enix cite a huge drop in international sales as well as an “increasingly competitive and oligopolistic” market in Europe and the U.S. Let me say here that I am not an economist and so I don’t understand the subtleties implied by the term “oligopolistic,” but my limited understanding is that an oligopolistic market is one in which a very small number of companies hold a dominant market share, so much so that decisions made by any individual firm have a large and direct impact on all the others. UK supermarkets are a good example. What I find strange about this is Square’s naming of this climate as the reason for its failures, when the company itself has made such a smash grab for other studios over the past decade. Square Enix was already the product of a merger between Squaresoft and Enix in 2003, it acquired Taito Corporation (Space Invaders and Bubble Bobble) in 2005, attempted a friendly but unsuccessful takeover of Tecmo (Ninja Gaiden and Dead or Alive) in 2008, and in 2009 took over British publisher Eidos Interactive (Tomb Raider, Hitman, Deus Ex, Thief and Timesplitters).

It is a point of fact that the videogame industry, at both the development and distribution ends, is tending ever closer to monopoly. Fewer and fewer companies are making games and each company is making fewer games. Each game costs more to develop and has a larger share of the market, meaning it needs to sell more copies in order to turn a profit. Games are expensive, luxury items when purchased new and close to the date of release (around £40 on consoles) meaning that most players can only buy a couple new a year and are often very choosey about the games that they purchase. This year’s Tomb Raider reboot was the most successful UK videogame launch of all time and the game sold more copies than any other in the franchise’s history and yet it still did not meet its sales targets. Let’s not forget previous Tomb Raider games didn’t exactly sell badly.

So what happened? How did we get to a point where record high sales are resulting in millions of pounds of net losses? Well, let’s step through it. I’m an average gamer, at any given time I will only buy one game, because they’re expensive and will keep me occupied for a relatively long time, and so the developers want me to buy their game, because after I’ve bought a game I will not be a potential customer again for awhile. The developers and publishers are almost all large entities and if I buy a game from one of them I am not buying a game from one of their competitors, because each game takes up such a large market share lost sales on one game make a big impact for the publisher. Because each publisher is so large they require lots of sales to sustain themselves, therefore every game released is a large gamble for its publisher. What are their solutions? Make the game safe – something like what you played last year – but bigger, louder, more explosions, more violence. If it can make more noise than the similarly familiar game your competitor has just released then you can count on increased attention and higher sales. The problem is more noise and explosions is usually also more expensive, and so the publisher can put out even fewer games, increasing the market share of individual, high profile titles even more, meaning higher sales of these titles are needed, and the problem compounds on itself.

The videogame industry, in both development and distribution, is tending ever closer to monopoly. Each game costs more to develop and has a larger share of the market, meaning it needs to sell more copies in order to turn a profit.

Another, even darker, solution that many developers and publishers are grasping for is vicious anti-consumer policies. Here are a few choice examples, there are many more currently in use:

• Force us to buy games new and before the price can dip down as retailers try to clear shelf space. Online activation allows game publishers to detect whether a game has been purchased new or not and often locks the player out of significant content, like multiplayer, unless the player purchases an unlock directly from the publisher, often priced at a significant fraction of the games cost new.
• Significant content being stripped from games and sold later as “downloadable content” expansions. Often content that a few years ago would have been included in the initial purchase (sometimes, as in Alan Wake and Mass Effect 3 the actual endings of the game), making the game feel incomplete unless a usually overpriced expansion is purchased. An even more troubling trend is that many more companies are releasing significant downloadable content on the day that a game is released and sometimes even having the extra content on the physical game disc, in which case your £12 download is for a key to access content you have already purchased.
• Shorter and shorter games. If you’re still busy with last month’s game why would you buy this month’s? Or any downloadable content? Also a prevalence of games with significant multiplayer but very little single player content. Multiplayer focused games require popularity to work, you need to know you’ll have lots of people to play with, and so you buy new, at high prices, in order to guarantee that people will still be playing. This also handily forces you to keep buying DLC map packs and other extras in order to keep up with the player base.

Games like Call of Duty encourage online mutliplayer, but at what cost to the consumer?

Because the market is oligopolistic the small number of companies that dominate either explicitly or implicitly collude with one another and all implement policies of this kind. No one competes by treating the consumer with dignity and so the consumer gets shafted. By doing this developers and publishers are shooting themselves in the foot though. Why? Because the net effect of all this is that people who buy games have less money, so buy fewer games and so publishers increasingly rely on a few high profile titles etc.

The basic problem is that the videogame market operates at extremes. You have the ultra high budget, blockbuster, require record sales to compete videogames, you have cheap, very low budget, independent game made by teams of usually less than ten, and then you have the ultra-cheap, ultra low budget but largely disposable games for smart phones. Like Ubisoft Montreal (Assasin’s Creed) CEO Yannis Mallat said, “there is no room for B-games.” The middle market has vanished. It is no longer viable for the companies with a dominant market share.

Let’s look at two of Square’s multi-million selling failures this year, Sleeping Dogs and Hitman: Absolution. Hitman is the latest in a long running franchise and Sleeping Dogs is the re-named True Crime 3 (Square Enix bought the game after Activision Blizzard, the product of another large corporate merger, cancelled development. Square did not purchase the naming rights). These two games have one thing in common that sticks out to me. The True Crime and Hitman series were very successful middle market, middle budget games. They sold well but neither of them were spectacle driven, crowd pleasing block busters. Square Enix, however, attempted to retrofit these franchises into the AAA mould, paid a AAA budget and expected AAA sales. They paid the price.

[pullquote style=”left”]The middle market is equally, perhaps more, important. The combination of freedom and restriction that comes from medium sized financial backing is a great catalyst for creativity[/pullquote] It’s not that I don’t like big deal videogames like the Bioshocks and the Call of Dutys. It’s just that the middle market is equally, perhaps more, important. The combination of freedom and restriction that comes from medium sized financial backing is a great catalyst for creativity. Devil May Cry, Street Fighter, Tekken, Final Fantasy, The Sims, Theme Hospital, Thief, Jack and Dexter, Guitar Hero, Spyro, Mario Kart, Mortal Kombat and many other beloved franchises either began or always remained middle market games.

Recently Portal, Persona 4, Team Fortress 2, Bayonetta, No More Heroes, Torchlight, Phoenix Wright and Professor Layton have provided inventive, polished, fun experiences that have driven the medium forward. A lack of games like these would not only be an unfortunate state for the industry, but I think it would struggle to survive without them. Certainly not in any way that rivals the heights it has been to previously.

My hope for the future is that some of the promising indie developers like Super Giant Games (Bastion) will use their success to grow into medium sized entities and begin to fill the middle market gap, hopefully at reasonable prices. More games are released, each game takes less of a market share and people buy more, but less expensive, games. The big publishers realise that spending vast amounts on single games is no longer viable and so make a larger number of smaller games in addition to the blockbusters themselves. Letting some of their subsidiary developers develop on a scale closer to where they’re comfortable. We have diversity of content and legitimate alternatives for consumers which discourages anti-consumer practice. We have lots of great games sold on interest and quality rather than an unsustainable increase in spectacle and scale. Fingers crossed, I guess.