A wave of consolidation is about to sweep the computer games industry. Small software developers can no longer afford to develop games for the next generation consoles and are being forced to sell out to their bigger rivals.
Twenty-eight per cent of the UK’s top 350 computer games publishers will disappear in the next year, according to a report by technology consultancy Plimsoll Publishing.
The European games consoles market is set to be worth &£3bn by 2003, and it will be dominated by a small group of “super publishers”. Industry sources say the cost of developing a game for the new 128-bit consoles such as Sony PlayStation 2 and Microsoft X-Box, could be &£3m, and it takes a team of up to 80 people 18 months to create one.
Small developers are already struggling because of the transition to new hardware: consumers are rel uctant to pay full price for games for 32-bit consoles, such as PlayStation 1, while they await a successor.
Sony launched its new console, PlayStation 2, on November 24. About 70 million are expected to be sold in the next three years.
But games developers have been hit hard by the delayed arrival of the console. Eidos, manufacturer of the Tomb Raider games, last week reported pre-tax losses of &£82.3m on sales of &£54.3m.
Short-term, the situation looks bleak. Games sales are not predicted to improve until 2002, when the new consoles will be widely available, according to media research company Screen Digest. The industry will continue to suffer from discounted retail prices on software for the older consoles. There will also only be a small number of games available for the new consoles.
The UK computer games industry, worth &£1.5bn, spent &£25m on advertising last year (AC Nielsen MEAL). This is likely to increase as fewer, bigger companies compete to produce hit games.
But publishers must strike a balance between developing projects for new, untested machines and those for existing platforms, whose market could collapse within months with the launch of new hardware.
Industry sources say developments in the gaming capabilities of Internet-enabled phones and digital TV will help protect bigger companies against future slumps in profits during transitional phases. But smaller companies will have no choice but to concentrate on their core business.
The situation is compounded by the escalating cost of software development, growing demand for licensed products, the widening gap between market-leading games and other titles, and the relatively short lifespan of titles.
Merseyside-based developer Rage Software, which floated on the stock exchange in 1994 and which has acquired four smaller games companies in the past year, foresees more consolidation in the industry as a result of rising development costs.
“We are at the beginning of a cycle of new platforms. The costs for developing games for these platforms are higher than ever,” says Rage head of communications Glen O’Connell.
Rage launched Wild Wild Racing for PlayStation2 last month and is planning to launch another seven PS2 titles over the next 18 months.
“The average PlayStation 2 game will cost &£1m to develop – a hell of a lot for a small business that is used to spending a couple of hundred thousand on a PlayStation game. If you are a small business you may have to look for a bigger company to buy you out or take a stake in the business to survive,” says O’Connell.
Eidos blamed its &£54.1m one-off costs on the uncertainty ahead of the launch of PlayStation 2, as well as Microsoft’s X Box and Nintendo’s Dolphin, both due out next year.
Eidos executive chairman Ian Livingstone warns that the short-term outlook remains uncertain. Because games can take years to develop, companies need to grab licences for sports stars and brand names – and the bigger publishers have the most financial muscle to secure rights.
Livingstone says: “Quite a few companies will be gone by the end of next year, although the 25 per cent estimate seems high. The survivors will be those that own content and do not have to rely on winning licences. It is predicted that there will only be 20 million PlayStation 2 consoles worldwide by the end of next year so it will still be another couple of years before we really see the end of this hardware transition.”
Games companies must also find and nurture creative talents who can develop innovative games. Rage, for example, has grown from 80 people to 265 in the past 12 months.
Darren Carter, European marketing manager for PlayStation, believes there is still room for smaller, independent companies: “Consolidation has been going on since before PlayStation 1 came out. There is a cyclical effect between one generation of hardware and the next which allows companies to dis app ear and come back in different guises.”
The danger is that creativity will be sidelined as the industry becomes dominated by a few giants competing to produce blockbuster games
The challenge will be to strike a balance between securing licenses for big brands while still producing titles that are original enough to grab the gamers’ attention.