June 11, 2009

Digital Downloads Threaten Video Game Stores

Video game retailers, such as Wal-Mart, Target, and GameStop, are concerned that Internet distributors may soon push them out of the video game market.

At last week's E3 Expo in Los Angeles, retailers spread out across large booths showcasing games like Activision's "Transformers: Revenge of the Fallen."

Despite efforts from retailers, games continue to turn to "streaming" online games, or downloading games rather than purchasing from a brick-and-mortar store.

"Our solution is not to dive into a fight with Sony (Corp), Microsoft (Corp), Nintendo Co Ltd, as it wouldn't gain any 'new audience' for publishers," said industry veteran Dave Perry, whose Gaikai online system lets PC gamers buy and stream games through their Web browsers without needing to download any content.

"Instead, our strategy is 100 percent focused on being an ally to publishers and first-party hardware makers, by delivering them audiences they don't reach today," he added.

Digital downloads are still a small business, but according to the NPD group, 17 percent of games sold in 2008 by PC gamers were digitally downloaded.

According to Michael Pachter, analyst for Wedbush Morgan Securities, digitally downloaded games will account for nearly 2 percent of industry sales this year, or around $400 million.

Pachter expects that number to double annually for a few years, to $800 million in 2010 and $1.6 billion by 2011.

"As broadband penetration increases and the Internet connection migrates to the living room, downloads or cloud computing solutions will become much more viable," he said.

"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," said Pachter, assuming an overall market growth of 5 to 10 percent annually.

Recently, overall video games sales have slowed, leading publishers and developers to seek new ways to reach customers.

Some retailers are still resisting the digital format, arguing that third-party online distributors will cut margins for developers and retail chains.

According to analysts, large retail stores like Target and Wal-Mart have yet to embrace digital video game sales.

"Nothing that has been digitally distributed retains the same value as a retail version; it's always less," said GameStop CEO Dan DeMatteo.

Today's consumer is used to getting content on demand, but video games on demand are still hampered by the limitations of a user's personal computer.

Some companies are trying to work around that problem.

For the past seven years, Steve Perlman has worked to develop OnLive, a digital distribution box that offers high-definition PC games for low end hardware.

OnLive has already worked out deals with Electronic Arts Inc, Ubisoft, Take Two Interactive, Warner Bros. Interactive Entertainment, THQ, Epic Games, Eidos, Atari and Codemasters. 

The company showed off 16 games at the Game Developers Conference in March, but was not at this years E3 show.

OnLive is set to launch a subscription service this fall that will be similar to Microsoft's Xbox Live service.

According to NPD, 18 percent of Xbox 360 users with a "Gold" membership regularly download from Xbox Live Arcade, while 10 percent of PlayStation 3 users buy from Sony's digital PlayStation Network.

Valve Software's Steam is the largest independent games distribution network, boasting 21 million users and 700 games.

According to Doug Lombardi, vice president of marketing at Valve Software, digital distribution has already been embraced by the video game industry.

He believes the benefit of digital distribution may be the ability to provide extras and automatic updates to games.

"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," Lombardi said.


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