Russ Pearlman's Blog

Following their most recent financial period, Nintendo’s CEO Satoru Iwata was asked the following question:

Question: I’d like to ask about your company’s online strategy as a whole. During the last Game Developers Conference, so many third parties were showing iPhone applications that I expected a surge in their download sales. How does President Iwata evaluate iPhone? How do you feel about the current situation of Nintendo’s WiiWare and DSiWare? What is your future prospect?

Answer: People often said that Nintendo and Apple share much in common and I’ve often been asked how I feel about Apple products because I myself have been using Apple products.
Quite recently, media have been reporting that iPhone is a rival to Nintendo DS, but I do not strongly agree mainly because of the difference in the customers. For the customers with whom we have the most strength, it must be rather difficult for Apple to reach, and for the customer base where Apple has the biggest strength, Nintendo products would have a hard time in receiving their appreciations.
About online sales in general, if people ask such extreme question as, “Do you think that 20 years from now, customers will still be visiting retail outlets in order to purchase the majority of software in packaged format?”, I will then have to answer, “well, perhaps, the situation will be different.” However, if I am told, “within a couple of years from today, there will be no retail outlets which will be selling packaged software,” my reaction must be, “there’s got to be something wrong with that assumption because I do not believe people’s behaviors can change in such a short time.” …

I think his answer demonstrates two blinds spots from Nintendo’s perspective:

• On the DS vs. iPhone front, Iwata believes that the different demographics for these two devices is sufficiently different that he can continue to rely on the DS dominating as a portable gaming device between the two. As I’ve stated on this blog before, my own son asked me for an iTouch to replace his own DS. He sees a huge advantage over Apple’s App Store, and he really enjoys the form factor much more – especially with the accelerometer. You’d think that Nintendo’s own success with the Wii would make them think of that too, but alas, they seem to be publicly saying that the DS is fine just the way it is. After all, the newly introduced DSi isn’t terribly different than previous generations.
• On the connectivity front, I think Iwata has it totally wrong. I wonder what the CEO’s of the music industry said about digital tracks during the time that physical retail CD packages were so successful? I wish he would elaborate on what he thinks the ‘advantages’ are for physical retail products. In my mind, there are huge downsides including the cost of goods sold (i.e., physical packaging), fixed cost vs. variable cost, lack of monetization model flexibility, etc.

Sometime over the next few weeks, Capgemini will be releasing a Video Game segment POV (point of view). In that POV, we will be highlighting a number of the points above along with some other broader points about consumer behavior. I will also be attending E3 June 2-4… I do hope that I have the chance to speak with someone at Nintendo during the conference, because I really do believe that the answer publically espoused in this response should not represent the future thinking of Nintendo. If it does, I believe they will be dramatically hurt by the expanding Connected Entertainment revolution.

Congratulations go to Apple – their application store has achieved over 1,000,000,000 downloads in just over 9 months. Their current rate is about 100 million downloads per month, which I expect to pick up significantly when they release the 3.0 update this summer (due to support for micro-transactions).

While 1,000,000,000 is an impressive number (that’s why I’m not just spelling it out – it looks so much better with all those zeros), what does that really mean in terms of revenue for Apple? The majority of those applications are free, but we can probably piece together a reasonable idea:

• Back in August of 2008, Steve Jobs told the WSJ that Apple sold about $1 million per day at the application store. Today Apple sees at least 2x the traffic it did back then, so we could use $2 million per day as a conservative estimate.
• Apple takes 30% of sales, which translates to $600 thousand per day for Apple.
• Given that figure, Apple should expect revenues of $20-25M annually coming from the application store.
• Additionally, Apple charges $99 or $299 for developers. While I haven’t found any credible source for the # of developers who have subscribed to Apple’s iPhone developer program, we do know that there are over 15,000 applications on the store. Given a 2:1 (applications per developer) ratio, that would equate to only 7,500 subscriptions or only about $750k. (Even in a best case scenario, this does not represent a huge revenue opportunity for Apple.)
• While I can only speculate on what micro transactions will do for the future, I would expect the average application price to drop (from about $1.75 today) since many developers will lower their base price looking for add-on fees. But, I expect those add-ons to dramatically increase their overall revenue.

So, based on my own analysis, I’d predict that Apple will see roughly $25M (and growing) anually from the application store. I would expect this to grow significantly with microtransactions – my prediction is that we could see a 25-30% growth followed by a rise in base pricing as the overall quality of premium applications increases within the application store. For Apple, I think that would translate to roughly $35M annually.

Just $35M?! Yep. Even a succesful platform like Apple will only see revenue roughly equal to one of it’s most successful applications. So, Apple better get in the game (pun intended) if they want to significantly raise that number. My suggestions:

• Start to understand consumer behavior and use that to your advantage: advertising, demographic research that you can sell to developers/publishers, etc.
• New monetization models such as subscription based pricing (to a set of Apple or premium developer titles), premium service offerings (App Store Gold which allows users to connect socially, play multi-player games, etc.)
• Certification / rating services – provided for developers to ensure that games / applications are of high quality; getting the Apple stamp not only helps filter out the games, but Apple makes money 2 ways: 1) charging for the certification itself and 2) collecting a higher premium since those applications are likely to charge consumers more.

1,000,000,000 is an impressive number Apple… 35,000,000 – not so much…

The Inquirer recently reported that Bob Dredbin has joined Apple. Bob is the former CTO at AMD and has extensive experience at Silicon Graphics, ATI, Artix and LucasFilms.

I think that this move shows that Apple is starting to take mobile gaming even more seriously. Of course, with the major success of the application store and the push for micro transactions in the iPhone/iTouch 3.0 software update coming this summer, they have reason to be serious.

I often ask the trivia question to friends and colleagues: what is the top selling gaming platform? Many guess the Wii, others think it must be the PS3 because of BluRay and others think that the XBox 360 is probably tops (at least in the United States). Usually, they fail to think about the Nintendo DS – which outsells the other 3 significantly.

I bring this up because my 10 year old son, who owns a DS himself, has now saved enough money (from birthdays, etc.) to buy an Apple iTouch. He doesn’t care about music or videos – he wants to play games! I wonder if Apple could eventually outsell the major consoles. Certainly the consumer form factor is there, the portability is there, the low cost purchase point is there, there is lots of gaming content available and it provides connected entertainment to Facebook, MySpace, Twitter, IM and email.

My big bold prediction. Sales of the iPhone/iTouch will outpace at least 1 of the major console players this Holiday sales year. And, DS/DSi/Gameboy and iPhone/iTouch will collectively outsell all consoles combined.

Are video games too expensive?

Warren Spector, video game industry giant, thinks so. During a recent interview, he said: “We’ve been a niche medium that over-charges for its product and therefore generates a lot of revenue which makes us a little bigger than Hollywood, which is crazy.”

Let’s compare:

• In 2000, a ticket to the movie theater averaged $5.39 while today, it averages $7.20. (According to BoxOfficeMojo.com) That’s a 133% increase in price.
• In 2000, Deus Ex (one of Spector’s games) sold for $49.99. Today, the full retail price for most games is $59.99. That’s a 120% increase in price.

So, movies have gone up in price more than video games over the last 8 years.

But, the more important fact all comes down to revenue — not just price point. In 2000, the Academy’s movie of the year was Gladiator. It’s for sale at Walmart on DVD for about $13. How about Deus Ex? Amazon / E-Bay has listings as low as $1.99 and as high as $4.99. Wanna bet if there is any royalty payment going to the publisher for those copies?

And, how many retail channels were there for Deus Ex? Let’s see …. there was retail and rental. For the video game industry, rental only involves a single royalty payment, so you pretty much get just one – retail. And, after the first 6 months, you pretty much see little to no revenue coming in.

How many retail channels for Gladiator? Well, you had the theatrical release. Then there is alternative releases through airlines, pay-for-view hotel, cable / satellite pay-per-view, premiums channels (i.e., HBO, etc.), network syndication (i.e., ABC, TBS, etc.), re-release on Blu-Ray disc, director’s cut re-release, etc. etc.

Would consumers be happier with lower prices? Yes. Should game developers / publishers look for opportunities to lower price? Yes. Absolutely. Should Warren Spector’s Disney Interactive and Media Group (DIMG) lower prices when they lost money last year? No. Should individual development shops get a lower $ per unit sold? No.

If you don’t fix the retail channel, you won’t fix the problem. And if you don’t fix the revenue opportunities, you won’t fix the problem. It doesn’t come down to just price per unit… it comes down to changing revenue opportunities for video gaming.

A new study from Screen Digest has some rather interesting tid-bits:

• The subscription based MMO (masively multiplayer online) gaming market grew 22% in 2008
• World of Warcraft enjoys a 58% market share of the US and European based subscription MMO marketplace (this is actually down from 60%, though the revenue numbers are up due to the 22% growth)
• Since it’s launch, WoW has collected over $2.2 billion in subscription fees. (I know with the recent US government plans, the word billion no longer has the same impact, but that’s HUGE!)

A few years ago, I predicted that WoW would become the #1 entertainment property of all time in terms of gross revenue (including music, movies, books, games, etc.) Here are the top sellers in each category:

• World of Warcraft (Video Gaming) – $2.2+ billion
• Gone with the Wind (Movie) – $199 million (1929), adjusted for inflation $1.5 billion
• “The Bible” (Book) – claims of over 6 billion copies sold, but I have no idea how to calculate the revenue; besides, there are so many versions out there, is this really a single property? Ditto for all other types of ancient and relgious texts
• A Tale of Two Cities (Book) – over 200 million copies sold; not sure about gross revenue, but would need to be north of $10 (adjusted for inflation) per copy to match WoW
• Thriller (Music Album) – over 100 million copies sold; again, would need to be north of $20 (adjusted for inflation) per copy to match WoW

I had made that prediction back in 2006 that WoW would be the #1 entertainment property of all time. Outside of beating sales of the bible, I would say that my prediction is finally proved correct! And, while it might still be close if you are generous in pricing out the books and music, WoW doesn’t seem to be slowing down.

Recession or party for the video games industry? This week marks the GDC (Game Developer’s Conference) in San Francisco. Following major lay offs from development stuidos such as EA and THQ and headlines about the dire economy, you would think that even the video game marketplace is suffering.

But, in reality, February 2009 was yet another strong month – up 10% over last year’s February numbers. And, that’s across the board – Nintendo, Microsoft and Sony are all seeing growth. What about other entertainment sectors? The numbers from the box office certainly are encouraging – a 10% YTD growth from 2009 compared with 2008.

The difference, though, is that the video game segment has been growing significantly for the last 10 years compared with a bumpy ride for the box office. So, while both are seeing the short-term benefits of a major recession, there is likely a more lasting impact due to the gaming industry.

Computer Science is Cool Again is a recent article I ran across. Basically, enrollment in Computer Science classes is up significantly after years of downturn. According to the article, this is due to the economic slow down and the opportunities available to computer science graduates.

Personally, I find that hard to believe – I’m not sure many freshmen or sophomores at a university are picking their major based purely on economics following graduation. Sure, some are looking at that, but I think more are looking at the ‘cool’ factor. As the article points out, Web 2.0 and the iPhone are cool.

Speaking of the iPhone, Apple announced plans for the 3.0 software. It looks great – we finally get copy & paste, there is a push for better application integration, etc. But, beyond the enhanced features, the biggest opportunity with the new software is micro-transactions. You know, the things that let you purchase add-ons like new songs in Guitar Hero or new levels for your first person shooter. This is going to continue to push the economic strength of the iPhone as a gaming platform, and I suspect it’s going to mean even further dominance within the smart-phone category until someone else can replicate what Apple is doing with the device / iTunes combo.

I’m not sure if it’s because I take it personally, but I’m often upset when I hear people make stereotypical comments about video game players. Recently, I was working with a colleague who was talking about challenges for companies like Sony or Microsoft in regards to their online strategies because they have to deal issues such as keeping content kid friendly. I interrupted with the usual facts about most game players being well above 18 years old, but it really didn’t matter. On one hand, he was certainly right – kids play games, and we should be careful to make sure that we are sensitive to those needs. On the other hand, this has become a more robust and mature industry that caters to all demographics the same way that Hollywood studios do.

I ran across another article recently that also piqued some of the same feelings: IGN: Editorial: Is Casual Gaming Destroying the Industry? The IGN story is more of a chronicle about how various video game developers are viewing the trend towards casual gaming. (Some of the comments following the story, I think, are even more interesting.) The stereotype being portrayed here is that gamers come in two flavors – casual vs. hardcore. Like anything else, I think that you will find folks interested in something, folks who take it extremely seriously and those somewhere in the middle. I would suspect that most game players are either interested in it or somewhere in the middle – I don’t think the majority of game players would come anywhere near the classification of ‘hardcore’.

But, what about casual gaming? Having spent time talking to various sources inside and outside the industry, I think what is being called ‘casual gaming’ now is going to be mainstream in a few years time. Look at the proliferation of iPhone applications or XBox Arcade titles. These casual games are entertaining and – most importantly – accessible. With retail outlets like the Apple iTunes store (for iPhone/iPod), the new XBox experience (for arcade), Steam (for casual PC games) or the many Flash games out there (my kids are totally addicted!) you are no longer chained to a PC or console to play.