The quest to deliver three-dimensional entertainment has been around since as early as 1838, when the the stereoscope, a device to view 3D images, was first invented. While the technology has since evolved, progress came in starts and stops, and 3D periodically faded from public interest. Thanks to recent innovations, and the commercial success of 3D films like “Avatar,” 3D is now making a comeback. In fact, if recent product launches and media coverage are any indication, 3D seems to be the buzzword du jour for the video gaming industry.
At the June Electronic Entertainment Expo (E3) in Los Angeles, for instance, Sony promised consumers an end-to-end 3D experience, with its Bravia TV 3D model, 3D glasses, and the launch of more than 20 3D titles for Playstation 3 by early 2011. Microsoft announced new 3D titles to go with the Xbox 360 and its “controller-free,” 3D motion-sensing Kinect device, while Nintendo unveiled the first 3D game console which doesn’t require glasses — the handheld Nintendo 3DS. Meanwhile, at the May Computex conference in Taipei, GPU and chipset developer NVIDIA debuted “3D PCs,” which allow consumers to play 3D games and view 3D photos, videos and movies.
However, considering that 3D gaming has been attempted before with negligible results –Nintendo’s Virtual Boy 3D game console, for instance, was discontinued a year after its 1995 launch – can 3D really stick this time around and help boost the gaming industry? This is a market which appears to be in decline.
According to the 2009 year-end and 2010 mid-year reports by research firm NPD Group, video game sales have been sluggish overall. NPD says total console, portable and software revenues amounted to $10.5 billion in 2009, an 11 percent decline from 2008. And as of mid-2010, total sales were only $1.1 billion, a 6 percent decline compared to last June. Note, however, that while software sales continued to dip, falling 15 percent as of June to $531.3 million compared to last year, hardware sales have started to pick up, climbing five percent to $401.7 million for the same period. NPD analysts are hopeful that the slate of new content and devices will drive sales, and a recovery, further.
Why Some Say “Yes”
One reason for a positive outlook is the increased availability of 3D technology in itself. Manufacturers are now coming out with a wide range of 3D-enabled devices, including TV sets, Blu-ray disc players, monitors, computers, camcorders and even mobile phones. Content providers and distributors are launching 3D television networks, dedicated 3D channels, and 3D copies of videos and movies. Software developers are working on more 3D game titles for consoles and PCs, while companies like Microsoft, Intel and IBM are working on 3D streaming for the Internet. Indeed, as more and more players across the media value chain invest in 3D technology, this creates synergy and momentum that could help leverage sales and propel innovation even further.
Another reason is that, according to a survey of 2D and 3D gamers by 3D certification and advocacy group Meant to be Seen (MTBS), consumers seem ready to embrace 3D gaming options. The group’s 2009 U-Decide Initiative found that 65 percent of 2D respondents thought 3D was “intriguing,” while 27 percent said they “must have it.” Only less than 4 percent thought it was “tacky,” and about 5 percent thought it sounded “uncomfortable.” Furthermore, while 3D glasses have often been cited as a consumer turn-off, only 12 percent of 2D respondents and 3 percent of 3D respondents said they objected to 3D glasses for video games.
Why Some Say “No”
Some critics believe 3D gaming still has plenty of hurdles to overcome before it breaks out of its niche. The topmost of the hurdles is price. On average, 3D-enabled TVs and PCs start at around $1,500 for basic models, and the prices can quickly go up for those with more sophisticated gaming capabilities. Specialized 3D glasses start at around $100. Consumers who may have recently purchased flat panel HDTVs may be unwilling to shell out new money for a new 3D TV set and its required accessories. They may choose to wait for a more affordable version or for more 3D content to be available in the market. As Microsoft's VP for Interactive Entertainment Business in Europe Chris Lewis commented in an August interview with Bloomberg Businessweek: “We are two to three years away [before 3D gaming takes off], till the price point comes down, till the experience is sufficiently social, that you don’t sit there with big glasses on and don’t talk to your family.”
Indeed, some market research firms predict that while sales for 3D TVs will no doubt increase as manufacturers roll out new models, they will likely do so at a conservative pace — at least for the near future. Research firm iSuppli, for instance, says only four percent (about 1.8 million out of 46.5 million) of total TVs shipped to retailers in the first quarter of 2010 were 3D. In fact, iSuppli predicts Internet-enabled TVs (IETVs) — TV sets designed to connect directly to the Web and display content — will be the focus of consumer upgrades in the short-term, and they estimate 3D TV sales will reach merely 4.2 million units in 2010 compared to 27.7 million IETVs.
That said, Nintendo’s 3D offering could be a good point of entry for casual gamers and those on a budget — not only does it forgo the need for 3D TVs and 3D glasses, but it will also likely be in the price range of Nintendo’s DSi devices (in the mid-$100s). Of course, it remains to be seen whether or not the Nintendo 3DS will be widely adopted by consumers. And if adopted by consumers, will other manufacturers introduce their own products, potentially making this new technology a game-changer for the video game industry?
Only five percent of respondents would choose to pay for news, if their favorite news site suddenly begins charging for content, according to a study by market research firm Harris Interactive, commissioned by PaidContent UK. The vast majority, 74 percent, said they would "find another free site."
But can giving away most content to gain a small percentage of paying users ever be profitable for a company? “Freemium” advocates say “yes.” In fact, that’s what the freemium business model is about: Most customers get basic services for free, while a small percentage pay for premium access.
There are two main principles behind this: 1) free marketing, 2) economics of scale.
Wired editor Chris Anderson wrote the book Free on the subject. He says on his blog: “Free is not a business — it’s zero-cost marketing for a business. And it works best at the largest scale: a small percentage of a big number is a big number.” As freemium uses the near-zero marginal cost of online distribution to reach the maximum possible audience, converting a small fraction of them to paid users is not only possible, but a smart strategy, says Anderson.
The success of some companies has validated this idea for some products. For example, a survey by mobile advertising agency AdMob shows that Android and iPhone users download approximately 10 new apps per month, according to Cellular News. Of users who bought paid apps, the top reason cited for their purchase decision was that they liked the free version of the app.
Another example: When Random House’s Del Ray imprint offered the first book of Naomi Novik’s Temeraire fantasy series for free, sales for the other Temeraire novels increased by more than 1,000 percent, says The Associated Press. And it’s not an isolated case: the AP notes that the top three Kindle sellers – that is, the most downloaded e-books on Kindle – in recent days have been free e-books.
But perhaps the best examples can be found in the virtual gaming world. For instance, The Guardian reports that Club Penguin, which targets child gamers, was said to have 12 million users, of which 700,000 were paid subscribers, when Disney bought it in 2007. At a rough average of $5 monthly subscription at the time, the site was estimated to be generating $42 million in annual revenue. “About 80 percent of the site is free,” Anderson told Journalist Charlie Rose at the recent MIXX advertising conference in New York. “Eventually, young users will ask their parents for a credit card and say, `I want to buy a pet for my penguin.’”
Freemium may in fact be necessary for the Web, says Ranjith Kumaran, CTO and co-founder of online file transfer and e-mail service YouSendIt. Because “without traction, it doesn’t matter how good your product is or how much you spend to market it,” he tells BNet.
Of course, success based on freemium is not certain, nor easy. In fact, YouSendIt still needs more premium subscribers before it will become profitable, notes BNet. Currently, the company has 10 million registered users and 100,000 paid subscribers, not including corporate accounts or pay-per-use. While the overall conversion rate from free to paid is over 3 percent, for the company to turn a profit, around 5 percent of all customers will have to be “paid.”
So when is freemium a good idea and when is it not? Michael Mullany, VP of marketing at online hosting company Engine Yard, tells CNet News that companies should consider the following four factors: Cost of marketing and selling to a user in a paid model, cost of serving a free user, cost of acquiring a free user, and how successful you are at converting users from free to paid.
CNET reports that the highest freemium conversion rates fall anywhere from 2 to 8 percent. Mullany notes that for the freemium business model to make sense, your cost to serve and acquire a free user must be from between one-twelfth and one-fiftieth the cost of acquiring a customer under an alternative paid model.
Non-online companies that have to physically package or ship products should beware, however. Freemium will likely not work for you because of your actual costs. You won’t enjoy the Web-based near-zero marginal cost model. As Anderson says, “You can't mail a brownie to everyone in the world on the hopes that a tiny fraction of them will come back for more.”
Can celebrity power save a troubled industry?
According to market research firm NPD Group, US sales of videogame hardware and software fell for the sixth straight month in August, down 16 percent to 908.72 million dollars. Of all genres, music video games were the weakest, down 46 percent year-to-year as of July.
Media conglomerate Viacom, anxious to salvage its troubled music video game franchise “Rock Band” (which caused a 41 percent decline in ancillary revenues to its Media Networks division, per the company’s 2nd quarter filings), placed its bet on timeless celebrity: the Beatles. The Los Angeles Times reports that Viacom paid Beatles rights holders an unprecedented amount to include the band members’ songs and likenesses in “The Beatles: Rock Band,” released September 9.
And from the looks of it, that bet is paying off. "Sales have exceeded our internal projections and we’ve sold 25 percent of our inventory in the first week,” says Viacom CEO Philippe Dauman at the recent Goldman Sachs Communacopia Conference (as reported by The Financial Times). The company expects the operating profit margin for the Beatles game, which also has special edition hardware bundles and additional downloadable songs for sale, to reach 20 percent.
It’s a strategy shared by Activision, which publishes the pioneer – and current market leader in music video games – “Guitar Hero” series. With “Guitar Hero 5,” launched September 1, users can play 85 hit songs, using avatars modeled after music icons like Johnny Cash, Carlos Santana and Kurt Cobain. While data on US sales won’t be available until next month, tracking firm Chart-Track reports that “Guitar Hero 5” debuted at top spot on the weekly UK charts, while “The Beatles: Rock Band” took fourth place.
Guitar Hero CEO Dan Rosensweig is confident that more growth is foreseeable for both the “Guitar Hero” franchise and the music video game market. "Less than 20 percent of console owners have a music game. So, there is an upside,” he tells The Hollywood Reporter. “Also, we are only two years into (the franchise’s launch) in Europe. And we haven't even started thinking about Asia yet. There's plenty of growth left."
Indeed, The Los Angeles Times reports that Activision is planning to launch other music video games such as “DJ Hero” and “Band Hero,” which will include songs from popular artists such as Taylor Swift, the Jackson 5 and No Doubt. Meanwhile, the team behind “Rock Band” (music video game developer Harmonix, Viacom’s MTV Games, and distributor Electronic Arts Inc.) recently announced shipment of “Rock Band Metal Track Pack,” to retailers nationwide. The standalone disc offers 20 tracks specially chosen by heavy metal icons such as Godsmack, Children of Bodom and Judas Priest.
Celebrity power can only take the industry so far, however. If the music video game market is to continue growing, companies have to continue to innovate, says Jesse Divnich, Director of Analyst Services at video game industry research firm Electronic Entertainment Design and Research (EEDAR). “It would be erroneous to assume that any franchise or brand can grow unless it brings something new to the table,” Divnich writes in IndustryGamers.com. “Even if DJ Hero and The Beatles propel the respective series forward, as both are looking to be strong commercial successes, one still has to ask, where do we go from there?”
