NEW GROWTH VENUES DEVELOPING FOR VIDEO GAMES

Christina Veiders

NEW YORK -- Mass and specialty retailers will remain a strong channel for video game software sales, but third-party software publishers are eyeing rapid developments in online and mobile gaming to provide incremental revenue streams for their products.

According to a panel of software publishers, who spoke on trends in the video games industry during Piper Jaffray's consumer conference here earlier this month, the industry is cycling through a transition to the next generation of hardware with Microsoft's Xbox 360, expected to be released this fall, followed by platforms from Sony and Nintendo.

The next generation of video game consoles will promote online console game playing, which is still in its infancy. This type of game playing enables multiple gamers in various locations to communicate and interact with one another via set-top consoles. The growth of broadband is creating a foundation for content transmission and integration.

Piper Jaffray expects online sales to follow a subscription-based model with additional sales driven through pay-to-download content, also called "micro-transactions." Estimates put console online software/content sales at about $150 million in 2006, growing to $400 million by 2008 as the installed base of next-generation consoles reaches nearly 40 million units, said a Piper Jaffray report.

"Online will drive more game play. It will add to the community and gaming as a lifestyle. Once we have mass consumer base used to getting online, it will be an additional way to drive revenue through micro-transactions," said Paul Eibler, chief executive officer of Take-Two Interactive here.

Yves Guillemot, CEO of Ubisoft Entertainment, Montreui-sous-Bois, France, said he expected the online segment to grow to 10% to 20% of video game sales. However, it will take three to four years before significant penetration is achieved both online and through mobile devices, he said.

Brian Farrell, CEO of THQ, Calabasas Hills, Calif., said that reaching the mass market via online and mobile is three to four years away. He pointed to the strength of the traditional retail channel. "There is a lot of social things about gaming and purchasing games. Walking into a store and talking to the manager and seeing what's on the shelf, it's an experience."

The growing installed base of data- and media-enabled mobile handsets has created an additional distribution opportunity for content developers and video game publishers, according to the Piper Jaffray report, which estimates North American mobile/wireless game sales for video game publishers at about $100 million this year and $200 million next year.

"It's just anther way for us to exploit our content," said Eibler. "We are concerned that the smaller [game experience] could take away from the product. Our catalog has some opportunity in mobile games and there are some other ways to take some of the larger games and adapt them to more sophisticated handsets."

The video games industry is poised for double-digit growth as it cycles to the next generation of hardware at the end of this year and next, according to the panel.

Retail sales of video games (including portable and console hardware, software and accessories) totaled $9.9 billion last year, down 1% from the prior year, according to the NPD Group, Port Washington, N.Y. Video game software on all platforms (consoles, handhelds and PCs) accounted for about $7.3 billion, up 4% from the previous year, according to the Entertainment Software Association, Washington.

Retailers remain the biggest channel for video games. In 2004, Wal-Mart held 23% of the market, followed by Best Buy 14%, Target 9% and Toys "R" Us 7%, and specialty retailers GameStop 14% and Electronics Boutique 12%, Piper Jaffray reported.