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Game execs see digital distribution coming -- slowly
Console makers and publishers play with new models of selling to gamers
By Dan Gallagher, MarketWatch
Last Update: 7:17 PM ET Nov 12, 2009
NEW YORK (MarketWatch) -- Several top executives in the video-game industry said Thursday that they are investigating new digital-distribution channels, but the days when consumers can simply download a full, top-flight game are still believed to be a long way off.
Still, many companies are making early moves, hoping not to be left behind if and when gamers can get the latest big title online rather than by visiting a store.
"We see direct-to-consumer transactions growing significantly in the coming years," BMO Capital Markets' Ed Williams said Thursday. "While not every company will win, the category as a whole is poised for growth."
The analyst made those remarks at the opening of the BMO Capital Markets Digital Entertainment Conference, an annual gathering for executives in the game industry.
Several firms addressed the issue of digital distribution at the event. The implications are different for all. For instance, makers of game consoles such as Sony Corp. SNE, Microsoft Corp. MSFT and Nintendo NTDOY already operate their own networks that allow consumers to download games, expansion packs and other content such as movies and TV shows.
'We are encouraged. As for the idea that digital downloads will somehow eliminate retail, we just don't see it.'
Reggie Fils-Aime, Nintendo of America
Game publishers -- such as Activision Blizzard Inc. ATVI and Electronic Arts Inc. ERTS -- are interested in the idea but have proceeded cautiously, not wanting to cannibalize sales of major releases such as "Call of Duty: Modern Warfare 2," which command prices of $50 to $60 and are a popular draw for retailers.
Merchants clearly are threatened the most by the new digital models, but they are not sitting still either. At the conference on Thursday, executives for GameStop Inc. GME laid out their plans for getting into digital distribution.
GameStop also announced that it has acquired a majority interest in Jolt Online, which develops free-to-play online games.
"GameStop has invested significant research on broadband and digital-download technology," Chief Operating Officer Paul Raines said in a presentation. "It's clear today that full-game digital downloads will move slowly."
Technical hurdles
Many games already are distributed over digital platforms, namely the mobile market. Games are the most popular type of application over Apple Inc.'s AAPL App Store. Similar offerings from the Android Market by Google Inc. GOOG and BlackBerry's App World from Research In Motion Ltd. RIMM also feature games.
In addition, services such as the PlayStation Network, Xbox Live and WiiWare sell games available exclusively for download.
But these are typically smaller titles or expansion packs that are easier to distribute online. By contrast, major titles such as "Modern Warfare" and "Halo," which are still the main driver of profits in the industry, are too big for even a broadband connection to handle in a reasonable amount of time.
In a presentation Thursday, Nintendo of America President Reggie Fils-Aime said the market will ultimately decide the fate of digital downloads. He pointed out that the necessary broadband connections to handle full game downloads are only available in about 66% of homes in the United States, which would leave out a significant chunk of the potential gaming market.
"We are encouraged. As for the idea that digital downloads will somehow eliminate retail, we just don't see it," he added.
Streaming
One notable presentation came from OnLive, which debuted a streaming technology that grabbed a lot of attention earlier this year at the Game Developers Conference. Read full story about OnLive's debut at the GDC.
The venture-backed firm has developed a proprietary technology that allows big games to be streamed to the user from a data center. The processing for the game is not handled by a console, but by an off-site server. The customer needs only a small router box that plugs into the TV to provide the game.
Under this model, gamers would neither buy games from a store or download them from a site. They would simply pay a monthly subscription to have access to the games in OnLive's database.
"OnLive is kind of coming at the right time," Chief Executive Steve Perlman said at the event. "Games are ripe for a new way to market them. We're the last form of digital media that does not have a good way to distribute online."
For now, game makers will likely move cautiously into the new market. Digital distribution offers the benefits of reducing piracy and used-good sales that don't benefit publishers. But it also risks upsetting key relationships with retail partners that will likely remain important to the sector over the next few years.
As Brian Farrell, chief executive of game publisher THQ Inc. THQI said: "We view the move to digital as an evolution, not a revolution."
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