The gaming industry is booming, but could it be heading for a crash?
On 26 April 2014, a team of documentary makers turned up part of an unlikely story in the arid expanse of the New Mexico desert: a trove of some 700,000 buried Atari cartridges. The discovery of this 8-bit burial ground, assumed for many years to be little more than an urban legend, was a reminder of the near-destruction of the videogame industry in the early 1980s.
A number of factors led to the spectacular crash. The industry was flooded with poor quality consoles, and the home computer was emerging in the form of the Apple II, the IBM 5150, and the Commodore 64. Consumers were becoming interested in a piece of hardware they could upgrade, rather than one with features rigidly set in stone by its manufacturer.
There were also great shake-ups within the industry itself. Atari employees, annoyed that they weren’t paid royalties like their counterparts in the film and music industries, split from the company and formed Activision. Atari attempted to sue Activision for producing games for its consoles, but when the action was turfed out of court, it opened the door for numerous other third-party companies to also start creating games.
The result was a torrent of absurdly crap games that completely overwhelmed stores that were unprepared for, and uninitiated in, the ways of games. Atari didn’t help matters by programming and releasing ET in just six weeks, resulting in one of the most notoriously awful titles in videogame history. The general public was disillusioned by the quality of games, and retailers began to write them off as a fad.
The result was that in a matter of years a $3 billion market became a $100 million one. Companies created to make a quick buck vanished as quickly as they appeared. Videogames were reduced from $35 to $5, and Atari’s multitude of ET cartridges, along with titles such as Centipede, Pac-Man, and Defender, some consoles and—allegedly—some Mindlink controllers ended up buried in that desert.
It was a massive setback for the games industry, and one that allowed Sega and Nintendo—which survived by virtue of being in the more savvy Japanese technology market—to gain footholds in North America. The industry, it seems, learned its lesson. Tighter controls combined with newer, better business models have meant that despite its occasional failures, the entire shebang has never again come close to imploding on itself quite so spectacularly.
But we should never be too careful; there are signs that the industry is heading for another catastrophe. Here we cast a magnifying glass over the industry’s current performance, from the cheapest ways to buy games to the half-billion dollar budgets that companies are ploughing into them. Our quest: to find out if the market could ever crash so dramatically again.
A Survivor’s Tale
In the fallout of the great crash the PC defiantly survived, like an irradiated cockroach. It also became a more realistic gaming platform, with industrious hobbyists creating their own videogames. By 1987 it had become the largest target market for games companies, and it continued to evolve incredibly quickly: VGA graphics, CD-ROM drives, and soundcards meant the desktop computer—even in its boring off-white housing—was many times more exciting than its console equivalents.
In terms of publishing, the PC around this time was still emulating the system employed by consoles. Publisher and developer were often one and the same, and it was a system that worked because publishers had enough cash to invest in potential flops without going under, as well as the supply and distribution networks to get games to the general public. But it also meant that smaller developers, which we’d probably now term “indies,” were unable to get a look-in unless they’d been contracted by a publisher to create a game—which happened very rarely at the time.
The method indie developers created to circumvent publishers was ingenious. Bedroom developers would issue the full versions of their games with certain restrictions—the final act would be locked, or a parrot would kill the player character (hello, Escape Velocity). These versions of the games, dubbed “shareware,” would be distributed via 3.5-inch disks mounted on the front of magazines or via mail order services.
Shareware Shower
The result was that these versions spread like wildfire, an impressive feat given the Internet was only in its most nascent form, and unavailable to most. Even if a tiny fraction of players paid for the full game, it was worth it to the developers because their overheads were so low; they’d just got a million copies of, say, Duke Nukem into people’s homes w hile spending barely a cent on marketing.
More important than the shareware distribution method was its message: the value of games didn’t lie in their packaging or their marketing and advertising budgets—it lay in the lines of code that made them up, and nothing more. Again, the PC was at the forefront of this underground movement, and some of the format’s most important games (Doom, Wolfenstein 3D, Commander Keen) were distributed this way.
The rise of the Internet gave developers a whole new way to distribute software in the late ’90s, but glacial speeds and a lack of infrastructure meant most shareware and demoware was distributed via floppies and CD-ROMs rather than 56K dial-up.
By 2000, 3 percent of US adults had access to a broadband Internet connection. Stardock, a company that published both games and Windows customization software, was the first to offer an online marketplace, dubbed Stardock Central. It wasn’t until 2004 that digital distribution really took off, though, with Amazon Digital Services, GameStop, Games for Windows Live, Origin, and Steam all launching. Despite initial reservations — especially with regards to Steam, which was required to play Valve’s Half-Life 2—digital distribution became a huge success.
Discovering Digital
Like games themselves, digital distribution services could now have unique selling points—Green Man Gaming allowed trade-ins, Good Old Games specialized in getting older titles painlessly up and running on newer hardware, and Origin would ruin your computer with crap games. While the games offered by these services were often the full titles, with a few demos here and there, it very much carried the spirit of shareware from the early ’90s—no packaging, and word-of-mouth taking precedence over marketing. Tying in critic systems such as Metacritic meant the way we valued games was altered drastically.
The lower requirements of digital distribution meant these services were free to take risks. In late 2009, Valve launched the first Steam sale, with then two-year-old titles BioShock and Portal reduced to $ 4.99 and Stalker: Shadow of Chernobyl available for just $1.99. While Steam has never released stats for the sale, the Internet was ablaze with people asking Steam to “shut up and take their money.”
Of course, this wasn’t a sale in the conventional sense—Valve didn’t have shelf after shelf of mouldy Twinkies or party frocks to peddle at reduced prices. But it affirmed the idea that digital versions of games, which could be infinitely replicated (until, at least, you run out of Steam keys), and transported for next to nothing, could be sold in quantity and still turn a profit.
Stream of Consciousness
Others followed Steam’s quietly revolutionary sale. The first Humble Indie Bundle, released in 2010, offered older games World of Goo, Aquaria, Gish, Penumbra: Overture, and Lugaru HD for whatever price purchasers wanted to pay—an idea that had its roots in the pay-what-youwant pricing of Radiohead’s album In Rainbows. It generated over $1 million in sales. Developers got a fair chunk of cash, and a little money went to charity, too.
Humble has since branched out into mobile formats and other media, such as audiobooks and digital graphic novels, and even hosts its own store. It also dropped the “indie” title for bundles from bigger companies such as THQ, EA, and Warner Bros. The EA bundle stands out as the most successful to date—it generated a massive $7 million in revenue for the company, despite the fact you needed Origin to claim the games.
Around this time broadband connections were getting faster, and powerful graphical hardware capable of quickly decoding high definition video streams was commonplace. As a result, services such as OnLive and Gaikai were able to offer game streaming with high resolution graphics and instantaneous interaction. Initially written off as little more than elaborate parlor tricks, both systems worked, with the latter being bought by Sony for adoption into its PlayStation Now streaming service.
As it stands, OnLive represents a gaming version of Internet entertainment services Spotify and Netflix. For $9.99 a month you can access 250 games, which can be streamed to any device with a screen. The service has also expanded with its CloudLift platform, which allows you to play games on the cloud and download them to Steam. While OnLive perhaps hasn’t been embraced by gamers in the way its founders expected, it’s been an industry hit, with most large studios offering games via the service.
You can still wander into a store and buy a boxed copy of a PC game, although the shelf space allocated to the medium is rapidly shrinking. PC games still at times have an edge over console versions when it comes to pricing, and that’s on top of the numerous advantages of the PC being a flexible platform, and one which has shaken its bug-ridden image.
So that’s pretty much the state of how the industry’s working at the moment. It’s just the tip of the iceberg, too—mobile titles make truckloads of cash in a triumph of quantity over quality. Vast streams of money, meanwhile, come in from licensing and spin-offs; according to publishing analyst Nielsen BookScan, Minecraft books alone are almost a $4-million-a-year industry. And boxed software, predominantly released for consoles, is still the biggest revenue stream. Over in the UK industry, for example, boxed software sales were valued at $1.5 billion in 2013, compared to digital and online game revenues of almost $1.3 billion.
Too Big to Fail?
With such vast amounts of money coming in, it’s hard to see how anything could ever go wrong. But this is a turbulent, immature industry. Since the industry began, 614 companies have been declared bankrupt; games with huge budgets and talented crews can completely flop, and for every successful console there’s been a handful of out-and-out failures.
However, we haven’t actually seen many of these failures for a few years. APB and Kingdoms of Amalur: Reckoning were the last major gaming flops; THQ was the last company to go bankrupt. While it’s great that no-one’s lost their livelihoods for a while, and that games seem pretty much guaranteed to make their investments back, this can lead to one of the worst things for any industry: overconfidence.
High Stakes
Every major stock market disaster, from the 1929 Wall Street Crash to the 2008 financial crisis has come about, in part, due to overconfident investing. If investors believe they’re putting money into a sure thing, this can lead to a rapid growth in credit and loans, and suddenly publishers are treating $100 million games like $10 million ones. Games require more investment than ever before, with Star Wars: The Old Republic rumored to have cost more than $500 million to produce.
The stakes, therefore, are a great deal higher. If just one game fails, it can drag a whole developer or publisher down with it—as happened with Kingdoms of Amalur’s creators Big Huge Games and 38 Studios in 2012. A bigger studio, such as Activision Blizzard, could be brought to its knees if Overwatch flops.
The industry has certainly learned its lesson thanks to the sheer number of consoles on the market leading up to the crash of the 1980s; the last console to be considered a failure was Sega’s Dreamcast, but Sega cannily repositioned itself as a software company. The final piece of the puzzle is the games themselves. Afraid to take risks with massive investments, publishing companies are tending to play it safe with sequels and spinoffs. The problem here is that gamers will be put off if identikit titles are released year after year.
The elements for another crash are there, even if the industry is too varied and too huge to ever fail as catastrophically as it did in the early 1980s. But nothing is permanent. Maybe 30 years from now, hundreds of thousands of Steam keys will be found buried in the New Mexico desert…
by HENRY WINCHESTER