The Changing Shape of Entertainment Commerce

A few weeks ago the 2009 Game Developers Conference took place in San Francisco. The Game Developers Conference, or GDC, as it's commonly referred to within the industry, is arguably the year's most important gathering of video game publishers, developers and luminaries. Historically, the week of GDC has played host to some of the most influential companies making some of the biggest product announcements in the history of the industry, and this year was no different. The one product that clearly stole most of the buzz was OnLive, a potentially revolutionary game console that promises live, streaming games delivered by a sophisticated array of servers, something we refer to as cloud computing. With speculation abounding, one thing's for sure -- the industry is in for a big change.

The emergence of OnLive is symptomatic of a larger trend within the gaming industry, which is symptomatic of an even larger trend within the general media and entertainment industry. I'm referring to the ever-increasing consumer demand for digital products, delivered instantly at little or no cost. The failure of music, movies and print media to sufficiently adapt to this demand has been crippling for those industries. As the only major entertainment medium to emerge from the digital revolution, video games represent the first consumer product that is capable of both satisfying consumer demand, and supporting its own means of production.

The music industry, unfortunately, made an example of itself by going head-to-head with consumers, suing the very people they depended on and asking the federal government to protect their business. The lesson all business leaders in media learned from the big music executives then was that it's time to start figuring out how to work with Internet technology, not against it. That meant building entirely new business models to generate revenue from a market where consumers are used to paying nothing. The challenge was, and still is, to offer digital products and services through the Internet that are worth paying money for.

With music, for example, peripheral services like recommendation filters and social networking functionality can add value to a service, providing the incentive for listeners to pay a little extra for the music they would otherwise download for free. The security of buying music from a trusted source is often enough to persuade consumers who'd rather not risk downloading music illegally from filesharing networks riddled with viruses and malware. The same can be said about video games, because they're so deeply engaging and often support a great variety of peripheral services, much more than most other mediums. Video games sold online have even more value to leverage with editorial reviews, strategy guides, community forums, automatic updates, etc. The experience of buying a game can be built into the game itself and become part of the appeal.

When a new game is launched, retailers expect game publishers like Electronic Arts and Activision Blizzard, for example, to promote the new software; but at the same time retailers prioritize used games rather than new releases, pitting the publisher's profits against the retailer's. In this way, traditional retailers like GameStop are directly capitalizing on the promotional and marketing investments of publishing companies. So, of course GameStop's CEO, Dan DeMatteo, doesn't believe in the digital distribution model. A few months ago he stated that digitally distributed games are more than a decade away. The longer the current model can be sustained, the more revenue will come to brick and mortar retailers.

In an effort to gain revenue share from traditional retailers, Amazon recently announced their entrance into the used-games market, a notoriously problematic consumer service that bleeds revenue from publishers and developers. Amazon's announcement was met with disbelief and criticism from GameStop, the brick-and-mortar retail giant. Anyone not involved in the business of retail saw Amazon's move as a significant sign that the era of disc based games is coming to an end. Video game publishers are looking at used game sales in much the same way music publishers looked at filesharing networks -- they see a leech and they want to protect their business from it.

Many argue that Amazon won't be able to cut into GameStop's market share, and that Amazon will struggle to establish a viable trade-in market. However, whether Amazon succeeds or not isn't the issue. Amazon's entrance into the market, and the potential that move brings, essentially broadens the market and is going to force all but the most belligerent of publishers to envision the approaching day when they'll stop printing games on discs. Essentially, these retailers are burning the candle from both ends by allowing used games to undercut new games and refusing to acknowledge consumer demand for digital content.

I think that this is where the music industry ran into trouble. Once a company or a group of companies attempts to force the market, rather than adapt to their customer's needs, they are shooting themselves in the foot.

The gaming industry needs retailers, like GameStop, to help find new ways to work with digital distribution models in order to help the industry cater to its customer's needs. Doing so will help put more money in the pockets of developers and publishers producing innovative content, and help put an ease to illegally traded games. The more we can move online, the more we can help gamers by offering a convenient and worthwhile service. If we work to maximize the game purchasing experience, improve the pricing structure and continue to improve the secure, virus free installation process, gamers will be more satisfied with their online purchases, preferring to buy through secure, legal means.

I'm not the only one who feels this way. In a recent interview, Christian Svensson, Capcom's vice president of strategic planning, said selling digital downloads of their PC titles is more important than selling boxed copies at retail. "One of the problems," Svensson explains, "is that retail is falling away. What are the reasons for that? Partly it's that return rates are very high." That's one part of the problem, the other is that retail can't handle the growing demand for downloadable content (DLC), or virtual goods, and not to mention all the aforementioned services around a game such as the latest patches and updates, multiplayer functionality, discussion forums, etc. Dave Perry, creative officer at Acclaim Entertainment, stated that Acclaim's digital distribution business sells directly to the consumer, and his business has "absolutely no interest in retail anymore."

Moving into a digital download model can seem very risky for any traditional media company because it's often unclear who the audience is, whereas with television there's 50 years of market research to back statistics for targeting ads and content. However, companies like Hulu and Netflix offer a model for successfully establishing an online audience. Hulu reported explosive growth in February with an increase of nearly 10 million visitors when it ran an advertisement during the Super Bowl featuring Alex Baldwin. Netflix also blew the digital distribution market wide open when it struck a deal to stream movies directly to the Xbox 360. With such creative partnerships and exclusive, quality content consumers will gladly take their entertainment experience online, and the companies waiting for them with the best experience will carve the path for the future of entertainment.

My company, GamersGate, had a 100% growth last year and we are aiming at the same -- or higher -- growth in 2009. If you take statistics from any of our competitors, they will probably also report booming growth. The same signals are coming from all over the industry; when talking to both large and small publishers, developers and independent studios, everyone is saying the same thing -- focus on digital distribution.

As the gaming industry works to incorporate all the various services gamers demand into their purchasing experience, and create business models to capitalize on digital content, we'll begin forming the model for other media to monetize their content online. Video games truly represent the ideal form of entertainment to suit the tech-savvy consumer's needs. The interactive experience inherent in gaming is the key to monetizing the content -- the depth of engagement that they provide allows us to reach consumers in dramatically new ways.

It's clear that publishers are taking digital distribution models more seriously, all while retailers continue to cannibalize their business, eating up capital that would normally go to developing new games. At any rate, it would behoove GameStop to come out of denial and do what they can to find a niche within the digital distribution model. The faster these various industry players can reconcile, the faster we'll all be able to meet consumer demand, and from there we'll be on our way to building a new economy of electronic commerce.