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Adam Creighton, Computer and Video Gaming (Subscribe)

Friday, November 24, 2006

The economy and its effects on gaming ...

Or, "It's the economy, stupid!"

This thing I do is me being an "armchair video game analyst". I don't pretend to be formally schooled in market or economic assessment, but I am fairly critical and adept at pulling together the bigger picture of vertical markets, opportunites, and challenges. And I've had some great training.

And I do this because I like this vertical market, and I think it's important to pop culture, entertainment, and the world economy.

I've been irrated for a while that games industry analysts sometimes seem to be tunnel visioned on the game market, and miss contributing factors like domestic and world economy impacts, and more irritated that the "really good analysts" are, by my reckoning, right a little over 50% of the time. And they get paid to do what I do for free.

So, I'm thinking there needs to be more focus on other factors contributing to video game sales and market growth (positive and negative), and in particular, recursive economic factors.

Another pet peeve: I noticed this year has seen a lot of "video games analysts" for financial groups popping out of the woodwork. To be frank, many of them suck.

And while "I don't pretend to be formally schooled in market or economic assessment", I am responsible for economic stuff on a worldwide scale, and by nature of how I leverage my job with BigHugeCorp, I have huge insight into the domestic and world economy and consumer spend, and have written internal whitepapers as to the affect of and opportunity for gaming.

So, as an example, let's talk about Jason Kraft and Chris Kwak of the Susquehanna Financial Group. I don't know if they really suck, but I'm not crazy about their recent negative assessment of the Xbox 360's "alarmingly high" attach rate (the humber of games on average each console owner owns).

Kraft and Kwak argue that the Xbox 360's attach rate of 5 games per console (as opposed to its predecessor's 4) "is a sign of an increasingly unhealthy console growth rate, and should be worrisome to publishers and investors."

They say the Xbox 360s were likely purchased by "hard-core" gamers who purchase a disproportionate number of games. If the hardware installed base stayed unchanged for the next 18 months, the software attach rate would still to climb. They argue this would provide a false perception of a "healthy consumer trend", while "its growth will be capped fairly quickly without an ever-expanding hardware installed base."

They say in conclusion, "If the Xbox 360 sports an attach rate of ten by holiday 2007, it will probably be because it has failed to gather critical momentum. What does it benefit publishers and investors if ten games are being purchased by a total audience of 10 million 360 owners? It doesn’t take effort to see that a console with an attach rate of 8 and an installed base of 50 million is superior to a console with an attach rate of 12 with an installed base of 20 mln."

This is such a weak premise and argument, I'm embarrassed. You think the Xbox 360 install base is really going to stay static for 18 months, let alone this holiday season? I have been in so many retail outlets in so many states the last few days observing console sales, and I see one thing -- people buying more consoles than I have ever seen. And they're buying Xbox 360s, because they can't get the Nintendo Wii or ill-planned shipments of PS3s. I was at one GameStop alone the Saturday after the PS3 launch, and there were 6 people in line with Xbox 360 premium SKUs, which I have never seen at that GameStop (and I spend too much time there). Sure, this isn't a representative sampling, but multiply that by 3 states and 5 different retail chains (including a 6x sampling of Wal-Mart), and this trend may mean something. Add to this Microsoft's stated goal to ship 10 million units through this holiday, and Sony and Nintendo helping those units sell by their own short supply (and by bricking consoles with faulty auto updates, a la the Wii), and the above assessment seems even more faulty.

I honestly feel Kraft and Kwak are trying to create a video games forecast unique to them, and I don't think it holds much merit. And, guys? The reason a high attach rate is "normally seen as a healthy thing", is because it normally is a healthy thing.

Along those lines, let me beat up on the December issue of Game Informer Magazine, a publication I really like, but which includes a couple of unfortunate assessments of its own in the recent issue.

First, the new Pro/Con item that's been implemented in the mag has had a rough start, and this month's topic ("Does the Xbox 360 Lead Matter?") Con is weak, and looks to be all about trying to get to clever closing metaphorical statement. And it hinges on Microsoft not being in the 10 million unit range. See above.

The second problemmatic item in the magazine is "The Calm Before the Storm: Is the Xbox 360 Slumping?"

Which showcases how print mag lead times really take their content out of the applicability running against an online world. For example, it admits its contention may be moot in the face of holiday numbers and Gears of War -- both of which happened (or at least started) before the magazine shipped.

But here's the bigger issue that these three analyses (and many others) aren't addressing: Things like applicable domestic and world economic issues.

Ignore the shortages for Nintendo and Sony product. Focus on the price ($250 and $500/$600, respectively).

Then focus on factors that affect consumer spend. Like gas prices. Did you know consumer spend significantly decreases nine to eleven months after gas prices start to become "burdensome"? Did you know gas prices started to become "burdensome" in February, which would make their Consumer Spend impact hit October through December?

Did you know another indicator of Consumer Spend is the speculative housing market, which started to see a decline in August through October of this year in such over-priced markets as San Jose, Stockton, etc.?

And look at the console pricing in the context of tighter holiday dollars, and what it does for consumer spending choice.

Nintendo made an arguably smart choice in setting the Wii console at $250, because they are the only manufacturers allegedly making money on their next-gen offering. However, the downside is they have probably priced themselves $50 over being the "Mii-too" console -- Where Xbox 360 owners are less likely to purchase a Wii. This may be by design, but it could cause 360 owners to spend $50 less on the newly released Xbox 360 HD DVD drive, rather than a Wii.

Of course, Nintendo could end up OK in overall revenue if consumers wanting to save $50-$120 buy different Nintendo product -- like a DS Lite. Sony may likewise end up with some lift from their PSP, but those things aren't moving as well, and nobody's figured out the self-cannibalization maket like Nintendo.

Which is all to say there are bigger factors affecting holiday and general gaming spend than I've seen out there.

I actually wanted to do a much longer and move coherent treatment of the recursive domestic and world economic impacts on the gaming economy, but I've been wanting to do it since July, and I just needed to get something out.

Why am I making excuses? I seriously doubt many will read down this far.

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SOURCES: Gamespot.com, joystiq.com, kotaku.com, Xbox.com, IGN, GameInformer, Official XBox Magazine, CNN, gamesindustry.biz, and others.

Adam Creighton, Computer and Video Gaming (Subscribe)

Friday, November 24, 2006

The economy and its effects on gaming ...

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