Sunday, March 9, 2008

The Death of PC Gaming

Game industry pundits have developed a peculiar malady over the last few years. Analysts (both professional and amateur) continue to proclaim the death of the PC gaming market, pointing to tumbling NPD sales numbers, shrinking shelf space at retailers, and announcements by major development houses that they are moving to console only. Contradictory enthusiasts, fan boys and apologists alike quickly rise to the bait, pointing to major titles like the Sims or World of Warcraft expansions, which continue to achieve record-breaking sales numbers. Yet, a visit to a typical game retail outlet reveals a depressingly low number of quality titles for the PC, with most shelf space looking like the bakery bargain bin at the grocery market – dusty thumbed boxes with marked-down prices. Not a pretty picture, right?

Let’s consider the actual data on retail PC gaming reported by NPD. In 2002, sales were at a peak of $1.4 billion. Since then retail sales of PC games has been declining fairly steadily, while the total revenue of all game hardware and software continues to rise. In 2007, PC retail only accounted for $911 million out of the total revenue of $18.8 billion in overall entertainment software sales. What’s more, the actual number of PC titles sold at retail is falling off even more rapidly.

This superficial analysis seems fairly grim, but we can get a hint of what is happening by considering the top two PC retail titles for 2007: World of Warcraft: The Burning Crusade (2.25 million units) and World of Warcraft (914,000 units). Even the evergreen Sims titles have been dethroned by a game which only makes a fraction of its revenue from actual retail box sales. Subscription revenues are completely absent from the NPD data. A quick off-the-cuff calculation of 2.5 million North American WoW subscribers times an annual subscription rate of $168/year yields $420 million/year – nearly half of the entire report PC gaming sales we’ve been told about. Clearly there’s a lot of data we’re not seeing, which is likely why NPD announced in February of this year that they would begin tracking online subscription revenue.

Although subscription revenue helps paint a rosier picture for the total market dollars of PC gaming, it doesn’t necessarily explain the flagging retail game sales. One might postulate that everyone is so busy playing World of Warcraft on their PC’s that they just don’t have time for any other game. I for one don’t buy it.

There are two explanations frequently given for the decline in PC retail. The first is that software piracy is killing the market. It is too easy to download cracked versions of games off the internet, which causes sales of triple-A games to slide, and developers and publishers abandon the platform in favor of consoles. The major problem with this explanation is that in the most piracy-prone regions of the world, particularly Southeast Asia, PC gaming dominates over consoles. You can buy first-run movies on DVD from any street-vendor in Shanghai, but there isn’t a market for XBOX games, legitimate or otherwise. Walk into any wang ba or PC bang and you won’t see a console in sight.

The second explanation is that the latest round of console offerings are so superior to the PC as a platform that there is little reason to develop or play games on the PC. Why develop for a highly complex and highly unstable platform when you can create a game for the XBOX 360 or the PS3? All snickering aside, these consoles are simpler than modern PCs, particularly in terms of the complexity of the environment that the game software has to perform in. There may be some truth to this as it relates to certain types of titles, but it is highly doubtful that this is a significant factor in the PC retail falloff.

Declining sales in PC retail is not caused by consoles. It’s not caused by piracy either – at least not directly. It’s being caused by a platform transition. And, it’s affecting more than just games at retail. PC gaming hasn’t had a platform transition since games moved from DOS to Windows. This transition isn’t about hardware or operating systems. It’s a transformation in distribution and delivery. The new platform is the Internet, and the transition is online.

In the console space, a platform transition happens whenever a new generation of console hardware arrives on the scene. PS2 to PS3. XBOX to XBOX 360. GameCube to Wii. For developers and publishers of console games, platform transition years are scary. No one knows for certain which new console will grab the hearts and pocketbooks of gamers, but they know that betting on the wrong horse can turn an industry leader into a has-been.

The new platform is huge. It’s so big, no one is really quite sure where it begins and where it ends. It includes the entire PC casual games space, all of which is online. It includes subscription MMO titles. It includes F2P games making money from virtual item sales and ad revenue. And it includes Steam’s 15 million active accounts (compared, for example, to XBOX’s 10 million Live accounts). It is Games as a Service, and it is bigger than the XBOX 360, PS3, and Wii combined.

Consider the highest selling retail game from 2007, World of Warcraft: The Burning Crusade at 2.25 million units. PopCap’s best selling game, Peggle, already has over 10 million downloads. Valve’s Orange Box has an estimated 2 million units sold for PC, but since it fails to register on NPD’s top 10 best selling PC games of 2007 (number 10, The Sims 2 Pets Expansion Pack had 236,000 units), we can guess that the lion’s share of those units were through Steam.

The primary reason for the shift to the new platform is convenience, which, ironically, includes a backlash against anti-piracy methods. Requiring legitimate users to type in long serial codes just to install a game, and then keep a disc in the drive to play once it’s installed on their hard-drive is more than a nuisance; it’s treating all your users like criminals. It is akin to DVD movies which require legitimate consumers to sit through an unavoidable preachy message about piracy, when bootleg copies not only lack the annoying message, but play in more regions/players.

Digital distribution services for games merely require an account and a password, and the user has access to all his or her games, regardless of which computer, how many times it has been installed, and what time of day or night. Perhaps more importantly, the catalog of available games is far larger than that offered by dusty shelf space, and we are seeing entire new genres of games achieving success which would have never made it past the gatekeepers of retail distribution.

The old platform of retail distribution is going the way of the floppy disk, and the new online platform has brought about a virtual Renaissance on the PC. These changes won’t be limited to the PC platform alone. We can expect a similar transition on the consoles over the next few years. Don’t expect the hardware successors to the current XBOX, Playstation, or Wii to even incorporate an optical disc drive. Consider this: Sony’s victory in the Blu-Ray/HD wars will be a short-lived one, as transient as Nintendo’s stubbornness to adopt optical formats was legendary. In the end, our entertainment is just bits of data, and how we get them is only important as far as how convenient it is for us.

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