GMC Session: How to Ride Out 2006

Comments by Michael Pachter, Managing Director, Wedbush Morgan Securities

My view of 2006 is, it’s a mess. Most of the constituents in the video game business didn’t plan out ’06 very well. Everybody is quick to blame Microsoft for the console shortage, but publishers are responsible for declining sales last year. Publishers saw the rising development costs for next-gen games and thought “we’re going to take less risk and stick with proven concepts” in both next-gen and current-gen. Look at the movie business. Crap. Sequels and more sequels. Who thought Dukes of Hazzard would be a good idea?

All we got from the publishers last year were sequels and movie titles. Who would think King Kong would make a good video game? I’m shocked that people think that’s the kind of game consumers want. Consumers are saying: “Microsoft is telling me I must have this box. But all I can buy are a bunch of sequels. I’ve already got those games.” It’s easy not to make a purchase.

EA’s coming out with The Godfather. That’s Dukes of Hazzard with Marlon Brando. That movie is old! How are you going to make Godfather resonate with today’s game consumer?

I think this year’s a mess. Microsoft did a brilliant marketing job. They’re going to catch up on supply. But no one’s buying Madden ’06 when Madden ’07 is just about to be released. Very few games are coming out this summer. We don’t know when the PS3 is launching. You guys are all going to lose your jobs because your boss is going to say “why can’t you sell games to these people? You suck.”

Assuming Sony gets the PS3 out, ’07 is going to be big no matter what. The publishers all talk about how the PS3 is additive, but it isn’t. It is going to cannibalize sales of games on old consoles (again, nobody buys Madden ’06 if they can get ’07 for their new console).

I think Nintendo will be incredibly successful. Many people don’t realize it, but Nintendo defines hardcore. Grand Theft Auto isn’t hardcore — Mario and Zelda are. The people who love that stuff, love that stuff. Last cycle, Sony and Microsoft had lots of exclusive titles. This cycle, it isn’t the same. Hardcore gamers aren’t going to buy a PS3 and an Xbox 360. Of the [predicted] 40M Xbox 360 buyers, 10M will buy a Revolution, and 20M PS3 owners will buy a Revolution. The innovative gameplay will hook hardcore gamers. The low price will hook other gamers. Nintendo is going to do great. If they can get more developers to make games for the Revolution, great. If not, thats the developers’ loss.

Comments by Jon Goldman, CEO, Foundation 9 Entertainment

2006 is going to be a rough year, but ironically, for independent developers like us, rough years are good years because publishers are cutting internal costs and turning to outside studios for help.

I think there are a lot of good market trends; you just need to find your way through this year. More people are playing games. Not just hardcore gamers — there are returning gamers, new crops of kids getting into games, new platforms, and technology is making better quality cheaper (for example, better cheaper LCD screens).

So from my standpoint, the principle challenges are structural. Innovation is a giant challenge for the industry, and that’s structural in many ways. It’s very difficult to take risky bets when you’re shouldering the entire burden of a game’s development and distribution.

Foundation 9 is a consolidation of several experienced developers. With size and scale, you can pool human and financial resources to handle the investment necessary to deal with this next generation of game development. Right now, you need to be doing R&D at the same time that you’re developing games and meeting commercial deadlines. That’s really hard. Unless you can invest ahead of the curve — as a large publisher, console manufacturer, etc, you’re going to be behind the curve, and that’s going to hurt innovation.

In my opinion, a lot of the most interesting games are non-traditional games. I’ve got a couple of girls, and we play DDR and Karaoke Revolution. Katamari has been a huge hit in my household. There’s a whole wealth of gaming out there, where what’s fun matters more than high definition graphics. The only way to regain focus on innovation and fun gameplay is for people like us to invest in the equivalent of basic R&D to get games right, meet market windows, etc.

We’re seeing a lot of interest in the DS right now. Compare development costs for new consoles to costs for the DS and you can’t help but be interested in that platform. You can’t build a lineup of games exclusively for next-gen, not with $15M development costs.

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