A Video Game Industry Collapse Predicted

With the rush for the new XBOX 360 resembling Pamplona it's hard to envision a collapse in the video game industry.  But that's exactly what some are predicting may happen soon:

Mainstream media is recognizing gaming as something that a wider demographic than goths-with-guns(tm) and overweight basement dwellers do, and the industry is raking in more money than Hollywood. The problem is that they are facing the same problems as the moribund entertainment industry, and we could be on the verge of another 80s style crash.

Is the apocalypse nigh? I sure think so. The last one happened at the height of Atari's power, they were invincible, pumping out hit after hit. Pac-Man, ET, Asteroids, movie tie-ins, overflowing arcades and a rabid fan base. They were in the spotlight of the mainstream press, songs making the top 10, and money coming out of their ears. What could go wrong?

Throughout the era, there was an underlying theme, originality and creativity. Rocks floating around to shoot? Eating dots in a maze? Aliens moving left, right and inexorably downward? Centipedes? Who thinks this stuff up, and what were they taking? As an aside, from what I am told, if they were working at Atari, the answer is just about everything you can possibly imagine. Things could not possibly get better.

Then it all crashed, almost overnight. A string of big budget titles sapped the money from some companies, and the public soured after purchasing one lemon too many. The industry died, almost before anyone realized it. The 2600, Colecovision, Intellivision and others made way for a string of mediocre market failures like the 5200 and 7200, all of which probably didn't make dollar one.

The author's conclusion is that there is a proliferation of mediocre titles, sequels (where have heard this before?) and that production costs are skyrocketing (yes this is sound quite familiar).  It now takes 150 people people to build a games, and it may soon be at the point where it will be necessary to sell 1 million titles in order to break even.  This will then lead to less risk-taking, less interesting fare, and more big flops.  And since it may cost consumers up to $50-$60 for the latest generation games, you have a pretty high barrier for consumers.

I don't think it's that clear cut however. Video games have grown more popular over the years at a pace correlated with increases in graphics and realistic rendering.  Every time major technological advances have been made, a new wave of people became gamers.  Given that the new spike in costs is associated with the next generation of consoles, which promise better graphics it's likely that a flood of new people will come to the market.  It's estimated by the graphics-chip makers (like nVidia) that perfectly realistic real-time rendering is still maybe 10 years off, so there is plenty of time to ride this trend.  This is fundamentally different than the movie industry where improvements in CGI (or special effects, as we used to say) haven't made movies more popular, on net.

And while we had to beat a dead horse, the author is not talking about a true collapse here.  We're talking about the inherent volatility of what looks like it will be (along with movies and pharmaceuticals) another non-Gaussian industry with several sup-par releases and a few gigantic titles.  Once again, all of the factors (like high upfront costs, low marginal costs) are in place.  The trick, once again, is to not confuse a slump, if there is one, with a crash.

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