The Undercurrent of Revolution in the Games Industry
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1 As introduced, my name is Yoichi Wada. The Undercurrent of Revolution in the Games Industry September 15, 2011 Computer Entertainment Supplier s Association Chairman Yoichi Wada I've prepared today's slides in English. There are many overseas visitors attending this conference, and I imagine plenty will take photographs. To ensure various people will be able to read the slides I've decided to write them in English. I don't believe it will be that much of a problem for the Japanese here. Drivers of Growth in the Games Industry 1. The Market Expansion 2. The Gameplay Experience 3. The Business Model The expansion of games industry market is indisputable. The degree to which the market is expanding can make it difficult to understand what is going on, but I believe that if we look closely we can see an undercurrent flowing through this growth. Today I will speak about the drivers of market growth, those driving forces which are causing the game market to expand. I've divided the presentation into three drivers, and will explain each. 1. The Market Expansion The market expands as barriers to entry for consumers are reduced. Market Size Market Expansion = Consumer Diversification Cloud Games Browser Games PC, Non PC (Online Games, etc.) Mobile Games Console Game Software Console Game Hardware Arcades E In this slide (Figure 1), the X axis represents time, the Y axis represents market size, and via this image you can tell that since the birth of video games the market has consistently continued toward the upper right. Furthermore, there are accumulations that look like geologic stratum. You can see that it is not always true that something new replaces that which had come before it. Rather, these layers steadily accumulate. There is a tendency amongst the media to focus so much on the companies which shape today s industry that you almost feel as though everything which came beforehand was erased. But as you can see here, that has not happened until now, and I believe it likely will not happen in the hitherto mentioned expansion. Let's move onto the main question, then, which is why the games market is expanding, and what these drivers of growth are. Video games are incredibly complex applications. When they first appeared, machines owned by the average user could not play them under normal means. As a result, to play one game, you had to make one special device upon which to play it. For example, if you wanted to play Space Invaders, you needed a special Space Invaders-only machine. It goes without saying that individuals could not afford such machines, and thus the first video games began as arcade games. The video game market started here, with "one game, one machine," whereby arcade game operators bought these machines and recouped their investment by charging customers one coin at a time. 1/10
2 Next, Nintendo created its Nintendo Entertainment System (NES). Atari had previously released game consoles, but the explosive growth began from the NES. The NES was by no means cheap, and it was a pain to string up all those cables behind your television, but it was affordable enough for individuals to purchase. This is the red and orange areas on the graph. This is the console game segment. "One game, one machine" became rapidly less expensive, transforming into a single piece of dedicated hardware that could play multiple games. A time of growth and expansion occurred for the first half of the 1990s, whereby all the home electronics makers participated in what appeared to be a great market opportunity. Gameplay was enriched, and the market expanded, as both the participants and the customers increased dramatically. The video game market did not change for quite a while, but a change occurred in 2000, with the PlayStation 2 (PS2). I think that there are people here who remember the kind of debut that the PS2 had at the 2000 Tokyo Game Show. It was like something from the movie the Matrix. The PS2 was a multimedia device; a combination of game console and DVD player. Prior to the PS2, customers had to purchase a dedicated piece of hardware to play games, but after the PS2, you could also use it as a DVD player, and so the relative investment to play video games decreased. Thus, as is summarized in the slide, a driver of growth for the game market's expansion is the reduction of barriers of entry to the consumer. As the investment to play is reduced, the market grows proportionally. The market moved from "one game, one machine" to a dedicated game console which could play multiple games, to a multimedia game console which could play multiple games. Furthermore, in the first half of the 2000s, the specs for imode capable cell phones grew remarkably.* Cell phones are not bought with the intention of playing games, but rather for communication. But they can play some great games. Here, we reached an era where games could be played on general purpose devices. When this happened, the necessary investment needed by consumers to play games was reduced even further. The next watershed came in It was in 2007 that all the game consoles became connected to the net. And, it was when the iphone debuted. You could play games on both dedicated consoles and general purpose devices- thus, the necessary investment needed by consumers dropped to zero. Of course, up to this point, the PC as a general purpose device could play games, but in the first half of the 2000s if you talked about the PC you needed a pretty strong CPU, GPU and a ton of RAM, in other words if you didn t have a special machine that's beyond what you typically needed for 2/10
3 non-game applications, you wouldn t be able to play games. Thus, the gaming PC was a type of dedicated game console. And this began to change in the first half of the 2000s. And while I'm repeating myself, I want to highlight that it was not as though dedicated devices were replaced by general purpose devices. Both dedicated devices and general purpose devices have their own benefits. Rather, the market expands in compounding layers similar to geologic stratum- but the platform driving growth changes. And thus, in the period after 2007, in this new network-connected world, it was neither the general purpose device nor dedicated device which drove growth, because the physical device was not the platform; we entered an age where the network itself was the platform. Both general purpose devices- iphone, ipad, Android, etc.- and game consoles made the network their platform. Consider the PlayStation Network (PSN), Xbox LIVE, and Nintendo. The undercurrents began to shift toward the network as the platform. What s coming next is the browser and the cloud. These are the blue and green sections. To tell the truth, in this slide the Non-PC, PC, Browser Games and Cloud Games boundary lines don't have much meaning. Regardless of device or network, the axis itself is converging. We need to be a bit careful about the vocabulary. I think the word browser, as I use it here, is actually considered to be the cloud by most people. Now then, the browser has progressed to the point where the browser can do a pretty good job of playing games. This has already started to happen. Furthermore, the browser has the potential to play games at the level of the current game consoles. And storage will be managed in the cloud. Most people today think of the cloud as mainly dealing with storage. But the "cloud" I have written in this figure has processing itself done server side, the most extreme scenario. This will not happen in the near-term, so that boundary line doesn't have much meaning. In any case, what I wanted to explain is that the platform has moved toward the network, and eventually it will move further toward the cloud, which will greatly expand the market. There's something we have to be careful of here. It used to be that customers who played games were filled with enthusiasm to play games. They didn't care about spending hundreds of dollars for the hardware, and then $60 to buy software. But when you can play games on any device, and a consumer no longer has to make investments in hardware or software, games can become like any other service. In other words, playing a game is as easy and natural as being invited to Facebook by a friend. That dedicated resolution a player needed to have in order to play a game is gone, and it would be strange for developers to ask for such resolution on behalf of the customers. The people we call the "casual users"- that type of customer will increase. This is something we have to keep in mind for those of us making games. The market 3/10
4 Output Processing Power Touch Panel Controller Motion Control Handhelds Voice Control Input expansion means that the profile of our customers becomes further segmented. And, of course, our core users remain incredibly important. That said, we should be conscious when targeting those people who are not already core users. In the last twenty years of the games industry, both designers and users have developed a knowledge-base of implicit assumptions. For example, the user interface. And there are a lot of hardened assumptions in role playing games (RPGs). In Japan, we think of rock-paper-scissors when it comes to party roles, like with mages and fighters. There are so many different assumptions a user has to be familiar with. Many casual users are entering this gaming world not knowing anything. From the mid-2000s, games which were designed to allow first-time gamers to play easily increased. Of course, I don't think they will continue being so simple. As new customers get used to things, the standards they demand will increase. And this is something we need to be acutely aware of from the perspective of game makers; as I said, we should be conscious of our assumptions. 2. The Gameplay Experience Now then, let me move on to my second point. CPU/GPU Here, we'll talk about how a driver of growth shifts among gameplay experiences. Please look at the slide (Figure 2). I've drawn four axes. Processing Power, Input, Communication, Output, exactly in that order. This story is not guesswork but actually quite logical. Communication First, as I said earlier, in the beginning, video games were applications which could not be run on regular machines, and the industry was in competition for processing power. Consider the CPU-based competition of game consoles: in the 1990s we had the 16-bit competition, then the 32-bit competition, etc. This axis stopped being the primary driver around the year Until recently, there continued to be plenty of talk about processing power, but we now understand that processing power was no longer the driver of growth in the market. Of course, this does not mean that processing power has stopped or will stop increasing. Processing power will continue to increase. Next year, the year after, and the year after that- it won't stop. For AI and physics, the bar will be set to grow even higher. But when we speak of a driver expanding the size of the market, it won t be processing power. The creative side has to fulfill the demands of the customers, who thus have higher and higher expectations, but that is not the same as saying that the market will expand; it s a simple necessity of sustainable technology. Furthermore, the reason processing power stopped being a 4/10
5 driver of growth is due to general purpose devices gaining considerably in processing power. The next axis is input. At the very start, the great invention was the controller. The mouse, keyboard and joystick, then at a stroke, the Nintendo controller. This was a wonderful invention, and thanks to it, the gameplay experience became further enriched. You could enter exceedingly complex inputs. And from there, Nintendo also released the Game Boy, giving birth to the handheld genre. Around the year 2000, processing power stopped being the driver, and the world shifted in the direction of inputs. And here, Nintendo reappeared with the Nintendo DS and the Wii. One after the other came touch panels and voice control, then motion control. From the middle half of the 2000s to 2010, the Nintendo DS and Wii swept the market. And this makes a lot of sense. The axis had moved. And Nintendo consistently became the market s sovereign. As would be expected, Sony and Microsoft released the PlayStation Move and Kinect. But touch panels and partial motion, etc. had already become a standard for general purpose devices. Bringing motion controls to the consoles simply meant that the distance between dedicated game consoles and those devices that were not dedicated game consoles became closer; Move and Kinect could not become a driver of growth for the whole industry. I think the input axis will continue to evolve but the next jump will take time. For example, we can think about how to use brain waves. It could go as far as planting something in the brainstem like out of the Matrix, which is a bit of a gap from here. This axis, as seen in the slide, only reaches as far as where we are around Earlier I said that these theories were all quite logical so I want to link to our previous discussion. As the investment to play on the part of the consumer decreases, the market expands, and this expansion has moved from dedicated hardware to multimedia machines and then general purpose devices. The processing power and input are reaching standardized levels on general purpose devices and the gap between dedicated and general purpose devices is decreasing. Furthermore, from 2007/2008 and onward, in other words since the network has become the platform, and particularly 5/10
6 striking in 2010, the driver of growth has moved toward the communication axis. But this is only the beginning. From 2007/2008, many companies offering new services have appeared, but we are only at the very start, and we are only at the beginning of knowing what our customer's needs are. As we shift toward the communication axis, the hardships the old games industry faced are happening all at once. The gameplay experience is different. The customers are different. This is an example of market disruption. Because you can do micropayments, the business model changes too. And distribution is different. All of this is coming at once. We ve been rushed by these market disruptions. Fundamental changes are occurring. But, at this show (TGS), we can see that the big publishers have started to catch up. I don't think this communication axis will end in one wave. I think two, three waves are coming. This will be an important battlefield for years to come. To reiterate, this is not a competition fought only within the games industry. Beyond general purpose devices, we've reached the era of the network as the platform. Services, business models, and the gameplay experience- we'll be competing head-to-head with other forms of entertainment. While we are exposed to this competition, we'll have a greater number of users by which to do business, and the amount of chances are magnified. Lastly, theoretically speaking, I think there is one more revolution to be had with devices. We don't know what it will look like yet. Today s 3D is just an optical illusion. Later, we ll see, for example, holograms become real, or something which shows images directly into your eyes to allow you to overlay a fictional world upon the real world. Many things will come with the next axis, the output axis. There will be multiple drivers of growth on the output axis, but it will be quite a while before this happens. That's because it is a fairly large deviation from the undercurrent I mentioned earlier, and something which will take us back to hyper-dedicated devices. The output axis is not something which the standards within general purposes devices could handle; rather this innovation would probably need to be something that occurs at arcades or as part of toys. 6/10
7 3 1. The Business Model 1 Price The consumer controls pricing power and pays to his satisfaction (Freemium is an example) Our final driver of growth is the business model (Figure 3.) First, let s talk about price. When video games first appeared on the scene as arcade games, they were pay-to-play. You put in as many 100 yen coins as you wanted to play for. Then, console game software moved into packaged good sales. In other words, a fixed price. This trend has continued since that period. Customers rebelled; that lead to used games. It may be bad of me to say, but used games are inevitable; it's the start of the customer trying to take back control of pricing. The distributor does control pricing through lower priced editions, in America this would be price protection, in any case it's the start of price regulation. Supply-side, demand-side... When you have a sales channel which sells physical goods, in the end the distributor must control the price. Before I entered this company, I bought a game new, played it immediately, sold it immediately, and then bought my next copy used. I only paid the difference between when I bought it new, and when I sold it used. But that s the demand-side of fixed pricing. The decisive breaking point for fixed pricing was the internet. When you connect your game to the web, you can do micropayments. Then you can pay at any time. This is something completely different than fixed pricing. We've returned from fixed pricing to pay-to-play. But from here on out it gets difficult. The amount that gets paid for in pay-to-play schemes isn't something the suppliers can control. Customers will only pay to their satisfaction. And the realization of this phenomenon is microtransactions and freemium. This is, in a word, a situation where the customer pays for as much as he/she is satisfied. The unit price for goods and services is going down. People call this price destruction or "free." But that's not what's happening. The phenomenon may appear that way, but the undercurrent that I can see is we've moved to a system where each customer is paying as much as he wants to. And when this happens, the creative side needs to begin designing for this new model- game designs will change completely. But it's not that games will become cheaper and unprofitable; rather the method of game design has to change. Within this context, discussions over price become necessary. 7/10
8 3 2. The Business Model 2 Shifts in Value Experience Value User-generated data Community data Personal data Now for the second component of the business model (Figure 4.) When we say satisfaction, what kind of satisfaction do we mean? The point is, what kind of value do people seek to pay money for? Software Hardware Data Code Provided data Let's consider the word processor. It used to be that you bought a machine to do word processing. Then DOS-V and MS-DOS came out, and the PC, and the OS, and on top of that you could buy word processing software. Hardware and software were separate. If you asked which had value, hardware or software, it was the word processing software that had more value than the PC. Next let's consider spreadsheet software. The core of spreadsheet software is logic. If you add up this and this, you get this, and if you jump to this part of this column you get something- that kind of logic. But it's the calculations themselves which are important, not the calculation logic, so the software's value is split into two. They sell accounting software which uses spreadsheets. That's exactly what I'm talking about. If you divide the value it shifts up. This figure shows the order in which these shifts occur. Talking about games, first we started with arcade machines. Then, with the NES, hardware and software were divided; and when we reached the PlayStation, software's value was specialized into user generated data- which is to say, play logs and save data. And here the value shifted. And when the network became the foundation, play logs were transmitted, and communication between customers became critical. The value shifted like this. The dotted line, and the difference between what is above and below it, is important. To put it succinctly, this separates what can be copied versus what cannot be copied. I will never say that pirating is permissible. But I am trying to highlight that we need to seek out value that others cannot recreate. No matter what amazing data assets we create, or what kind of wonderful logic we code, when data assets are copied they lose their value. But if we made use of it to find out how customers experienced things, there's value. Making an experience out of user data has value. It s unique. For example, playing with your friends: trying to recreate being at the same place and having a shared experience, that's impossible to copy. That's the direction that communication will go toward. The source of value is shifting. The payment model is changing. We need to be self-conscious of this. 8/10
9 And as people in the industry it's very difficult. We make enormous investments, we make the things that are below the dotted line. But our customers are only seeing value in what's above it. There's a gap between what we're targeting for investment, and the model that's going to make the money back. This is incredibly difficult. But, I think that's the way games always have been. I define games as communication with rules. Something like sports is included in this as well. It's all games. Let's take Shogi, or Japanese chess. Until Shogi as we know it was created, only the board and the pieces had some sort of value. Once the rules were created, well the board and the pieces are something anyone can make, so now it's the rule set. In other words, value transferred to the rules of Shogi. Once this is diffused, a completely different type of added value grows there. Playing itself becomes what's fun. And as time passes, today you have completely different added value services which have become mainstream. OUBAN KAISETSU, JOUSEKI, DAN-I SHUTOKU ** These are all completely different added value services. It's all the same, I think. There's a lot to learn. In the case of video games, it's how we interposition the computer which gives us a way to blend things. At first, video games simply created computer opponents in place of humans. Now they help introduce people to each other. How will this change? The undercurrent of competition is going to be in how we design games. Finally, and this is not just about games, but it's something I think is quite important. When I speak of the cloud, I speak of a fundamental revolution. In the world today there are tens of billions, if not hundreds of billions of dollars invested almost completely in devices. And incidentally, I've got amazing processing power! Of course, I have all the game consoles, two computers, and I've got a company smartphone, and if you add it up, this can do some astronomical calculations, enough to do protein synthesis with! But all their operations are meaningless. I've got this growing amount of processing power, but most of the time it s just sitting around. If we focus the world's investments on the cloud, the cloud will evolve, and the communication environment will evolve along with it. It's a complete paradigm shift. The industrial ecosystem will be transformed. It will be the industrial revolution of infrastructure. (Though this is different from the industrial revolution of games.) The cloud has the power to change governments, corporations, etc. Today s vested interests exist to protect our current system. Moving toward this new shared resource 9/10
10 system that is the fullest potential of the cloud means a new system is needed to regulate how we share creative efforts, pricing, etc. Copyright law will need to be changed, patent law will need to be changed. There will be immense conflict with vested interests. There will be market failures. It s possible that the visible hand of the market will determine the resolution, and emerging countries may manage to attain hegemony through the cloud. The cloud has the power to change the balance of power in the world. Years from now, when we enter the cloud era, our games industry will face off against other forms of entertainment. What kind of value will our customers expect, furthermore, how will the world be completely changed? We need to create our products in anticipation of these changes. I've spoken quickly and nonstop so there have been parts which may not have been understood well, but I think that as this games industry grew incredibly large, it became chaotic to see what those drivers of growth were. My motivation today was to sort out and share these thoughts. As members of the industry, we each have to develop various innovations to meet the demands of our customers. That said, I believe that if our industry as a whole recognizes the undercurrents together, we can create proper, high quality products, and that is why I took the time to speak with you about it today. Thank you very much. (Parts of this document have been revised since the actual presentation.) NOTES: * imode is a Japanese mobile internet platform. **OUBAN KAISETSU is, for example, similar to commentary in American football games, where announcers offer diagrams that simulate alternative plays a team could have made. JOUSEKI are similar to gambits in Chess, which have become widely known and studied over the course of centuries. DAN-I SHUTOKU refers to a grade obtained according to the level of one s skills, such as a black belt in Karate. 10/10
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