Apps Come to TV: Consoles, Marketers Weep

Apps Come to TV: Consoles, Marketers Weep

Click Here for Part 1 of How and Why App TV Will Disrupt the Console Game Industry

As an industry, video games are at an inflection point as economic, technological and social trends are coming together to disrupt the way we develop, sell and build games. These trends will remake the console business in ways both expected and unexpected.

Movies vs. TV

The underlying force that is driving all of this change is convenience and low cost.

In fact, the tsunami affecting the video game industry right now has some parallels to the change that overturned the studio system in the 1950s, which changed the movie industry from a centrally-produced, vertically-integrated entertainment retail business to a decentralized industry with multiple revenue streams across a fragmented landscape, with aggregators (networks) and advertisers becoming much more important to the sale and development of new programs.

When TV came along, the response from the film industry was to make ever more epic movies at higher and higher budgets (Cleopatra for example), to create new technological standards that could not be duplicated in the home (widescreen, 3D), and create “location based” movies (drive-ins) for cheaper fare aimed at niche audiences. While the underpinning industry of Hollywood changed dramatically through this period, the basic product did not – it was still a 2 hour movie with a beginning, middle and end, featuring the stars that the audience had grown to love.

TV, at first the despised red-headed stepchild of the industry, began to find its own way with brand new innovations that fit the episodic, advertising-supported nature of the business. Situation comedies, soap operas, coverage of live sporting events, game shows, daily news and yes, repackaged movies became the staples of the TV industry.

Home TV consumption increased dramatically because of its convenience and low cost. Initially limited by few channels, TV became the most powerful communication device in history leading up to the current innovations of lushly produced cable-based programming for adults like The Sopranos, True Blood, and Mad Men along with more cheaply produced reality programming like Celebrity Apprentice or Jersey Shore.

The Evolution of Video Games

Similarly, the rise of video games in bars and arcades led to the growth of home-based systems with arcades promoting simple-to-play games that appealed to casual consumers. An entire generation was trained by arcade machines to love interactive video games and demand them in the home.

It was a simple stretch to bring these same games into the home. After all, this was much more convenient and, on a per-play basis, much cheaper than arcades. Now you could play your favorite game forever for a low initial cost.

The sons and daughters of this generation have been driving the adoption of ever more complex, realistic and epic networked video games across multiple incompatible platforms. The buying experience is limited to a few major retailers and it is not easy to try before you buy, or even look at the packaging as many video game displays are locked behind glass.

Video game budgets have skyrocketed, such that AAA games cost anywhere from $25 to $100 million and must sell well over a million units at $60 price points to get a reasonable return on investment (ROI). Packaged video games are neither cheap nor convenient and knowledgeable purchase requires enthusiast knowledge gleaned from friends or the gaming press. Games for Xbox 360 or PS3 also require a large time and skill commitment – they are “appointment games” requiring the user to have a good HD TV and high fidelity audio to enjoy the experience as intended by the developers.

New gaming models that are cheaper and more convenient area already disrupting the video game industry. The Wii became the “anti-console” aimed at casual and non-gamers. Social games like FarmVille, free-to-play games and virtual goods-based payment schemes have all disrupted the PC game industry and served as a feeder system for an expanding casual games market. Sony and Microsoft are responding with their own “casual” initiatives with Kinect and the PlayStation Move, but the level of success these expensive add-ons will have with a cash-strapped casual market remains to be seen.

One salvation for exploding costs for hugely expensive “epic” games are subscription-based online games like World of Warcraft that keep consumers playing for many, many hours and offer an incredible revenue stream for publishers, avoiding the twin plagues of rental and used game sales.

Activision-Blizzard CEO Bobby Kotick was quoted by the Wall Street Journal saying the if he could snap his fingers and make one change to Activision, he would make Call Of Duty an online subscription service:

“I think our audiences are clamouring for it. If you look at what they’re playing on Xbox Live today, we’ve had 1.7 billion hours of multiplayer play on Live. I think we could do a lot more to really satisfy the interests of the customers.”

But while monthly paid subscriptions are one way to pay for epic experiences, only the largest of gaming brands (World of Warcraft, Call of Duty, Star Wars, etc.) will be able to profitably live in this space due to enormous development and maintenance costs. Right now, the delivery platform for these games is the desktop PC-based Internet, which has yet to migrate successfully to the TV.

App TV will become the dominant disruptive gaming force because it will be convenient, cheap and integrated choice, allowing both Internet access as well as subsidized native and cloud gaming in a TV-centric environment. App-based gaming will be cheaper and “good enough” for the majority of people and it will be the operating system which sits on top of existing console and cable boxes, so non-enthusiast consumers will not feel that they have to choose. But when the next wave of consoles comes to market, many of them may be less inclined to buy an expensive specialty box with costly purpose-built titles when they are drowning in low cost cloud based and native alternatives.

Consumers will get to “play anywhere, anytime” and not be restricted to just their TV, PC, tablet or smartphone. Within the structure of App TV, players will be able to play native games that take advantage of the hardware, they will be able to play browser-based and social network games, and they will even be able to play highly sophisticated games with cloud based services like OnLive or Gaikai through their App TV browser. More importantly, they will be easily able to switch functions on their device, using it for web browsing, search, displaying photographs, video chat like Apple’s FaceTime, music and access to all the world’s video content whether it’s You Tube, Hulu or traditional cable or satellite DVRs.

Like smartphones, App TV will have a much easier time penetrating world markets than traditional consoles have been able to do. With streaming video and cloud gaming services, piracy will be less of a problem and with the low friction in terms of packaging and updates, software developers can fix problems or add new features or content quickly, with localized versions being relatively easy to implement for even the smallest of developers. This is consistent with our experience at Appy Entertainment, where our FaceFighter game has reached #1 in its category in dozens of territories around the world, the majority of which have been non-English speaking.

By opening up the business model to advertisers, much of the gaming content will be episodic and ad-supported. Analytics from App TV will go a long way to making brand advertising more relevant to consumers, which in turn will drive more advertisers to forego traditional network TV buys in order to spread their spots across a range of content – including games – especially if these spots can follow consumers from their TV to their smartphones and tablet PCs. As the TV advertising is a $77.5 billion market (as of 2008, according to Nielson Monitor-Plus), even a small part would be highly significant to the games industry. With Google’s acquisition of Admob and Apple’s debut of the iAd platform, the delivery mechanisms for ever more interactive and engaging brand advertising within apps is already well underway.

The Fallout

Big, hairy, awesome console games will, of course, still be desired and played by millions of enthusiast gamers. But the ecosystem of three different technologically sophisticated platforms with enormous start-up costs that have to be subsidized by software sales over time will be eroded by companies with different revenue models (like search advertising-based Google or hardware-based Apple)

The financial model that both Microsoft and Sony pursued during the last console cycle will not be sustainable during the next one – the era of drilling a hole in the other guy’s half of the boat to get ahead is over.

According to the Wall Street Journal, as of February of 2010, Sony was still losing 6 cents on every dollar on PS3 hardware, or about $18 per unit. As for Microsoft, the Xbox business has never evolved into the consistently profitable business it was intended to be as the “Entertainment & Devices” section on the chart below illustrates:

Source: Silicon Alley Insider “Chart of the Day”

Developers of highly intensive games will need to develop business models around free to play, subscription, “try before you buy” and advertising in order to justify the expense of a large games. They will need to nurture enthusiast gamers who have grown accustomed to instant gratification and low prices with their phones, tablets and App TVs.

As App TVs become the operating system that organizes the living room, traditional box manufacturers that make dedicated single-use consumer electronics will be phased out. Video game consoles, DVD/Blu-Ray players, stereo receivers, media boxes and eventually cable and satellite boxes will be replaced by cloud services and native apps.

The TV will become an intelligent hub of a digital lifestyle, fully integrated and seamlessly synching with other devices. Music, media, games, social networks, web browsing and telephone and video communications and email will be fully expected functions on every device. Those companies that can provide valuable and integrated content aggregation will flourish.

The current consumer electronics landscape is a blizzard of choices with features piled on more features for their own sake… devices have wireless, but are wired to nowhere, there are too many choices and consumers are confused where they should feel excited about buying something new and cool. There’s no single company that offers a complete solution that just makes everything work in one box. App TV will solve this problem and enhance convenience and simplicity.

Many game developers will have to get leaner, more efficient and think “TV not movies” when designing their games. Games will need to be episodic with designed-in mechanics for sharing amongst friends. Word of mouth, as in Apple’s App Store today, will be the single most important means of building an audience and that audience needs to be fed on a regular basis, not every two years, or every year, but every week or even every day.

There will be crazy subspecies of games that we have not yet even imagined with audiences that can only be measured on a worldwide scale, but creating these new experiences profitably will take boldness and creativity. At Appy, we are taking baby steps to meeting the challenges of this oncoming trend. We frankly cannot wait until App TV gets traction, as the opportunities to create unique interactive experiences for a worldwide audience is the fulfillment of a lifelong dream.

* Editor’s Note: Article syndicated in partnership with Gaming Business Review.

About Chris Ulm
A serial entrepreneur, Chris Ulm leads production and creative development for independent iPhone publisher Appy Entertainment. Chris was essential in growing the dev teams at High Moon Studios and its acquisition by Vivendi, and the sale of Malibu Comics to Marvel.

1 Comments

  1. “TV became the most powerful communication device in history.” No doubt as far as spreading information and culture to a mass public. But communication? That also includes the exchanging of ideas and information such as through a conversation and I believe the telephone, for one, has been much more powerful.

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