“Call of Duty” drops A-bomb on video game business

November 12, 2010

“Call of Duty” dropped an A-bomb on the video game business this week. The $360 million first-day sales debut for the game’s “Black Ops” sequel set a new record. Producer Activision may deserve a medal. But the industry fallout looks deadly. Development costs are skyrocketing as packaged game sales shrink. For firms selling to hardcore gamers, it’s ever more about producing blockbusters — and taking bigger risks.

Designing a game for a console in the early 1990s cost between $50,000 and $400,000. Creating one today costs some $20 million, according to Deutsche Bank research. Make a game for multiple platforms — from Xbox to Wii to PlayStation — and the total cost is even higher. Moreover, users pick their purchases carefully because packaged games are expensive. That drives the industry to produce mega-hits that can produce sequels.

The result is small players are finding it difficult to turn a profit, particularly if they allocate lots of capital to a game that fizzles. Viacom for example, plans to sell its Harmonix unit, which produced the so-so hit game “Rock Band”, after writing down its value by $260 million. Viacom said it doesn’t have the expertise or scale to succeed in the business. And it is unlikely to be alone in coming to that conclusion.

True digital downloads of games are on the rise, even as retail sales dwindle. Consumers are increasingly willing to pay to play online or to download “extras” such as additional skill levels. And cheap or free games on social networks and smartphones are positively booming, attracting new players and hardcore geeks alike. Overall, the video game industry is actually growing slightly, according to PwC.

But start-ups like Zynga are capturing much of the new revenue. That’s a problem for established companies such as Electronic Arts, Konami, and Take Two Interactive. At Electronic Arts, for example, traditional game sales fell 11 percent in the last quarter. Digital sales grew 20 percent. Yet the former is four times as large. The risk of heavy losses before reaching the next level may tempt these firms into the M&A game.

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