Go anywhere in Silicon Valley these days and everyone is looking out for bursting economic bubbles.
When it comes to the latest cash cow, next-generation video games, some here say small software makers that develop titles for Microsoft Corp.'s Xbox console and Sony Computer Entertainment Inc.'s PlayStation 2 video game player may be the next to hear a pop, as consumer spending declines and competition grows.
That prediction came from a panel of executives of leading video game publishing companies and console hardware makers, who faced off in a discussion Wednesday night at a Churchill Club dinner in Santa Clara, California. Aside from competitive jabs between executives often found on opposite sides of the playing field, each concluded that a shakeout is due in the video game publishing industry.
"There will be 60 titles released in the U.S. for the holidays with TV advertising, and only 20 of them will be profitable," said Bing Gordon, executive vice president and chief creative officer at Electronic Arts Inc. (EA), a leading game maker that publishes such popular franchises as "The Sims" and the "Madden NFL" football game series.
Thanks to a growing population of U.S. homes with video game consoles, the industry recently has seen one of its biggest growth spurts ever. For starters, game publishers say they have a new audience of gamers to target in the 18-to-34 age group. Microsoft's entry into the market has been another driver, along with a concerted push to introduce to a larger audience competitive games played over the Internet.
EA has proved it has less to worry about than do some of its industry counterparts. The company on Thursday reported 89 percent growth in revenue in its second fiscal quarter compared to the same period last year, and it raised its outlook for the coming year.
However, others, including Sega Corp. and THQ Inc., are beginning to foresee a pinch. Even as game publishers report record earnings this quarter, these companies have recently warned that holiday sales may be disappointing.
The companies fear they may be squeezed by a fickle marketplace that can sink games in which they have made huge investments.
"Most titles lose money," said Ed Fries, corporate vice president of games publishing at Microsoft. "It's a risky business."
Microsoft may know best the risk involved in the video game industry, as it has invested as much as $2 billion to develop its Xbox game console and follow that up with software releases, according to some analysts' estimates, not to mention embarking on a $500 million advertising campaign to promote the gaming platform.
It is a risk worth taking, as video games move into the core of mainstream entertainment, these executives said. One indicator is that last year, for the first time, the sale of video game hardware and software in the U.S. brought in more revenue than U.S. movie box office sales. The industry reached $9.4 billion in revenue compared to $8.5 billion for U.S. box office ticket sales, according to market research company The NPD Group Inc.
However, competition is getting tougher and is likely to lead to consolidation, said Andrew House, executive vice president of Sony Computer Entertainment America Inc. He noted that as the industry makes bigger and more lavish products, spending on development will exceed what many smaller game publishers can afford.
Gordon said EA's budget to develop an average video game has jumped to about $8 million to $10 million, up from $1 million a few years ago. The company is preparing one title that will cost upwards of $25 million before it is released, Gordon said.
"There aren't any million-dollar games anymore," he said.
Although their financial future is uncertain, these companies look forward to no longer being seen as Hollywood's sidekick.
"We shipped 'Halo' and every movie studio called me and said they wanted to make the movie," Fries said of the popular Xbox title developed by Microsoft's game studios.
"We don't have Hollywood envy," said Gordon. "We're past that."