Time to get your house in order

Next generation consoles ask tough questions of the games publishers as development costs are set to soar

The launch of the next generation consoles will see games publishers' development costs increase dramatically. The current cost of console games development typically ranges between $3 and $6 million per title. This is set to increase to $6 to $10 million for the forthcoming new machines from Microsoft, Sony and Nintendo, with extreme cases surpassing $20 million.

However, set against this background of increasing development costs, the games industry is in rude health, with forecast growth of 9-10% over the next four years, though 2005 is forecast to be flat whilst the industry waits for the arrival of the next generation consoles.

According to a new ground breaking report from Screen Digest - Game Software Publishing: Strategies for market success – games publishers will have to choose their development strategies carefully as the cost of a failed title becomes even more pronounced. Screen Digest estimates that the number of profitable titles per year could fall as low as 80 as developers and publishers are forced to focus on fewer and higher quality titles.

The report predicts continued industry consolidation and the demise of smaller publishers which lack viable growth strategies. Currently, the large American publishers seem best placed and most capable to succeed. Japanese and European publishers, although creatively successful, will need to get their houses in order and focus on other key aspects of running a games business – strategy, marketing, finance, licensing and human resources.

This new landscape will undoubtedly force publishers to carefully consider their development strategies. Titles which are based on third party IP such as that owned by the movie studios, sports associations and sports personalities have traditionally been considered a safer bet than original content titles which are more volatile, either selling very well or very poorly.

Screen Digest's analysis shows that in the US in 2004, titles based on licensed IP, such as Madden NFL 2005, sold 23% more units than titles based on original content. However, the short term revenue gains of licensed IP, does not necessarily translate into greater profits. Licensing costs are rising as IP owners become increasingly aware of the growing importance of the games medium.

While the majority of games released in 2004 and 2005 by the major publishers will have been profitable, looking ahead new revenue streams will take on increased significance for games publishers. The total online PC games market topped $1bn in the West in 2004 and is expected to exceed $2bn by 2007. Mobile and digital distribution also offer growing new incremental revenue streams for publishers.

At 30 years of age, the games industry still suffers from an endemic lack of professional management compared to less mature industries such as the mobile telephony and the internet industries. The high number of bankruptcies - despite favourable market conditions - is testament to this fact. Games companies must complement their formidable creative and technological achievements with strong business planning and analysis in order to reap the benefits of the next phase of console market growth.

The report is the first study to identify the world's most profitable games publishers and reveals the strategies that have lead to their success. Employing analytical techniques never before applied to the games sector, the report critically examines a range of operating and growth strategies for games publishers.