In this exclusive interview, DFC Intelligence founder and president David Cole discusses industry trends along with two of his firm’s recent research initiatives, one looking at emerging markets abroad, the other at changing game distribution channels here in the West.
By Meelad Sadat
David Cole, founder and president, DFC Intelligence
To grasp how long DFC Intelligence has been covering the videogame industry, consider how different the game market was when the firm started in 1995. The game retail space was an alien landscape, one where stores such as Babbages and Software, Etc. peppered malls, most of which still had an arcade. Inside the stores, customers were more likely taking games home on cartridges rather than discs. The console market had familiar players, but in much different positions as they entered the 3D game era with 32-bit and 64-bit consoles. Sega was the champ, Nintendo a bruised contender, and Sony an unknown outsider. Microsoft was sitting in the audience.
The game industry has come a long way, and anyone who has followed DFC’s analysis over the years may have come across fewer surprises. The firm has been often-early and on-point on areas such as the run-up in game development budgets, the peaking of the hardcore console market, and more recently the growth of MMO and casual games. Just last week, DFC announced that it was turning its focus to another growth area, emerging markets abroad. It joined veteran China market analyst firm Niko Partners to form a new research arm called DFC-Niko Emerging Markets. The partnership is a research initiative focusing on ten burgeoning game marketplaces including Brazil, Mexico, Hong Kong, and a wide swath of fast-developing Asian countries. DFC has also launched a new internal initiative, again targeting an emerging area for the game industry. The firm started research on the current state of game distribution channels, an area seeing some fluidity as business flows from brick-and-mortar retail to digital distribution and downloadable content.
With all of the activity, the[a]listdaily reached out to David Cole, founder and president of DFC, to talk about the firm’s new initiatives as well as get his thoughts on recent industry developments.
the[a]listdaily: DFC has been right on top of covering the growth of MMO as well as online casual and social games. Do you think these types of games are affecting the console market?
David Cole: Right now, I do not think casual, social and MMO games are having much of an impact on the console market. Of course, long term they could take time and money away from the console systems, but I don’t think that is happening yet. While there has been indications of a decline in the console business that is really a natural part of the cycle and would have happened regardless of growth in other areas. DFC had been forecasting that 2008 would be a peak year for consoles for many years. Since 2005 DFC has forecasted a decline in 2009 and a further decline in 2010. However, this is a decline from amazing record sales and consumer spending on consoles is still robust.
The biggest problem facing the console market is that Sony and Microsoft have helped subsidize the business by spending billions on R&D and marketing. Now, Sony and Microsoft are struggling to make money in the console business and as a result they have cut back on much of the spending that helped grow the market for all participants.
[a]: When you launched DFC-Niko Emerging Markets, your firm said that covering game growth in South Korea helped you recognize these ten emerging markets. What are some telling signs of a burgeoning game market in a developing country?
DC: The biggest sign of growth is increasing broadband penetration and a population that is connected. In South Korea, this usage started in PC Bangs, or Internet cafes, where consumers could play online and be charged by actual usage. As home broadband penetration grew this allowed consumers to play at home. Of course, government initiatives can help technology industries grow (or not) and this is another important factor we monitor.
Once consumers are connected online, companies have a way to reach consumers on a cost effective basis without having to worry as much about the devastating impact of piracy. Basically, technology is allowing legitimate publishers and distributors to out price the pirates in many emerging markets.
[a]: Speaking to a West-based marketer or a developer, how would you define the opportunities in these emerging markets?
DC: With the cost of developing products it is becoming essential to have a global business. Obviously from a sheer numbers perspective only about 1 billion people are in the Western markets out of a global population approaching 7 billion. However, more than sheer numbers, emerging markets tend to like products that have extremely high profit margins. If you look at the top game companies in a country like China they are making these ridiculous profits on games that are often over five years old.
Of course, it is easier said than done. There are numerous issues in trying to establish a global business and each country will have its own obstacles. A major part of our research initiative involves working with lawyers to understand the unique rules of each country. Another part of the research involves identifying who developers should look to partner with in specific countries. In many cases it may not make sense for a company to try and enter a particular country. However, it will become very important for publishers to have a strong understanding of the global potential for a specific product.
[a]: You just launched a survey looking at game distribution channels here in North America. What prompted the research initiative and what are the objectives?
DC: The explosion of distribution channels is one of the biggest growth opportunities for the game industry. It also represents a potential pitfall for companies that don’t fully understand what changes are occurring and the implications of those changes on existing practices.
The ability to utilize the broadband networks to digitally distribute products is a major change for all entertainment products. It breaks the stranglehold large retailers and distributors had on getting products in consumer hands. Furthermore, online access allows for more flexible business models including subscriptions, rental, demos, buying low cost items. Of course, from a marketing standpoint, social networks allow companies to leverage masses and reach millions of users AND distribute products to those users at a low cost.
DFC is actually doing several surveys on distribution channels. It is an extremely complex and fast moving area and there is no single data source for reliable information. Our goal has been to survey consumers, collect actual usage data from several million consumers and collect sales data from distributors that will report to us. However, another major initiative has been to get publishers and developers to participate in surveys. We are asking industry insiders how specific products are being distributed through various channels.
We think by using a multiple approach of surveying consumers, collecting actual data and surveying the channel we will be able to triangulate what is truly going on in the market. As an incentive for completing the survey we are giving out a free report of the results to everyone that fills out the survey. We think the results will prove fascinating for marketers looking to understand the various ways consumers are now accessing products. Anyone that wants to take the survey can go here.