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++Chapter 1 (Innovation in General)++
++Chapter 2 (Innovation & the Games Industry)++
++Chapter 3 Investigation, Data Analysis and Conclusions, Recommendations and Conclusion++
Chapter 2
Now that the general aspects of innovation have been covered, this chapter aims to highlight the methods, variables, and limitations within the games industry, to delineate what role innovation plays in it. It will enhance the validity of
the hypothesis that ‘game ideas with more innovation sell better, than ones with less’.
Innovation & the Games Industry
Developers are the people who construct the game content to the best of their ability to meet the needs and market trends of the consumers.
Kerr (2006b, p.43) outlines the “…three types of development company: first-party developers who are fully owned by a publishing company; second-party developers who are independent companies who are contracted to create games from concepts developed by a publisher; and third-party developers who are independent development houses who work on their own projects”.
Kerr (2006a, pp.64-65) highlights one problem with “third-party developers”, they can experience “an aggressive and tough approach to negotiations with” publishers, as “they incur all the risk and uncertainties involved” with the introduction of a new game. This could affect the overall quality of the title, if the publisher tries to leverage creative control, developers may be less enthusiastic about working on their projects (Rocca 2005, p.41).
Fullerton, et al., (2008, p.33) suggests a potential developer technique focusing on the “formal elements” of a game, to cultivate new, innovative experiences. These elements or rules form a “structure” to how a game plays, so the “understanding” of these can allow us to “experiment with alternatives”, by “going beyond these basic elements and exploring new forms of interactivity that lie at the edge of what we call ‘games.’”
“Divergent thinking”, is another method in production, which encourages the free, experimental play of programming style, characteristic of “constructive” hackers and is used to “promote radical innovation by substituting quick intuition for the slow process of deductive trail-and-error testing.” This “childlike frame of mind in which possibility is less restricted enables a less-linear flow of ideas”, unrestricting innovative thought and production (Kline, et al., 2005, p.87).
Other techniques focus on the organization of the working environment. The social working conditions in the production process of a game can affect its innovative capacity. Games are made by teams, not just one person with a vision, so it is important for a development house to have social working conditions that allow for heightened communications between its staff (Kerr 2006a, p.75). An open floor plan, where everyone sits close to each other has been suggested; as it encourages different teams, such as artists and programmers, to be able to communicate, allows for shared skills, friendlier operation and a more team based lead in games development (Kline, et al., 2005, pp.199-201). Sharing ideas is an important aspect of games development, this idea attributes to a brainstorm friendly atmosphere, where ideas flow freely.
Innovation and creative control are independent; there are limitations in the publishing side of the games industry. Publishers are known to influence game content to suit their repertoire of titles, also providing a “producer”
to help regulate “quality thresholds demanded by the console manufacturer”, is commonplace (Kerr 2006b, pp.43-44). “Although people in marketing are not, strictly speaking, part of development, they often have a huge impact on the nature of the games a company chooses to make.” Often causing problems between the developers, who grow attached to their ideas, and marketing who know what the consumers want (Gershenfeld, et al., 2003, p.74). “Marketing” resides in “publishing”, with the aim of increasing “sales”. “Marketing budgets are typically double the development budgets…[and] you’ll find that the publisher reaps…approximately 32% of the retail sale price…less than most people imagine” (Fullerton, et al., 2008, p.430).
Mark Rein cited in Steinberg (2007, p.163), the Vice President of Epic Games explains that “[s]elf-fund[ing]” allows for total “creative control”, as PR firms relax their rule on content, because there is much less risk associated. Scott Miller cited in Fullerton, et al., (2008, p.451), the CEO of Apogee Software (aka 3D Realms) adds that “self-publishing” builds “financial independence”, where ownership and creative “control” of “original IP” stays with the developer. “In fact, a developer’s only chance of long-term success is to creating and won an original IP…Plus, as 3D Realms and Remedy have shown with the sale of the Max Payne IP for over $45 million, an IP is where the real value of a studio resides.”
Certain variables within a publisher will affect whether or not they choose to publish a game. Publishers have a range of clients, which means a range of games in different genres, hence they will not fund a game project, if they already have competing games of that genre, “no matter how good the idea” (Kerr 2006a, p.65). “Regardless of the publisher’s product strategy, they all need to release a certain number of games in order [to] meet their financial targets” (Gershenfeld, et al., 2003, p.85).
Games are made to meet the uncertain interests of the consumer. Marketers familiarise the consumer with the product via “trailers” and promotional media etc. and games companies “commission” games under certain genres to meet consumer demand and expectation (Kerr 2006a, p.45). Games publishers might be slanted toward using historical sales data per genre, to discern whether or not to purchase a “market development fund” for high visibility placement and in store advertising (Kerr 2006a, p.65). Publishers can negotiate with retail outlets where the product is placed on the shelves in stores, advertising space if you will, “end-of-aisle” placement can ensure more visibility, in turn, increasing sales figures. (Kerr 2006a, p.65)
Publishers know all too well the power of genre, Walker (2003, p.216) surveyed “141 gamers and industry veterans”, with the question: “What influences your gaming purchases the most?” The results were, “Genre: 78%, Topic 50%, Franchise: 49%, Developer/publisher: 18% [and] Cool factor: 15%”. Walker (2003, p.83) suggests the combination of genres to further increase the games marketability. Game genre is a powerful tool as immediately familiarises the consumer with the product based on expectations (Kerr 2006a, p.40).
Publishers have many methods of advertising, all of which focus on making the consumer aware of the product. In-store marketing greatly influences purchasing power, but as large retail outlets grow from strength to strength, more aggressive retail contracts result. The developer and publishers together may see as little as forty percent of the sale price, as the higher percentages go to the “console manufacturer”, “distributer” and “retailer”. (Kerr 2006b, pp.44-45)
“Nintendo was the first company to ‘brand’ the video game market…Nintendo was synonymous with video gaming” and gained an even more important status by “creat[ing] a net of cultural events, allusions, slogans, and spin-offs that as completely as possible absorbed the attention, and the purchasing power, of game players.” Nintendo iconized the videogame character Mario, mass marketing it with license upon license, even combining it with the famous franchise Disney. (Kline, et al., 2005, p.125)
It soon becomes obvious why the marketing budgets are so large, which makes it difficult for start up companies to self-fund. The more funds there are for marketing a product, the more famous it becomes, “[i]n the early 1990s Mario had greater name recognition amongst US children than Mickey Mouse. He became the basis of a full-length film, The Wizard. By the early 1990s there were two successful Super Mario Brothers TV shows, one produced for the Fox channel that came to rank fourth on nationally syndicated children’s programs, and an NBC program that became the top-rated Saturday morning cartoon for six- to eleven-year-olds” (Kline, et al., 2005, pp.125-126). Essentially, we see inter-media advertising, which aside from creating a celebrity game character, the formation of a franchise and brand is created, with extremely high market visibility.
Competition with companies with huge marketing budgets, limits market options for the smaller development houses. Kline, et al., (2005, p.126) continues in the description of Nintendo’s marketing strategies for the Mario franchise, outlining even further outreach into other markets from Mario “t-shirts” to ceramic “lamps”. Nintendo even formalized exactly how their icon could be presented to the public, allowing only certain “poses”, “costumes they could appear in, what they could and could not be associated with (no alcohol or tobacco products, no direct sale), and what they could do (no speaking or touching)”. The effect of this huge marketing strategy keeps Mario in a child’s receptive imagination, effectively making Mario a part of life; it makes a “child’s attention, time, desires, ambitions, and fantasies become attached to the Nintendo world.” This sort of branding has the same, if not more of the familiarizing powers of genre. It would be advantageous to have a publisher of this magnitude behind a game title, or even the use of such a famous, branded game character, like Mario.
Video game licensing allows a developer use of copyrighted intellectual property (IP) such as Mario, by contractual agreement with the owners of the IP (Kerr 2006a, p.69). This “increase[s] its exposure and sales, thereby decreas[es]…risk of investment” (Fullerton, et al., 2008, p.424). It helps to increase awareness automatically because the IP is already familiar with the public, so it works as an extension to genre, providing additional translations of a game’s content for a wider audience (Kerr 2006a, p.72).
The software market is unpredictable, not all games see financial success, the ones that do are in the minority, and failures make up for the rest. Firms increasingly have to develop a wide range of games to have a higher chance of success, as a games’ shelf life is short lived. Console manufactures and first-part developers would like to have an exclusive range of games for their console, but as games development is extremely expensive, licensing is the compromise that allows other firms to develop and publish games on the licensed console, for a fee, increasing the range of games, whilst also driving hardware sales (Kline, et al., 2005, p.113).
It is not often that an original IP outsells a mainstream licensed game (Rocca 2005, p.38). Resultantly, popularity of licensing has increased, because of the risk associated with original IPs. The use of licenses in expansion into new markets serves as a counterbalance to the risk, especially as, the seldom mentioned notion that the production of creative work, can be developer specific, as the developer is likely to create a game that he/she enjoys, rather than the general public. Thus, the creative side of the industry may need the counterbalance that licensing provides (Rocca 2005, p.37). “In 2003, the world’s largest game company, Electronic Arts, generated nearly $3 billion in sales, with only 3% of their production based on original IP” (Rocca 2005, p.40)!
Still, there are negative limitations in the licensing game, especially with the industry relying on licenses (Rocca 2005, p.36). Rising costs of licences are seen because of the economic growth of the industry, “because of this, some publishers…are actually quite aggressive about developing original game concepts” (Fullerton, et al., 2008, p.424). There are also lower profit margins when using a license, as “strict licensing agreement[s] with the console maker…[stipulate payment of] a licensing royalty for every unit sold…on top of the retail markup, advertising, shipping, overhead, and development cost for the unit” (Fullerton, et al., 2008, p.424).
Licences can make it hard for smaller developers to get a foothold in the industry, as the larger companies can license their media across their range of games. They may also “acquire development studios in order to gain access to intellectual property” (Kerr 2006b, p.51). As a result of this “vertical integration”, Kerr predicts a handful of publishers will run the industry, which means further increased license costs, but importantly, what this shows is investments into existing IP rather than establishment of new ideas. The trend that publishers are increasingly reliant on licenses to see marketing potential limits scope for “new ideas” (Kerr 2006b, p.54).
Again, there are particular variables within licensing and original IP that can affect the performance of a product. Though licensing can bring familiarity to the consumer, a savvy consumer can tell whether or not the license fits with the game (Walker 2003, p.9). The fact that Rocca (2005, p.40) uses the word “gamble” in the following quote: “[s]ome publishers rely on their ability to gamble on original IP and hit it big”, reveals the complication original IPs face in anchoring their position in the market, as the advertising of the game needs to establish familiarity with the consumer, without the use of a license.
Indeed licensers realise the value of their licenses as a marketing aid and its ability to satiate a marketplace that is inherently unpredictable, it is no wonder that the prices of licenses have increased and can vary. “It is not uncommon for large titles to spend hundreds of thousands of dollars on a license, in addition to giving away anywhere from 1% to 10% of net revenues to the rights holder…[as] [b]randed products have proven to be strong sellers time and time again, whether they have good gameplay or not…” (Fullerton, et al., 2008, p.424).
Unfortunately, the variables do not end here, “[c]onsole licensing agreements generally give the console maker the right of final approval”. This means the developer needs to meet a certain standard set by the console manufacturer in order to release the game, and if defects are found when it is tested, “…they can send the game back to the publisher and demand that it be fixed before release” (Fullerton, et al., 2008, pp.429-430). “Changes at this stage of development…can be very costly and can also impact the release date, potentially missing important market schedules” damaging sales (Fullerton, et al., 2008, p.430).
Kline, et al., (2005, p.114) reveal the licensing method Nintendo has used in the past to monopolise on the industry:
“It required all suppliers to submit games, packaging, artwork, and commercials for its seal of approval, limited the number of game titles a licensee could develop in any one year, and prohibited licensees from making games for other hardware systems for two years…backed up by a formidable litigation apparatus.”
They also received about five dollars per cartridge sold in royalties, and ordered licensees to pay for ten thousand immediately, before shipping.
With such stringent console licensing agreements and IP licensing, the industry sets a strong standard for production, but even honest original games can see profit in this web of limitations, variable and rules. “The challenge lies in finding the right balance between using licensed IP versus fostering original ideas.” Licensing also subtracts from profits, because of “licensing fees”, “[f]urther, the truly big selling games (e.g., The Sims, Myst, GTA, etc.) are more often than not based on original IP.” (Rocca 2005, p.40)
You could thank Spacewar for the birth of computer games, it impacted culture by the presentation of computers used for un-academic, fun purposes, opposing to previous association with unexciting number crunching etc (Kline, et al., 2005, p.88). This was seen by visionary entrepreneurs as the beginning of a new market of entertainment. The cultural impact this ideology had, was the precipitation of the “arcades, the home video game console, and the personal computer” seen today (Kline, et al., 2005, p.90). This accelerated technological advances of mechanical production which increased product supply, threatening to satiate the market. Firms want consumers to be hungry for their product and steer clear of market “stagnation”. To do this, they continually evolve products, resulting in “a ceaseless stream of new commodities with ever-shortening product cycles and life spans” (Kline, et al., 2005, p.66). This creates a reliance on technological, rather than game idea and content innovations which results in “carbon copies of previous games to flood the market [based upon past]…proven sales success” (Crawford & Rutter 2006, p.150).
Learning from Sega’s mistakes, shows how important the balance between hardware and software innovation has become. In competition with Nintendo, Kline, et al., (2005, pp.149-150) make public that Sega tried to create and monopolize upon too many new, innovative technological market segments, losing their balance to Nintendo’s focused approach. However, Sega’s efforts cultivated innovation on a global scale and accelerated this culture into a respectable industry, attracting the attention of much larger companies like Sony.
Kerr (2006a, p.93) reminds with each new generation of technological development “console manufacturers” compete for “the market share”. Healthy relationships with console manufacturers promote further understanding of the console’s technological capabilities. The manufacturer wants games for its console to reflect its technological innovation and abilities to drive hardware sales. A more innovative game that both
exploits the console’s abilities and shows innovations in the game idea itself, will be more likely to receive heavier marketing efforts from the console manufacturer because it holds the bonus of driving hardware sales. It therefore makes sense for the developer to make use of the technology they are developing for, by creating these healthy relationships.
The direct effect marketing has on sales is variable, thus hard to measure. All that can be done is the analysis of where the balance in the content of the game, between demonstration of the hardware’s ability and innovation in the game idea itself lies.
Another variable that may affect sales, often forgotten, is the actual price of the product. This for some people determines whether or not to make the purchase. Pricing strategies and structures have been “neglected for a long time” in electronic entertainment (Clausen 2005, pp.2-3). Fair pricing and value for money reduce consumer’s apprehension when making a purchase (Clausen 2005, p.227).