Sequelitis Hits Gaming!

Are megamergers healthy for the industry?

When the computer-game industry was young, just about anyone could sit down at a computer and pound out a game. Development costs were low; barriers to entry were few. Take the original Zork, a text-based game that came out in 1979, created as a lark by a bunch of MIT students and ultimately selling millions of copies. Times have changed, and the once-wild, entrepreneurial gaming industry has become a more methodical, less interesting business. Zork's sequel, Zork Nemesis, debuted in 1996 with a production budget of $3 million and another $1 million for advertising.

Gamers may be getting the moon when it comes to technological dazzle-the Zork Nemesis budget went into programming, animation and amazing sound-but they're paying a terrible price in creativity. The high cost of development coupled with a tight retail market has sparked dozens of mergers in the industry in recent years, and as the companies get bigger, their lust for risk-taking shrivels like a Shrinky-Dink in an oven.

The most recent merger frenzy hit on Feb. 16, when Irvine-based Interplay Entertainment announced it had acquired a 49.9 percent stake in Virgin Publishing. Interplay has had some resounding hits (most recently its role-playing game Baldur's Gate) as well as some financial troubles, posting recent net losses and laying off employees. But it hopes the Virgin deal, which will extend European distribution of its games, will help reverse its fortunes.

Interplay bought Virgin's European distribution arm-about all that was left of the British company after the titanic Electronic Arts bought Westwood Studios, Virgin's gamemaking division.

Virgin once had a software development office in Irvine and, along with Interplay, used to be one of the two biggest game companies in Orange County. The Virgin acquisition makes Interplay one of the biggest companies anywhere. But Orange County-like Austin and northern California-is well-stocked with game companies that started off aggressively independent and are now corporate subsidiaries. Blizzard Entertainment, another Irvine firm, publishes Starcraft, which holds the distinction of being erroneously labeled one of the most violent games in existence. Blizzard started as a small independent company in 1990 but is now a division of a subsidiary of the French media conglomerate Havas. Bill Fisher, who owns Quicksilver Software in Irvine, says he's gotten a couple of offers to buy his company over the years, but he's turned them down. "I've always made it clear to people that I'm not very interested in such offers," he said.

Steadily, the number of independent game companies in Orange County is dwindling. But the microcosm of OC-in which indie companies slowly merge and coalesce into large, multicellular beasties-is merely a reflection of the computer-gaming industry as a whole. Doug Lowenstein, president of the Interactive Digital Software Association, told Reuters the other week that four-fifths of industry revenues are now in the hands of perhaps 20 companies.

"That's pretty significant concentration, and it's going to get more concentrated-maybe five or 10 companies," Lowenstein said.

The list of mergers is impressive, and seemingly endless: MicroProse and Spectrum HoloByte, later bought by Hasbro Interactive; Electronic Arts and Origin Systems, Electronic Arts and Maxis, Electronic Arts and the previously mentioned Westwood Studios; GT Interactive and Legend Entertainment; Take-Two Interactive Software and TalonSoft; and Microsoft and FASA Interactive.

Several of these companies-notably Electronic Arts and GT Interactive-are known for their snacking ways. "Right now, it does seem to be an accelerating trend in the industry," said Computer Gaming World editorial director Johnny Wilson, who rattled off the preceding list, plus a few more I didn't have room to list, without taking a breath.

One reason for the drive toward consolidation is the aforementioned high costs of development. But Wilson thinks the real problem in the industry is the tight retail market. Retailers charge game developers enormous fees simply for stacking their games on store shelves, a situation that cuts into companies' profit margins and makes it practically impossible for a seat-of-the-pants company to get space on the retail shelf.

"It's very difficult to get shelf space unless you have a deal with a major company that's got some muscle," Wilson said. "Any time an industry has retailers making more money in stocking the product than in selling the product, you know there's definite unhealthiness in the market."

The tight retailing situation has also led to a steep rise in marketing costs, as game publishers advertise heavily to attract the fat-'n'-happy retailers. With those kinds of barriers to entry, is it any wonder small companies wind up inking deals with larger ones just to survive? The net effect on the industry has been the rise of a kind of duck-and-cover mentality, as game companies search desperately for the next surefire hit to keep them afloat.

"We're an industry completely devoted to sequelitis," Wilson said. "Budgets are so high and the retail situation is so sticky that everyone's trying to put out something with maximum appeal." As a result, any time someone comes out with a successful game, everyone else clones it. Doom's initial splash was followed by a rash of first-person shooter games, each one trying to out-gore the others. Then there was the epidemic of real-time strategy games-Warcraft, Waterworld, Dark Rain-following the success of Command & Conquer. It's the worst consequence of the rush to consolidation-an industry that previously prized innovation above all has begun instead to value cowardice.

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