Analysis: Good times, bad times: crisis behind video games boom

Britain led the world in developing innovative entertainment for PCs and consoles. But some pioneers are now going to the wall
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Is the video games industry thriving or dying? On the surface, all is well in the world of simulated Grand Prix and shoot 'em ups. Globally the industry is worth more than Hollywood, grossing $30bn (£20bn). Last year sales grew by 10 per cent – the sort of increase that would have many computing companies (indeed, the entire sector) weeping for joy if they had been the beneficiaries.

Is the video games industry thriving or dying? On the surface, all is well in the world of simulated Grand Prix and shoot 'em ups. Globally the industry is worth more than Hollywood, grossing $30bn (£20bn). Last year sales grew by 10 per cent – the sort of increase that would have many computing companies (indeed, the entire sector) weeping for joy if they had been the beneficiaries.

Yet there are also darker signals. The small "independent" games companies are beginning to disappear, squeezed out by the high costs of devising new game, which can run into millions. Some note an absence of creativity, citing the way that many of the latest games are just "franchises" of earlier more successful products, just as Hollywood locks itself into film sequels for no other reason than that is easy. And finally, the work of actually writing the games is being shifted offshore to cheaper countries in Eastern Europe or the Far East, leading to worries that the intimacy with the code needed to make the best games is being lost.

At the moment, though, the optimists who have the upper hand. This week the analysts Screen Digest published a report, for the European Leisure Software Publishers Association (Elspa), forecasting that the market in Europe was growing at its fastest rate, with the most popular games console systems – the Sony PlayStation 2, Nintendo GameCube and Microsoft Xbox – selling 30 per cent more than the previous generation of gaming technology over the same period.

In Britain, spending on the leisure software market in 2002 was twice the size of the video rental market and 40 per cent more than cinema box office spending. Games hardware sales in 2002 were also up 44 per cent, accounting for 3.3 million units in the period.

In March last year, another mark was passed, when The Sims game became the highest-selling game for PCs, selling 6.3 million copies worldwide in just two years, and passing the previous titleholder (the entrancing Myst), which was released in 1993.

So is everything booming and blooming in the games industry? No, says Peter Molyneux, managing director of Lionhead Studios, makers of games such as Black & White and BC. He thinks the position is now so bad that the Government should be helping the smaller games companies. "It is well known that Britain leads the world in development terms," he told BBC Online this week. "There's no other place on Earth that has the concentration of development talent."

That has largely come about because Britain was the first country to leap on to the home computer games bandwagon, sparked by the success of 1970s machines such as the Sinclair ZX-81 and BBC Acorn. Users could – and often did – write their own games for these machines; it led to an explosion of back-room games companies that made Britain a nation of games developers.

Now that hands-on approach is being lost, with firms complaining that they cannot find people with experience writing code at the machine level, as ZX-81 and Acorn users used to; yet that is what is needed to produce the best and fastest games. Instead, just as Hollywood has exported the grunt work of animation to the Far East (check the end titles of any US cartoon), so games companies are exporting their coding work and keeping the game planning at home.

But even so, says Mr Molyneux, the cost of planning, writing and selling a good game has spiralled wildly. Ten years ago, it would have been £200,000; now, the average budget is £1m. He said: "Making a computer game now is incredibly expensive. You're talking about millions and millions of pounds to make a triple-A, globally successful game. A few developers are really, really struggling."

Last year, while the games business did boom, a number of small British games companies – Red Lemon, Crawfish and Runecraft – went out of business. The publicly listed Game plc saw its shares fall by 43 per cent after it warned in January that its profits would be static after a slow Christmas.

The reaction of the industry to the need for big hits has been twofold: "franchises" are becoming increasingly common, so that the racing-crime game Grand Theft Auto from Take 2 was quickly followed by "GTA" 2 and 3, and then by GTA: Vice City – the last of which proved the most successful, selling more than 10 million copies.

But often, reviewers complain, franchises lead to listless spin-offs from film or TV brands – say, The Simpsons Road Rage (released last year), about which one reviewer noted: "What would be thought of as a good idea winds up a train wreck yet again. Is this going on by accident? Or is it the work of someone wanting to put out low-grade games with a Simpsons label to make extra cash?"

Mr Molyneux thinks the small independents are the cure for that. "They are the creators of all the new, fresh and different ideas, and that is definitely going to suffer. You are going to see less of the creative, out-there ideas which turn into the compulsive properties."

Roger Bennett, director of Elspa, admitted that the market is dominated by the best-selling titles. "The majority – probably 60 to 70 per cent of sales – come from the top 10 titles," he said. "The top seven or eight represent more than half the turnover." With hundreds of titles released every year, each bearing the hopes of scores of programmers, there's a lot of disappointment around.

Yet Mr Bennett is insistently upbeat. "Since 1996 the UK games industry has grown faster than any other sector in British industry. It grew last year in both value and volume. It's on a par with the DVD and video industries. It's only journalists who seem to see any mixed messages in it."

One thing pleasing games writers is that people who buy games consoles seem happier with what they've got: there isn't the mad demand to upgrade that led to huge queues for the latest box. That lets games companies recoup their investment in learning how to program for a console, and from the games they write for it.

Mr Bennett said "It's reached a plateau in terms of technology. There isn't the same aspiration, and that's good. We're not expecting another generation of consoles until 2005."

But, in the meantime, there is a new "platform" emerging that could help games companies: mobile phones. These are becoming more sophisticated, able to run complex computer languages and download games over the network. In San Jose, California, the Worldwide Games Developers Conference spent two days on this topic alone, and there was a lot of attention on Nokia's N-Gage, which looks like a Nintendo handheld and has more than a dozen buttons, making it usable for even quite complex games. The telecoms analysts Analysys forecasts that, by 2005, mobile companies revenues from games will increase tenfold over 2001 to €3bn (£1.8bn) by 2005. And all that is in addition to the billions that games companies are already raking in, and in the face of piracy at least as bad as that hitting the music and film industries.

So no wonder Alan Yu, organiser of the Games Developers Conference, told his audience: "We are already bigger than a box office first run and, as the youth get older, games will be more popular, and they are certainly a driving influence in pop culture today." It sounds as if the games industry is not going away in a hurry.