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Moving the Margins

By October 31, 2008Editorial

By Neil Schneider

Some troubling news today is that Electronic Arts (EA) is laying off about 600 employees – nearly 6% of their entire workforce! EA, the video game publishing powerhouse is known for a smorgasbord of titles including Crysis, Spore, The Sims, Mass Effect, and countless others. With the video game industry earning increasing double digit billion dollar revenues each year, how is it possible to be hit by a $310 million quarterly loss as of September 30th?

I’m not familiar enough to comment on EA’s internal balance sheet, though I’m unconvinced that this is just an issue of modern economic challenges. Game development is an art form, and it is unrealistic to expect every title to sell equally well on the basis that it is a video game. We wish it would work that way – but it doesn’t.

Having been laid off before, I can appreciate what EA’s former employees are going through. Though at an industry level, maybe there is a lesson that will help prevent this from happening again?

When I founded MTBS, I said that game developers were too comfortable – so confident in their revenues that it would take a lot of leverage to convince them to participate or even acknowledge new technologies like stereoscopic 3D gaming. I was right, as I’ll never forget when I went to the Game Developers Conference last year, how one of the exhibitors spoke to me.

I’m not going to name names, but I was very familiar with his company and title. The gentleman was their business development manager, and I was just asking him about his awareness of stereoscopic 3D gaming. I was hoping to find a way to get his game tested so we can have it MTBS certified and he could get free promotion.

I wasn’t talking very long and he looked distracted and annoyed. He interrupted me, and pointed me to the back wall of his exhibit and said “Do you see that poster”?

“Yes”, I said.

“Do you know the name of that game”, he asked?

“Yes”, I responded.

“That game is the number one game right now. I don’t care about stereoscopic 3D gaming.”

I looked at him, smiled, and in a confident cheery voice I said “I see what’s going on here. You’re comfortable! Good! You go on being comfortable. For me, I think it’s important to be more prepared for things, but you go on being comfortable. Good luck to you.”

As I was turning my back to leave, he got visibly nervous and stopped me. He was a business development manager, after all!

He apologized for his behavior, and we were going to continue talking, but his exhibit was about to get busier. I tried following up afterwards, but nothing came of it.

Seeing how the video game industry has its peaks and valleys like everyone else, maybe this overconfidence won’t be as prevalent? I hope so, because game developers desperately need to be open to new ideas and new technologies to drive sales.

Take stereoscopic 3D gaming, for instance. It’s unfortunate, but game developers look at the one and a half to two million stereoscopic 3D solutions in the market and say “that’s a tiny market”. Not so tiny!

Game developers need to appreciate why people buy products. In the 2D gaming world, it’s all about product differentiation. Does the game have a good story? Is it visually attractive compared to the other 2D games on the shelf? Can we effectively market it so our title is better known than the other fifty titles after the same gamers during Christmas?

Here is another way to look at it. If there are 1.5 million S-3D units in homes today, and on condition that people know they spent money on these S-3D display solutions, I think their first motivation is going to be buying games that are compatible with what they own. Whether it’s through console or PC, this will be their number on motivation.

Most MBAs will cringe at my methodology, but in simplest terms, $50 per game multiplied by 1.5 million motivated buyers is $75,000,000 in revenue. That’s $25 million more than the $50 million EA is looking to save in their 6% employee layoff plans. I agree that these numbers are pure fantasy and are much too simplistic, but if the motivations described here are correct, it is still significant revenue.

Mark Rein, VP and Co-Founder of Epic Games and
Neil Schneider, President & CEO of Meant to be Seen

Furthermore, we live in a different gaming world than we did just a year ago. NVIDIA, iZ3D, AMD, and several stereoscopic 3D manufacturers are working to grow the awareness of S-3D. Mark Rein of Epic Games accepted an MTBS certification and went on record for their enthusiasm of S-3D technologies at SIGGRAPH, Ubisoft is cooking something up with James Cameron for Avatar, and we are seeing multiple game engines implementing native S-3D support.

I would add that there are intrinsic promotional benefits to stereoscopic 3D gaming too. MTBS offers free promotion to game developers who participate with the technology, S-3D gaming is newsworthy, and Hollywood 3D cinema has shortened the learning curve and added appeal to the technology as well.

The real proof in the pudding will depend on the opinions of actual gamers. Working with AMD, iZ3D, Blitz Games Studios, The Game Creators and Guild Software, Meant to be Seen launched the U-DECIDE Initiative. With nearly 60 prizes being given away including high performance GPUs, 3D monitors and video games, the industry will get the final word from both traditional 2D and existing stereoscopic 3D gamers on where these technologies sit in their future.

In conclusion, while cutting back expenses to increase margins is a necessary evil, I’d rather see developers seek out and invent new ways of thinking and marketing to increase sales in the long term.

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