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Can Video Games Make a Comeback?

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The video-game industry was once thought to be recession-proof, but sales now consistently disappoint.

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Since the current video-game industry console kicked off in November 2005 with the launch of Microsoft's (MSFT) Xbox 360, the fortunes of industry players have varied wildly.

By a long shot, the best stock market performers have been Nintendo and Activision (ATVI), who had one important thing in common: They changed the way we interact with our games and actually penetrated pop culture. Comparatively, software publishers like Electronic Arts (ERTS) and THQ (THQI) have suffered as they missed the trends and failed to engage gamers with new franchises.

Yes, it's nice to be feature in Wired Magazine, but there's something to be said for the Wii popping up on shows like Good Morning America and Oprah.

The Wii introduced a revolutionary motion-control system that captivated the masses in a way the Xbox 360 and Sony (SNE) PlayStation 3 never could. Activision, for its part, acquired the Red Octane publishing house and took its Guitar Hero franchise to a new level, placing plastic guitars in the hands of millions of boys and girls.

These new ways of playing brought non-gamers into the mix like never before; the need to master a 38-button controller was gone. Grandma and Grandpa started playing Wii bowling, while hipsters got busy playing Guitar Hero in bars all over Brooklyn.

But times have changed. The video-game industry was once thought to be recession-proof, but sales now consistently disappoint, with major retailers like Best Buy (BBY) and GameStop (GME) reporting lousy numbers. And the music-game boom, which saw consumers readily dropping $100-plus at a time for the hottest new titles? Dead as Dillinger. Guitar Hero II was a smash hit in 2006 even before it hit the shelves. But in 2009, gamers uncategorically passed on The Beatles: Rock Band and DJ Hero.

Clearly, the industry needs something to turn things around.

The Big Bang

If I had to point out one major challenge to the video-game establishment, I'd focus on what I call the industry's own Big Bang; the explosion in new gaming platforms.

Last cycle, the Sony PS2 dominated console gaming. Now with a resurgent Microsoft and Sony, there are three contenders in the mix.

But that's not all. Smartphones' gaming capabilities are evolving rapidly, and are now taking a chunk of traditional handheld gaming sales. And now tablets are getting into the game with Apple (AAPL) iPad. Even the cloud is getting into the mix, with OnLive rolling out a system where all processing and data storage takes place on a server network.

Industry executives typically claim that every new platform is a new opportunity, and that's true to a certain extent.

But there's a problem: pricing.

The most expensive title among the 25 best-selling iPhone games in Apple's App Store costs just $2.99. For the iPad, it's $9.99. This is fine for up-and-coming private companies like PopCap, but not for publicly traded companies facing the pressure to grow earnings. They just can't do enough volume at these low prices to make a dent in the bottom line.

Did E3 Save the Day?

Not by a long-shot.

I wanted to see exactly one thing at E3 this week: something that could create new gamers. And what did we get?

1. Stuff that appeals to people who already own gaming consoles (Sony's 3D system, and a long list of hardcore-gamer titles).

2. Motion-control systems wanting a piece of the revolution Nintendo started in 2006 (Microsoft Kinect and Sony Move).

And oh yeah, it's all way too expensive. Kinect and Move, bundled with their respective consoles, are far too pricey relative to the Nintendo Wii. And if you want a 3D adventure with your Sony PS3, get set to pony up for an outrageously expensive 3D TV and 3D glasses for all your friends. The Nintendo 3DS looks very nice, but it's not quite the game-changer the Wii was.

I understand the value of pleasing one's core audience, but those people aren't going anywhere. So why cater to them?

Are Video Games the Next Media Format to Die?

The video-game industry is stagnating, but it's unlikely to decline the way the newspaper and music industries have. Gaming companies are rapidly embracing new platforms. They're not running from the future, they're embracing it. Video-game companies are also well-financed with strong balance sheets, helping them ride out the weak economy.

Console makers were also hip to the dangers of piracy early on, and have generally done a good job of keeping their platforms relatively secure. Consumers got so used to stealing music that they no longer value it. That hasn't happened in the video-game industry, which may explain why game pricing hasn't suffered the way CD prices have.

My Suggestion

It's easy to point fingers at companies and industries and point out what's wrong. Coming up with solutions is the hard part. We can all identify the incompetence leading to the BP (BP) spill, but do you have an answer? I sure as heck don't.

But I'm going to stick my neck out and encourage video-game companies to do exactly one thing: push the envelope in terms of content. The industry is already a target for opportunistic would-be censors armed with bad science, so there's no reason not to experiment.

Now I'm not recommending that video-game companies start trolling for negative attention, making games that let you recreate the Holocaust playing as Hitler.

But video-game advocates do like to push the idea of games as art. Art has many purposes, one of them being to spark conversation and debate, even in the face of controversy.

In reaction to intense criticism and protest, Konami (KNM) canceled Six Days in Fallujah in 2009, a game re-enacting some of the most fierce fighting in the Iraq war. Why is the video-game industry so afraid of controversial non-fiction content? We can run over cops in Grand Theft Auto games, so why can't we simulate what goes on in the real world? Is it politics? Forget that. Nobody stands up for the video-game industry anyway, so it has no reason to play it safe.

So why is there no game about Darfur? And why is the average hero a square-jawed, barrel-chested man's man with a deep voice and no respect for authority?

Why can't a main character be a born-again Christian? Or in a wheelchair? Or obsessive compulsive?

In other words, why can't they be interesting? And by interesting, I mean worth talking about in places other than video-game blogs. The money will follow.


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Positions in AAPL, THQI
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