Is casual gaming destroying the traditional gaming market?

March 18, 2010: 6:14 AM ET

Trip Hawkins sees a videogame business at war with itself. It's Farmville vs. Halo and the winner could shape the next generation of game play.

It was only a few years ago that the videogame industry was tagged as "the new Hollywood," a billion-dollar market that operated with binary simplicity: A game's opening weekend – like a theatrical release – would determine whether the tens of millions a developer had spent had paid off. People threw parties around drop dates and critics posted reviews. Then it was onto the next game.

But the Hollywood metaphor has turned out to be wrong. Launching a game is more like launching a standalone business. Launch it and the staffing and resource commitments continue seemingly forever:  expansion packs, networking options, new levels and additional characters. There is no moving on, there is only more spending. And just like in the business world, sometimes seemingly trifling competitors can rise up to cause unexpected damage—the kind of from-the-garage innovation that causes CEOs to cower with fear.

The disruption at work was on the mind recently of videogame vet Trip Hawkins, who has been working out of the proverbial garage since starting his company, Digital Chocolate, in 2003. The business model of gaming is broken, he says, and traditional gaming faces its largest challenge since id Software unleashed Doom in the early '90s. The culprit? Casual games, with their small pleasures, constant releases, ease of play and cheap price. They can be played anywhere off any device—and in this device-frenzied age (hello, Android and iPad), the spread of these games is just going to get faster.

"Initially people were wondering why this [new gaming phenomenon] was happening," says Hawkins during a chat. "Well, customers are not into high-performance graphics anymore, and that's because they can find them intimidating."

Hawkins has always been ahead of the curve, sometimes too far, a fact he readily admits. ("That's probably been the biggest problem in my life," he says.) He founded Electronic Arts (ERTS) in 1982, creating the Microsoft of the gaming industry: a behemoth watched by everyone. His next project, the CD-ROM-based 3D0 console, earned tremendous fanfare when released (Time named it its 1993 "Product of the Year") but a high price point, lack of killer games, and small user base contributed to an early demise. So when he established the unfortunately-named Digital Chocolate, people were skeptical about a start-up focused exclusively on casual games, because at the time, there weren't many successful examples that were, well, fun.

Now of course, it's a different story. To date, the company has produced 15 chart-topping iPhone apps, like Crazy Penguin Catapult and New York 3D Rollercoaster Rush.

What's given people like Hawkins the ability to succeed is exactly why users have flocked: the games seem too simple. The big videogame console makers and developers catered to performance-oriented customers who demanded more and better and who were repeat buyers. Then in 2006, Nintendo's inexpensive Wii console came along, emphasizing accessible game play over elaborate scripts and point harvesting. So far, Nintendo has sold 28 million units of the Wii in the U.S., while Microsoft (MSFT) has sold just 19.4 million Xbox 360s and Sony (SNE) 11.7 million Playstation 3s—despite both launching before the Wii. Still, the Wii was only a wake-up call. Web games like Farmville, which introduced free gaming to Facebook, have taken the casual gaming movement into hyperdrive. While traditional console software sales declined 10 percent in 2009, Farmville now lays claim to more than 80 million active monthly users, an astounding figure considering it launched last June.

Which gets back to Hawkins's contention. The console makers and big developers brought this current state of affairs on themselves. Playing Grand Theft Auto or Madden NFL might be fun for a thumb-callused gamer, but for a newbie, its like being thrown into the deep end of the pool. How do you grow a market when you're only catering to repeat customers? Something like Farmville, with its simple graphics and communal setting, lets users wade in at their leisure, no manual or tutorial required.

At last week's Game Developers Conference in San Francisco, Ben Cousins, a general manager at EA, acknowledged that the industry better figure out a solution fast. He compared the current state of affairs in gaming to the modern American supermarket supplanting the early 20th century full-service grocery store. Eventually, he said, casual games will overtake retail-focused counterparts.

"I think as developers working in the packaged games business, we need to understand this shift to a world of convenience," Cousins said to a packed room of developers.

Hawkins early on spotted the benefits that increased computing power would have on Internet and mobile gaming. He's doubtful that even someone well respected like Cousins will provide a big enough wake-up call.

"If they think that they'll continue to have a hold over customers, asking them to pay a high fee upfront to buy a game, even if that game adopts a lot of modern features like downloadable content and network play, they're going to be addressing a fairly-isolated audience," says Hawkins. Factor in increasing development costs and brick-and-mortar issues like channel distribution and manufacturing costs for physical storage and they're clearly at a significant cost disadvantage compared to companies like Zynga, maker of Farmville and Mafia Wars, which can put out a product for a relatively small amount of money, see if users care about it, and keep investing in it if they do.

There is, however, one ironic upside for the Goliaths: the biggest console makers have to worry less about developing their next money-losing generation of machines.

"It would cost tens of millions of dollars – possibly hundreds of millions of dollars – to begin rolling out a new console product," says videogame analyst Scott Steinberg, author of "Get Rich Playing Games." "So certainly, the console makers are wiping their heads, like, 'Thank god. We don't have to rush another generation of systems out the door'."

With so much of the benefits of game play being delivered over the Internet or social networks, the console wars lose some of their urgency. Sure, Sony and Microsoft will talk about how they "future-proofed" their consoles, but really what it boils down to is less demand for the next generation of hardware thanks to this unavoidable growth in a new area of gaming.

As Hawkins is quick to point out, the industry will adapt, just like film and music did when piracy became an issue. But the process of getting there may make the bloodshed of Grand Theft Auto seem like a stroll through the park.

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About This Author
JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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