Recent media coverage of the supposed decline of the video game industry has me a bit troubled. The coverage almost singularly focuses on the fact that retail sales of video game are falling off a cliff as a sign of the video game apocalypse – the beginning of the end for the once vibrant industry. “Sorry gamers, it’s been a fun ride, but it’s time to pack up your toys and go home!”

But, wait a minute. Is this assessment of the video game industry fair? While it’s true that at GDC 2009 I made the prediction that the retail model of selling video games was going the way of the dinosaur, the fact is that people overall are playing more games. The market is as vibrant as ever. What’s happening is greater video game media fragmentation along with the trend towards digital distribution.

I will be the first to acknowledge that retail gaming is down. People have less discretionary income right now, and as a result are making fewer purchases, including video games and other complementary products. But should retail spending really be the only yardstick used to measure the current health of the video game industry? Perhaps what is happening is the same thing we see for newspapers, magazines, music and shopping in general: digital cannibalization.

Perhaps it’s the method that is dying, and not the medium?

To understand what’s really occurring in the video game industry, we must recognize that there are several trends affecting retail video game sales, including:

• Micro-transaction games
• Subscription-based games
• Ad-sponsored games
• iPhone games
• Digitally downloaded games

Let’s begin by focusing on digital downloads. Recall a year ago when the discussions on the street centered around the question: Would consumers adopt a model of digital delivery for ‘games of size’ (i.e. DVD sized installs, etc)?

To answer this question, consider Steam, by Valve. This free-to-install application allows consumers to shop for retail available games through an easy-to-use interface.

Valve’s ‘Steam’ Digital Delivery Interface

Consumers can purchase complete versions of PC games, new and old and the majority of popular games are available. Recently, I added Bioshock (amazing), Assassins Creed and an older game Silent Hunter III (I like submarine simulations) to my library. I paid the retail price for these games, something I feel is very likely invisible to the research folks examining traditional checkout register receipts.

Digital downloads of games achieve a couple things that retail sales can’t. First, they provide an online social relevance to the game where existing players can communicate the quality and playability to those who haven’t made the purchase yet, thereby driving the second and most powerful aspect: the impulse buy. This doesn’t happen at Gamestop, and you won’t see it happen at Target. But I can guarantee you it happens on Steam. In fact, each game deployed under the Steam framework has the ability to easily communicate with other logged-in Steam users.

Steam, in particular, offers few free games. There are a handful of ad-sponsored, limited feature version games (such as the completely amazing TrackMania), but by and large the games are sold to the consumers. You’ve no doubt heard of Half-Life, Portal and Counterstrike, top selling games that gave Valve the popularity it now enjoys.

A year ago, the concern was that bandwidth and digital purchase hesitation on the part of consumers might curb the adoption of digital downloads. At the time, the Steam application had 11 million users globally (June 2008). Then the recession hits, and presumably digital delivery services will show a pullback just like the retail video game sector – right? Wrong. In June 2009, the number of Steam users had grown 62 percent to more than 18 million. I personally haven’t purchased a game in a store in well over a year, and the last console games I bought for my Wii were Star Wars: The Force Unleashed and Rock Band.

In coming posts, I’ll discuss other emerging areas of video gaming online that are slowly eating away at the classic retail video game model. I’ll also discuss dollar-to-eyeball conversion, where consumer spending on games can effectively be replaced by display advertising.

Game on!

It’s not that big of a history lesson, but online ads have evolved from novelty to absolute bedrock; they are now a part of many major brands’ ad spend. As soon as this became status quo, advertisers began to demand planning tools to find the right audiences for campaigns, and the industry responded. Then, the next logical demand was issued: give us the ability to evaluate the results of these campaigns – and by the way, please do this with measures consistent with what we use in traditional media.

Lo and behold, several mainstream solutions now exist to do just that. It’s closed the loop on advertising in the digital space: plan, buy, evaluate results.

We’ve just released data indicating that while the economy may be slowing, people’s tendency to play games has increased dramatically. The reasons are fairly elementary. People are seeking a diversion from the economic storm clouds as they watch their bank accounts dwindle and credit card debts rise.

Games, as it turns out, are a great diversion. Lost your job? Kill some trolls. No pay raise this year? See how far you can whack that penguin into the void. Pressure on because fewer people are having to do the same or more work? No problem, Bejeweled will take your mind off of it.

Many pundits out there have said that gaming is recession proof, but as much as demand for diversions like games might be increasing in this economy, discretionary income is nevertheless in decline. Which means that if you don’t have the money to go out to eat or the movies or vacation, you are probably short on the cash to buy a cartridge game or a PC game as well.

I predict that, if gaming remains recession resistant (my term for it), it will only remain so with a shift in the monetization model. Thirty to fifty bucks for a game is a hard pill to swallow if you aren’t sure you’ll have a job next month, and while micro-transaction models might act as a buffer, discretionary income is still just that -- discretionary.

Which brings us to an alternate monetization model, not so directly dependent on discretionary income: ad-supported games. Over the next 24-36 months, game sales may suffer along with the rest of retail. But as gaming demand increases and people turn to free alternatives, the window of opportunity for ad-supported games is getting bigger. Meanwhile, as our data has indicated, ad impressions targeting gamers and in-game ads will continue to climb.

There is a caveat; pressure from the agency and planning community continues to drive demand to evaluate the effectiveness of campaigns. The gaming audience is no longer a niche, as many mistakenly think – rather, it is decidedly mainstream. So measuring who was reached, how frequently, and what happened as a result of the campaign must be evaluated.

And not only must campaigns be evaluated, but they have to meet basic conditions; the measurement has to be from a third-party, the methodology needs to be rock solid and the measurements taken need to be compatible with the same metrics used in measuring traditional media.

Close the loop. Plan, buy, evaluate. Gaming ad impressions are on the rise when many other categories are down – but it won’t last unless everyone gets on board and starts providing the measurement and metrics that are status quo out there on Madison avenue.

Game on!

Hi, I’m Edward Hunter. I’ve been a gamer for many years and now have the perfect job working with comScore clients in the gaming industry.

I’d like to share some things I’ve learned along the way. My advice might not be sage or even wise. In fact, without comScore numbers at my disposal, I'm pretty powerless. But, I do know a couple of things.

Never, ever, let anyone see behind the curtain.

Pretty simple, right? Well, you'd be surprised how many MMO's have lost their mojo by violating this simple rule. I remember the first GM position I took a long time ago. It was for an exceptional text based MMO that I really loved. I was sort of a trouble maker, but I was creative so they gave me a shot.

The process involved my creating a new account with GM powers. I would log in and appear in the GM lounge and that was that. But it wasn't. Right away, I was no longer bound to the constraints of players. I could have any item. See any creature and with a simple word or gesture, dispatch it. I was in heaven, or so I thought.

Everything was great until I tried to play the game as a player again. I couldn't do it. The goals of reaching great heights no longer held any appeal to me, and, why should they? Just moments before I was creating creatures, now defeating them just didn't have any appeal.

I never played that game the same way again, and eventually quit. I had loved that game.

I used to play Ultima Online and wow, I was doing great. I was a woodcutter by trade and was just having fun sort of building stuff and you know, life was good.

Then I got an emulator. Yeah, I could run my very own UO shards, create objects, maps, buildings -- you name it. Very cool, until of course, I tried to actually play UO again. That was more than 7 years ago. Haven't ever gone back.

I played an MMO in beta recently. Decent game, it really was. It was a new metaphor for the genre, one I won’t reveal because frankly anyone halfway savvy reading this would immediately identify it. Anyway, played the beta, even preordered. That’s how cool it was.

I logged in on the last day. I was excited for the server wipe because like many beta players, I had firsthand knowledge of how to get a leg up before the unwashed masses started playing.

I went to a local NPC shop and, to my horror, there were experience books there. They were cheap and allowed me to instantly level my beta character to the highest level possible. Of course I did it. Of course I ran off and obtained what I tried so hard to obtain in the beta, what I knew I would try equally hard to obtain in the live game.

So there I was with all the goodies. It was great.

I never played the game again once it went live. I tried, once, but...I had already seen behind the curtain. Once I had experienced end game content, the mystery was gone and so was the appeal.

The lesson I learned is: don't promote paying players to GM's unless you have a damn good system in place.

Another lesson is: don't design your games so they can be emulated. Always keep something so key to the game’s operation that it keeps the smart ones guessing. And when they figure it out, change it. Change it again, and again. At random. Make it clear to your paying subscribers that any client detected having played on an emulator will be permanently banned from the live game.

Finally, don’t ever expose your end game content during beta to players who haven't gotten there by their own means. It might seem like a great reward, but I'm here to tell you, it’s a game killer. Period.