THE BACKGROUND
The development of an interactive physical exercise game by Sony in a tie-up with Nike marks the latest step by the games industry to broaden its audience beyond teenage boys. Now titles offer something for everyone, from a female-friendly Pop Idol tie-in to games so violent or risque they attract a film-style 18 rating. Cheap consoles have driven UK penetration to 40% of UK homes, and with next-generation devices set to combine gaming with MP3, DVD and web technology, the video games market is likely to become even broader.
Despite media criticism of video games and their influence on young people, UK sales of leisure software have more than doubled since 1997, according to the Entertainment & Leisure Software Publishers Association (ELSPA) and Screen Digest.
The UK, one of the creative centres of the software industry, is the third-biggest market in the world, behind only the US and Japan. The growth in gaming reflects its transition from an activity indulged in by teenage boys to a pastime of adult consumers, a shift helped by the increasing sophistication of the games.
There are two categories in the video games industry: hardware and software.
Hardware accounted for 52% of the sector's value sales in 2003, according to Euromonitor, with penetration nearing 40% of UK households.
Sony, Nintendo and Microsoft account for 90% of hardware sales in what is a highly concentrated sector.
Sony's PlayStation 2 dominates the market, having sold about 1.6m units in 2003, according to Screen Digest, ahead of Microsoft's Xbox (600,000) and Nintendo's GameCube (400,000). The latter's Game Boy Advance handheld device sold over 1m devices last year.
Sony first entered the market in 1995 with PlayStation, and its marketing has been a major influence in broadening gaming's appeal to older consumers.
PlayStation 2 has enjoyed phenomenal success since its 2001 launch, selling 4.3m units in the UK by the end of 2003, according to Euromonitor.
Platform value
The hardware market is greatly influenced by product development, and sales of consoles tend to slow as new models are anticipated. But according to ELSPA director-general Roger Bennett, there is likely to be an increase in the time between platform launches. 'There is a far greater awareness and understanding of the need to maximise the value available through current platforms and systems,' he says. 'It is more important than promoting the next technological advance.'
Neither Sony nor Nintendo are expected to introduce next-generation hardware until the end of 2005. But while updated consoles are still some way off, there have been some areas of product development recently. Sony introduced EyeToy, a camera device that allows gamers to appear on-screen and interact with game characters. Nokia has also entered the market with the N-Gage, a combined mobile phone, handheld games console and MP3 player, although its high price and limited software range will hinder its efforts to end the dominance of Nintendo's Game Boy in the handheld market.
The Japanese firm introduced Game Boy Advance in 2001 and Advance SP, with a built-in screen light, two years later. But it will soon face further competition - Sony will enter the handheld market for the first time next year with the launch of its PSP, a portable media centre that includes a music player and internet capabilities.
Retail discounts
The console market has seen significant price cuts and bundling deals (where games are included with the console). Their retail prices have tended to fall over time, helping to build console penetration. In November 2003 Nintendo slashed the price of the GameCube from £122 to £79, while Microsoft reduced Xbox from £199 to £129, which it has since cut to under £100. Although Sony held off longer than its rivals, it cut the price of the PlayStation 2 to £125 for Christmas 2003, and has introduced a slimline model with a reduced price of £90 this year.
UK sales of software totalled £1bn in 2003, according to Euromonitor, and the increasing penetration of the hardware is the key driver behind the category's strong performance. There is now a broad range of software - hit games last year included titles based on football, the Lord of the Rings movies and the Harry Potter books and films.
'There is less orientation of content toward males now,' says ELSPA's Bennett. 'The only problem is a lack of creativity in games, as licences and sequels become the order of the day.'
Female-targeted software includes Pop Idol, a music game based on the hit ITV programme, karaoke game Singstar and The Sims, a PC title in which players control the lives of virtual people.
Electronic Arts is the leading software manufacturer. It accounted for 34% of value sales, according to Euromonitor, with Sony trailing on 16%.
Other software companies include Eidos, Vivendi Universal and Infogrames, which now publishes under the Atari label after acquiring rights to the name.
There is still plenty of room for growth. The sector's older demographic means more is expected from gaming devices, and additional features such as DVD players and MP3 technology will help expand the market further.
Mintel forecasts that the computer games sector will grow by 43% in real terms during 2005 and 2006 on the back of the anticipated launch of Xbox 2 and PlayStation 3, and by 2009, the market will have doubled again.
MARKET SHARE OF VIDEO GAMES BY VALUE SALES (%)
Company 2003 2002
1 Sony 38.0 37.7
2 Electronic Arts 16.5 15.5
3 Nintendo 12.0 11.8
4 Atari Europe 6.8 n/a
5 Microsoft 4.6 5.2
6 Vivendi Universal 3.9 4.4
7 Eidos 3.3 3.4
8 Infogrames Entertainment n/a 6.8
9 Others 14.9 15.3
Source: Euromonitor
SOFTWARE SALES BY HARDWARE FORMAT (m units)
Company 2003 2002 2001
1 Sony PlayStation 2 21.5 16.1 7.3
2 PC games 13.0 12.2 12.0
3 Sony PlayStation 5.3 7.9 15.5
4 Microsoft Xbox 4.7 2.1 n/a
5 Nintendo Game Boy Advance 3.6 2.7 1.6
6 PC edutainment/reference 2.8 2.5 2.5
7 Nintendo GameCube 2.7 1.7 n/a
8 Sega Dreamcast n/a 0.4 1.6
9 Nintendo N64 n/a 0.1 0.6
10 Nintendo Game Boy 0.1 1.0 3.9
11 Nokia N-Gage 0.1 n/a n/a
12 Total leisure software 53.8 46.7 45.0
Source: Screen Digest
RETAIL SHARE OF VIDEO GAME VALUE SALES BY OUTLET TYPE (%)
Company 2003 1998
1 Toy specialists 60.0 49.0
2 Audio/video retailers 15.0 15.0
3 Home shopping/mail order 7.0 5.0
4 Electronics retailers 6.0 10.0
5 Department/variety stores 3.0 6.0
6 Supermarkets/discounters 3.0 5.0
7 Others 6.0 10.0
Source: Euromonitor
ANALYST COMMENT - BEN KEEN, CHIEF ANALYST, SCREEN DIGEST
In the next year the most interesting area of the computer games sector will be the handheld category. Two devices hit the UK in early 2005: Nintendo's DS and Sony's PSP.
The DS, just launched in the US and rolling out in Japan this month, is Nintendo's first handheld outside the Game Boy brand, which has dominated the category for more than a decade. The DS is different because it has two screens, opening up new possibilities for game developers. It will appeal to Nintendo's core market of dedicated gamers. The company has a very loyal customer base, and this will extend its franchise.
Sony should not have left the handheld market to Nintendo for so long. What is interesting from a marketing perspective is that we were led to expect that the PSP would be sold for far more than Nintendo's devices. But in Japan it is being priced very aggressively. The two handhelds will compete more closely than Nintendo expected.
While the PSP is pitched as a games machine, it is more than that. It will play back movies and music, making it an all-round portable entertainment device - beyond Nintendo's proposition and extending further than gamers to reach a wider demographic.
The first big battle for these two in the UK will be Christmas 2005, and Screen Digest expects DS to have sold 780,000 by the end of next year, and PSP 700,000. But in the long term, we expect PSP to overtake the Nintendo product and attain a dominant market position.
The handheld sector is growing to a significant market size. By the end of this year software sales for handheld devices will be £92.2m, but this will have grown to £157m by the end of 2005.
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