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Why Is Innovating in the $20 Billion Games Industry So Hard?

The video game industry is – paradoxically – very traditional and resistant to change. That’s odd when you consider the history of video games and its the first 100% digital industry ever – All content has always been created and consumed on a screen. Yet for years, the business has been about putting this digital content onto plastic disks and cartridges then selling them at retail stores. However these major video game publishers like EA, Sony, Nintendo, Activision, Microsoft and UbiSoft are having a tough time with the “digital transition” not wanting to upset the sacred cow of the powerful few retailers that currently move 90% of their revenues. Now the social games and app businesses roar ahead leaving traditional video game publishers scrambling to answer their moves.

This shouldn’t be a suprise – they have seen this coming for over 12 years! An earlier company I founded in 1999, Gigex, was a leader in digital downloads of game demos, trailers and MMOs. We believed that the network would flatten distribution of content across the Internet. We didn’t focus on transactions, just getting the content into people’s hands. We tracked that distribution data and provided predictive trends that video game publishers used to predict future sales. We tried to sell them cost per click ads (before Google) but they said that was “too complicated” a model and instead wanted a flat rate. They said we had the “wrong” business model – (I guess we were a little early for that one! )

So how can a $20 billion industry built on new technical innovations and 100% digital all the way along be so slow to adapt? I think its wishful thinking that their business is like any consumer packaged goods (CPG) business. Give away the razors and sell the blades. That’s been the model of the video game industry for 20 years by subsidizing game consoles and making the money on software sales. Now entrepreneurs have disregarded the “channel” and have gone directly to consumers on the web, mobile platforms and facebook /social networks. This model works differently where Average Revenue per Customer, Daily Active Users, Virality and Monetization are the core metrics. This is a real business that the traditional $20 billion games industry has first ignored then begrudgingly began to accept as a reality.

I believe now the tipping point has arrived. The big game publishers must either innovate or die a slow and humiliating death. Here are 3 things they must do now to avoid the junk heap of history. There will be case studies and books written about this industry and rise of social and mobile game models. There are billions at stake and the smart innovators will win, the slow stodgy razor blade salesmen will be toast.

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