PLAY TURNS ROUGH
FOR GAME MAKERS
Copyright 2001 www.sundaytimes.co.uk
[ October 1st 2001 ]
computer-games developers and publishers were
the toast of the leisure sector two years ago.
They had a reputation as the world's finest in
an industry that generates more annual profit
than Hollywood movies.
a sharp 18-month downturn, fuelled by a rash of
profits warnings, £1.4 billion has been wiped
off their value, taking the size of the sector
to just £335m. And there was worse news last week
as French-quoted Infogrames, the second-largest
computer-games company in the world, reported
a £75.8m loss, having made a £16.9m loss the previous
the channel, AIM-quoted Empire Interactive reported
on Thursday a £1.63m loss in its interim results,
an improvement on its £2.07m loss on the comparable
period last year. Meanwhile, Sony said it was
slashing £100 off its PlayStation 2 console. But
shareholders toying with pulling the plug on their
games investments might have a few lives to play
with. The next few months will be crucial for
a turnround that could put much of the value back
into the shares.
hinges on the success of new consoles due to be
launched early next year. Nintendo is bringing
out its GameCube, and Microsoft is making its
debut in the games-hardware market with its Xbox.
Sony has already brought out its PlayStation 2.
Much rides on the success of the new consoles,
as customers have been holding off from spending
as they wait for the new technology, contributing
to the sector's poor performance over the past
Gibson, a games analyst at Durlacher, says consoles
come out every five years, so the fall in demand
and the "year of profit warnings" follow a predictable
trend. "Cyclical growth has been a characteristic
of the games industry since its inception," he
says. "The cycles have proven remarkably uniform
in pattern. Periods of strong growth have tended
to last four to five years, followed by flat or
falling sales during a two-year transition period
as new games platforms are introduced."
platforms drive the cycle. In the 1980s, the Sinclair
ZX81 and Atari hosted classics such as Space Invaders
and Pac-Man, and the technology has since become
increasingly sophisticated. Where 10 years ago,
cars in racing games were almost identical, it
is now easy to recognise individual brands and
models as well as the tracks and environment in
which the game takes place. Those that never wanted
to play games in their youth are finally able
to relate to them as the technology makes them
more accessible and broadens their appeal.
says the depths of the cycle this time round have
been mild compared with previous years. "The last
two growth periods occurred between 1989 and 1993,
and between 1995 and 1999," he says. "The major
players haven't been hit as much as they were
in 1994-95, which really was a drop off the cliff
- some companies were wiped off the map."
is in the later stages of a two-year transition.
It is moving out of the downward part of one console
cycle and onto the incline of the next. The problem
is the transition is not fast enough for Britain's
software developers and publishers depending on
a Christmas launch of Xbox. It has been delayed
until next year.
is the peak time for sales and many had factored
revenues into their profit forecasts. It now seems
strong year-on-year growth will really be felt
only at the end of 2002, with a 15%-25% annual
boost from then until 2005.
McGarvey, chief executive of Eidos, which has
fallen in value from £1.3 billion in December
1999 to £233m after two profit warnings, is exposed
on only one game for the Xbox. "I think the implications
of the slippage in revenue terms are not huge
for us," he says. "It will not make much of a
dent as we were only bargaining on some opportunistic
are also concerned that the appetite for games
involving violence may collapse after the terrorist
attacks in America. Jane Cavanagh, chief executive
of Sci, which fell from £111m at the beginning
of last year to £13.38m, is an expert in bad-taste
games. She developed Carmageddon, in which players
get points for the number of pedestrians hit,
and signed up Ronnie Biggs as an adviser for her
Great Train Robbery game. She is developing a
war game set in the Middle East.
has consistently been an appetite for these types
of game," she says. "Conflict: Desert Storm is
entertaining and based on fact - it in no way
glorifies war. As far as violence goes, it is
what boys want, and I don't think what is going
on in America will stop people playing - it may
even attract more interest."
firms whose market values have crashed are Rage,
down from £211m to £17.4m; Argonaut, down from
£90.4m to £26.6m; Empire, down from £52m to £27.3m;
Warthog, down from £19m to £12.9m; and Bits Corp,
down from £20.6m to £4.5m. Infogrames has shouldered
the biggest loss - from £3.8 billion to £553.9m.
publishers have used this year and the last to
write off as much of the bad news as possible,
so they are in better shape for the upturn. Bruno
Bonnell, Infogrames' founder and chief executive,
has rapidly grown the business by acquisition
and has spent the past year rationalising. "Yes,
there has been a drop in value, which has surprised
us all," he says. "But we are at the cusp of an
upturn and it is true we have been careful in
shedding loss-making units - if it was not expected
to make a profit in the next year, we closed it."
Bonnell has also written off his online and Wap
cycle begins again with a new set of consoles,
only time will tell whether the sector will bounce
back. The market is expanding as the age of gamers
increases, upgrading their consoles with each
cycle. "The increasing sophistication of game
aesthetics is attracting new players," says Gibson.
"The industry is at a pivotal point, and few would
doubt that growth is a given."