It's been an interesting year for the video game industry. We've seen individual companies post record-breaking sales, but overall spending is still well below its 2009 peak. Moreover, the growth of social and mobile gaming has sparked a fundamental shift in the industry that may send investors in search of a new instruction manual. Let's take a look at some of the top stories from the year and what to expect from 2012.
Hardware's a mixed bag
Surprisingly, it was actually a pretty good year for home consoles. Microsoft's
Unfortunately, Nintendo (OTC: NTDOY.PK) didn't have the same luck. Demand for the Wii has plummeted, and initial sales of its latest handheld were so low that the company was forced to slash the price from $250 down to $170. After the price cut, sales of the portable picked up and have now surpassed the first year's sales of the original DS.
However, given that revenue from games on Apple's iOS and Google's Android now surpasses the combined software sales of Nintendo's and Sony's portables, I wouldn't expect the 3DS to repeat the success of DS over the next five years. Nintendo's loss of pricing power also doesn't bode well for Sony's upcoming PlayStation Vita, which, after you add in the expensive proprietary memory cards, will set gamers back a minimum of $280.
Software: An adventure in new business models
On the software side of things, Activision Blizzard
Frankly, I think investors may have acted prematurely. Call of Duty: Elite -- a subscription service Activision launched with Modern Warfare 3 -- signed up more than a million subscribers in its first six days. Blizzard plans to create a real-money auction house for Diablo III to allow players to make a profit from selling the booty they pick up in-game in exchange for a small listing fee. The company has also revealed that it's begun working on a second MMO codenamed Titan. Even if WoW continues to lose subscribers, I'd be willing to bet that these new revenue streams will pick up the slack.
Overall, I think you'll see game developers drift more toward these recurring revenue models to supplement their cash flows. Electronic Arts
The rise of free-to-play
The other business model that gained a lot of steam this year was free-to-play -- or freemium. Under this model, the developer gives the game away for free and then makes money by charging for in-game power-ups and goodies. Perhaps inspired by the success of Zynga and Chinese game developers like Changyou.com
What to watch in 2012
I expect that developers will continue their push to turn games into more stable sources of revenue during the next year. I would keep an eye on the development and releases of Nintendo's Wii U. Investors have already written off the console as the next big flop, but I'm more optimistic. However, I do think that if it does fizzle, Nintendo will probably have a hard time bouncing back.
I would also watch Zynga's first year as a publicly traded company. There's no denying the popularity of its games. It currently holds the top five most-played games on Facebook. However, I worry about some of the company's less than desirable business practices as well as competition from developers like EA.
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