The Strange Economics of Gaming and Why 2013 Could Be A Financial Bloodbath - mbellacio Blog - www.GameInformer.com
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The Strange Economics of Gaming and Why 2013 Could Be A Financial Bloodbath

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No one ever said gaming was cheap. Any gamer who's been around for more than two console generations can tell you that. In recent years, there has been a great deal of outcry about the expense of modern software, game hardware, gaming peripherals, subscription fees, and various other costs associated with electronic entertainment. And while some of those thoughts may have been well-grounded, the dynamics behind the economics of gaming are varied and complex. But for analytical purposes, let's just say that the majority of concerns in electronics boil down to a few core issues.

1) Profitability

Arguably, this has to be the primary issue facing many companies in the electronic entertainment industry. After all, we are talking about businesses whose main purpose for existence is to make money. This issue is often blurred, particularly in the world of video games where there are many feelings and memories associated with certain intellectual properties and products. While many love Mario or Sonic and consider them to be video game legends if not cultural icons, they would have had very short lives indeed if they had not demonstrated the ability to generate substantial revenue for their respective companies.

2) Growth

While turning a profit is always good, most business professionals will tell you that a thriving business must have more than just healthy balance sheets. Without growth, you have stagnation. And that is exactly what happens to a business when they fail to grow and expand. Some specific business types do not demand growth, like your local Quicky Mart or Thrift Shop. These businesses can operate year after year carrying the same products, with the same business models and generally do not suffer.

Electronics are different because they cater to your ever changing desire for fun. What was considered amusing today may well be utterly boring tomorrow. The fads of the electronics world are as fickle as the fashion industry, if not more so. Which brings us to the next issue.

3) Innovation

Innovation is often times the key that makes growth possible. What is the next big thing? That's what everyone in the business world wants to know ALL THE TIME. Billions of dollars in equities are traded every year based solely on a simple premise. Anticipating what you want. Some companies, or even individuals are very adept at looking into the future and reading trends, then interpreting that into a business plan.

An excellent example of this is Apple. Although many (particularly in gaming) have been angered by Apple's bold encroachment on the scene of mobile entertainment, the impact of Apple's success is undeniable. The key to that success was their keen ability to introduce a new idea at just the right time. The introduction of the iPhone was nothing less than a Trojan Horse, perfectly grasping and anticipating the needs and desires of billions of consumers.

4) Value

Perhaps this is where some of the turmoil in the electronics industry is stemming from, because in truth, they are various "Theories of Value". According to Wikipedia, theories of  value fall into two main categories, the subjective and the intrinsic.

"Intrinsic theories, as the name implies, hold that the price of goods and services is not a function of subjective judgements. Subjective theories hold that for an object to have economic value (a non-zero price), the object must be useful in satisfying human wants and it must be in limited supply."

In other words, how much a product is worth is either fixed on hard data, or is based on what you think of that particular product. From this, you can easily see where problems may begin to occur. For example, if Sony or Microsoft or Nintendo were to introduce a new gaming peripheral that carries a price of say $89.99, ideally that MSRP would based on the costs of R&D, production, packaging, placement, advertising and profit.

What any of those companies would tell you is that they MUST sell that product at that price in order to remain profitable and continue to do business. The problem is, in most cases, that means very little to you as the consumer. When you look at that price tag of $89.99, you are thinking of what it is worth to YOU. A smart business tries to find a happy middle ground between those two perceptions. A shortsighted business will ignore it. Now we're ready to look at the core dilemmas facing the electronic entertainment industry.

The Big Picture

2012 has been a very rough year as far as economics go. And that's not just in reference to video games or even electronic entertainment. We're talking about GLOBAL BUSINESS. In our modern economy, nearly every type of business is interconnected with another, and often times the fate of one relies heavily upon the welfare of another. Consider some of these headlines from today's news.

Stocks Dip In Choppy Trading, Dragged By Techs

Ipad Mini Could Cause Tablet Gaming To Explode

Nintendo Slashes Profit Forecast 70% On Weak 3DS, Wii Demand

Zynga Lays Off 5% Of Workforce, Closes 3 Offices

US Federal Agency Dropping 17,000 Blackberries In Favor Of iPhones

AMD Expands Free Game Offer To Juice GPU Sales

Google To Unveil 10-Inch Nexus Tablet With 300ppi Resolution

Microsoft Surface Hardware Shines, But Software Is A Letdown

Facebook Stock On Way To Best Trading Day Ever After Reporting Mobile Advances

Public Beta For "Playstation All-Stars Battle Royal" Fails To Impress

Apple's Stock Chart Loses Some Sheen Before Results

Buffett Says Global Economy Slowing, Wants More Deals

 

Had enough bad news? What is the picture you see? Here's my take. Today's economy, including the electronics industry is teetering on the edge of a very steep precipice. It has never been harder to do business and make money than it is today. Companies are literally in a whirling dervish of activity trying to figure out "what's the next big thing". Many in the tech industry have resolved that mobile is where the future is at, and betting BIG that they can still see benefits of their investments in it. Business in traditional hardware such as consoles and even PC's is slowing, but for how long? Sony appears to be in freefall, desperately trying to correct itself or hoping that it will soon land on solid ground. In short, it's BAD out there. And no one, absolutely no one has any clear ideas on how to turn things around.

But the health of the tech industry and even the world economy in general depends almost entirely on one simple bit of information that many in the world of business and even those who report on business, are reluctant to talk about. The financial health of the average consumer.

A New Taboo

In recent years, perhaps as a response to all of the flood of bad news from 2009 to the present, there has been a significant increase in what Alan Greenspan referred to as "irrational exuberance". He was in fact referring to an attitude where many had simply chosen to tell themselves that everything (economically speaking) was perfect, and essentially ignoring the problems at hand.

Many in the business world are eager to say that things are fine, the economy is showing progress, and that by default, everyone can return to their previous habits and business as usual. But is that true? Does the average household in 2012 really have healthy enough finances to consider the purchase of a Wii U at $299, an iPad Mini at $349, a remodeled PS3 that hasn't dropped below the $200 range, or even an Xbox 360 subsidized by Xbox Live membership?

And what about mobile gaming? Will gamers really pursue gaming where they will be bled to death through micro-transactions? Your choices seem to be paying $60 for a brand new game, which may be incomplete depending on whether an Online Pass or DLC is attached to the product, or getting a game for free and easily paying 10X what the title is intrinsically worth through micro-transactions.

The big dilemma for gaming, electronic entertainment and the economy depends squarely on YOU, the consumer, the individual. Are you employed, how good is your job, are you in debt, do you have student loans, are you better off today than yesterday. These are things that smart companies should be thinking about because it's what YOU think about when you go into a store.

The current competition in consumer and business electronics is nothing short of being a gladiator contest. Some businesses seem utterly confused by all the chaos around them, others cling desperately to their tried and true models for success. Some balance on a knife's edge of innovation and entrepreneurism. But not everyone can be winner's here. The truth is that business adheres strictly to the laws of natural selection. And ONLY the fittest survive.

With such a flood of companies introducing new or simply different products and services, there is only so many consumer dollars to be had. Profits are very lean for most companies these days, and there simply isn't enough table scraps for less fit companies to survive. It's well known that many companies rely heavily on Holiday spending to get back in the black, i.e. profitability. For many, this holiday may not be so rewarding. If so, the start of 2013 could very well be a financial bloodbath.

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