Sebastian: E3 Reflected 'Renewed Optimism' In Games Industry

Following last week's E3 event in Los Angeles, analyst Colin Sebastian with Lazard Capital Markets noted several games industry trends, adding that there is a "renewed optimism" permeating throughout the industry. Sebastian said in a Monday note: "Entering the middle innings of the current video game console cycle, we note a renewed sense of optimism among industry participants, following three years of navigating through a difficult transition to a Nintendo-dominated market and managing higher expectations from consumers in terms of game play and online capabilities." "Notably, the steep cost of 'next generation' game development as well as the meteoric rise of the Nintendo Wii suffocated some of the smaller software publishers that did not have deep pockets or enough strong brands, while several top tier publishers were slow to react to the changing market and sank into periods of financial and operational challenges they are only now leaving behind." "Yet secular growth trends remain healthy, and the industry has thus far exceeded original expectations for the cycle, despite the recent speed bump — or normalization — of Nintendo platform sales." Sebastian also suggested that "Innovation will extend cycle and expand growth opportunities." Upcoming products such as the newly-introduced motion-based control systems from Sony and Microsoft will "lower the barriers to entry for gameplay with user-friendly interfaces." Sebastian added also said new distribution methods will help expand the games industry, noting: "In addition, content creators and platform holders alike continue to shift toward digitally delivered services, leveraging the Internet and new business models to deepen relationships with consumers. Importantly, however, the industry did not ignore its roots at E3; in fact the majority of new games unveiled at the show fall into traditional genres (e.g., shooters, racing, RTS), and are geared toward core gamers." "At E3, we viewed a strong pipeline of content for both core gamers and mainstream consumers, not only through traditional console, PC and portable devices, but also web-based casual and multiplayer online games, as well as a surge of content for the 'third screen,' in particular for Apple’s iPhone." "Moreover, the video game industry is successfully integrating online social and community attributes to drive positive network effects and user engagement, as is most closely associated with World of Warcraft." The industry has benefited from the Wii and its ability to attract new gamers and ex-gamers, but Sebastian said that "core gamers are still paying the bills" for major game publishers, adding: "At the same time the industry contemplates the inevitable shift of content into the cloud, the bulk of revenues are still clearly dependent on core gamers, who relish traditional console and PC-based shooting, racing and fantasy games, among others." "Importantly, the majority of new content at E3 appeared to fit this mold, and suggests we are still years away from a profound shift away physical (disk) media, given that the Internet is not yet the most efficient distribution channel." "As such, the industry continues to take modest steps toward the shift to online platforms, despite the willingness of consumers to pay for online games. Bottom line, in our view, is that packaged goods aren’t disappearing soon despite the disruptive force of the Internet." Gamasutra will publish more analyst comments in the aftermath of E3 as we receive them.