Weak AAA launches are a precursor to industry transition

It's turning out to be a pretty tough year for big games at retail. Watch Dogs 2 just experienced an eye-watering 80% drop in UK launch week sales compared to its predecessor. It's another data point to add to a spreadsheet of gloom that also includes far weaker retail launches for Call of Duty: Infinite Warfare and Dishonored 2 than the previous titles in those series enjoyed. Titanfall 2, sandwiched in between two other major FPS titles, also took a dramatic hammering. Meanwhile across the pond, the world's biggest bricks-and-mortar games retailer GameStop cut its forecasts for the last calendar quarter of 2016 by between 5 and 10%, calling out November in particular as being likely to see a double-digit decline in the videogames sector.

There are two stories here, as Christopher Dring outlined in his feature on Monday. The first story is familiar and a bit dull; more and more people are buying their games digitally instead of physically. Precise numbers are elusive, but the trend of purchasing games online - through Steam, PlayStation Network or Xbox Live - clearly accelerated with the arrival of the current generation of consoles. While some optimistic voices opine that digital purchasing could complement rather than cannibalise physical sales, that sunny version of events does not appear to have materialised in reality. It's not exactly a zero-sum game, but for the most part, a dollar spent on Steam or PSN is a dollar not being spent at GameStop.

"one major driver of launch-week sales declines may be that people who have bought digital games cannot trade them in for credit in order to buy mint games at launch"

So far, so inevitable; and from the perspective of the broader games industry (as distinct from the perspective of the long-term decline of physical retail), that's not really a problem. It has side-effects, of course; one major driver of launch-week sales declines may be that people who have bought digital games cannot trade them in for credit in order to buy mint games at launch, a behaviour which has been hugely common especially among younger consumers. Overall, though, game publishers and developers are perfectly happy for their revenues to come from digital rather than physical products; if anything, the removal of inventory management issues and costs associated with warehousing and physical distribution is a major boon.

That story, however, doesn't explain everything. All of the available data suggests that revenue from launch weeks is not moving cleanly over to digital outlets; in fact, that transition may only account for a small fraction of the declines we've seen in so many of the industry's top franchises recently. Adding in second-order effects (like the aforementioned loss of the trade-in credit option for buying new games, which has quite probably been artificially inflating first-week sales for the past couple of decades) explains significantly more of the data, and economic conditions (especially among the industry's core consumers) aren't helping, but there's still a major fall in sales that needs to be accounted for.

That's where the second story comes in - a much more interesting story that has much more troubling consequences for the games business in general. It can be summed up in a single personal anecdote. To the great detriment of my wallet, there's a late-opening games and media store right next to the station I get off at on my way home every night. Several times in the past few weeks I've dropped in to browse briefly, and lingered over the shelf holding copies of Persona 5; a game which I've been looking forward to for a very long time, having played through its predecessor multiple times on both PS2 and PS Vita.

"I don't do much with my PS4 that isn't Final Fantasy XIV (a game I bought more than three years ago) and Destiny (a game I bought more than two years ago)"

I haven't bought it yet, though I've picked it up and ruminated over it several times. I haven't bought it for one simple reason; of late, I don't do much with my PS4 that isn't Final Fantasy XIV (a game I bought more than three years ago) and Destiny (a game I bought more than two years ago). Though I've played and enjoyed other games since getting into those two, the huge proportion of my gaming time that's poured into these two long-lasting, regularly updated titles has largely negated the desire to buy new games at launch.

I am not alone in this tendency. What massively multiplayer games such as World of Warcraft and Final Fantasy XIV began has been continued aggressively by a new kind of game, wolves in sheep's clothing which present themselves as common-or-garden AAA titles but actually require a classification all of their own. Unlike AAA games which offer weeks or perhaps a couple of months of entertainment, these "AAA+" titles are engineered from the ground up to have incredible staying power. Some, like the MMOs, ask for subscription fees; most monetise themselves through selling expansion packs and season passes (Destiny, Battlefield, Call of Duty), or through charging for cosmetic items (League of Legends, Overwatch) or in-game items (LoL again). All of them are capable of sucking in players for hours and hours each week, or even each day, over an incredibly long period of time - often on the span of years.

When MMOs first boomed, quite a few figures in the industry voiced concerns about what this would mean for everyone else - but we were still experiencing rapid growth of the "core" gaming demographic, which meant plenty of new customers to go around, and minds were quickly distracted from the hypothetical impact of MMOs by the very real (and for many studios, utterly catastrophic) collapse of the AA game sector. We live in a different world today. Budgets continue to rise inexorably, but the market isn't growing all that much (at least not fast enough to keep pace with budget growth) so margins are being squeezed and risk profiles are looking ever less attractive. Meanwhile economic pressures on younger consumers have barely eased at all since the financial crisis, with occasional positive movements in overall national economic figures hiding a disparity in the recovery that disproportionately hits the games industry's most important consumer groups.

Now, this wave of long term, hugely absorbing, AAA+ titles is adding to the strain by simply removing very active consumers from the marketplace for months or years at a time. Of course, they're still generating revenue; Activision Blizzard, Riot, Square Enix and the other creators of AAA+ titles are doing quite nicely from these titles, although the danger of hurting sales of their other franchises in the process is a constant concern. That revenue, however, is captive. The success of an AAA+ game locks up a portion of the market behind iron gates; other developers and publishers cannot compete on even ground against something like a Destiny expansion, a Battlefield season pass or an Overwatch transaction, because those players are already deeply embedded in that game and its ecosystem.

" Swathes of the AAA game market now face an attention vacuum as huge AAA+ titles suck up the focus of consumers long-term"

That is, of course, an entirely reasonable thing for a company to do; it may not be terribly healthy for market competition, but a company that can create a game compelling enough to be played for years on end is perfectly entitled to benefit from that ability. What's worrying, though, is the effect this has on the AAA market - parts of which suddenly start to seem just as threatened as the now-defunct AA market was only a few years ago. Swathes of the AAA game market now face an attention vacuum as huge AAA+ titles suck up the focus of consumers long-term; meanwhile their budgets continue to rise, margins continue to be squeezed, and a great many publishers probably find themselves thinking that the only way to compete with these new titans of the gaming landscape is to make the huge, risky investment required to try to build one of their own.

That investment isn't necessarily an appealing one. While Blizzard, Bungie and their ilk have a track record with this kind of game, few others studios can say the same. Given the investment required to create a game with such long-term appeal, and the requirement to sustain that investment on an ongoing basis post-launch, the financial burden is huge; and since success requires pulling players away from dominant titles in the market, the risks are vastly higher than they were in conventional AAA publishing, itself not a field for the risk-averse in the first place. In summary, the dominance of these titles and the damage they are doing to sales of AAA games threatens to ratchet risk and competition in the games business up yet another notch, launching the bar to entry skyward. We would be left with an industry that looks uncomfortably like the present status quo in mobile gaming; dominated by a handful of increasingly long-in-the-tooth games whose enormous revenue is funnelled into high-cost marketing for player acquisition, while new games struggle to pick up scraps from the tables of the giants and innovation, for the most part, falls by the wayside.

It's not an appealing future, and I may be painting it a little more bleakly than it deserves. If this year's tough climate for AAA launches does not recover as we move into 2017, though, we are most likely looking at an inflection point where the business model of console and PC gaming follows mobile in abandoning its boxed-game roots. That would be the death knell of physical retail and would signal a transition that would likely pull the rug out from under many studios and even publishers. Follow the data; it's not just a few tough launches, it's a major change of market climate whose impact will be far-reaching indeed.