Counting on year-end blockbusters

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The next three months are make-or-break time for the video games industry -- as they are every year. In 2007, Americans will shell out as much as $18 billion on the interactive entertainment, reports Port Washington, N.Y.-based NPD Group. Approximately half of that spending will occur between Oct. 1 and Dec. 31.

"No matter what the state of the industry is going into that time period each year," says NPD analyst Anita Frazier, "the all-important end-of-year selling season is nail-biting time."

And because games -- like the movie business -- are a hits-driven industry, all eyes would have been on two highly anticipated titles -- "Grand Theft Auto IV" from Rockstar Games and "Halo 3" from Microsoft Game Studios. Only "GTA4," as it is known, is nowhere to be found, leaving "Halo 3" to shoulder the burden when it is expected to hit store shelves Sept. 25.

What happened? Rockstar chose not to provide a spokesperson to elaborate on why, on Aug. 2, its parent, Take-Two Interactive, announced it would delay release of the 11th installment of its hugely successful action game by four to six months -- from Oct. 16 to sometime in its Feb.-April 2008 fiscal second quarter. (Take-Two's shares subsequently fell 28% over a two-week period following that announcement.)

Instead, Rockstar sent a press release quoting Take-Two chairman Strauss Zelnick: "Certain elements of development proved to be more time-intensive than expected, especially given the commitment for a simultaneous release on two very different platforms [Sony's PlayStation 3 and Microsoft's Xbox 360]. We all recognize that perfecting the game is vital and I can assure everyone it will be worth the wait."

Potential blockbusters, like "GTA4" and "Halo 3," have the ability to energize the industry, according to Ben Schachter of UBS. The analyst describes a ripple effect that top-selling games generate.

"Like in many other businesses, blockbusters get the excitement going inside the industry," he says. "And if gamers perceive them as 'must have' titles, then they also must have the hardware -- the consoles -- that's needed to play them. At the end of the day, sales of hardware don't depend on how good or bad the equipment is but on how good are the games that play on it.

"I would argue, for example," Schachter adds, "that you would likely not see the Xbox 360 game console in existence if it weren't for its exclusive 'Halo' series. Because, if it weren't for the huge success of that one title, the original Microsoft Xbox would not have done nearly as well as it did. I would also argue that if not for the success of the 'Grand Theft Auto' series, you may not have seen Sony's PlayStation 2 do as well as it did. The point is that one or two key titles -- particularly key exclusive titles -- can really make or break a platform."

At Microsoft, Shane Kim admits that the "Halo" series has sold an awful lot of Xbox consoles for Microsoft. Kim is corporate vp of Microsoft Game Studios.

"We consider it our flagship franchise for Xbox," he says. "Even though it came out three years ago, we  know there are still 2-1/2 million people playing 'Halo 2' and, by the way, plenty of people still playing the original 'Halo' which released in Nov. of 2001."

Additionally, Kim believes that blockbusters have an impact outside of the games industry, too.

"The big releases are helping legitimize our industry," he says. "For example, 'Halo' has been able to break into pop culture and make people outside our industry aware of what we do and what we create -- not just toys but big pieces of art. Due to our promotional and marketing efforts, I'd say there'll be an awful lot of people who know about 'Halo 3' even though they don't own an Xbox 360 or play video games. It's all about moving our industry forward on the path toward becoming a mainstream form of entertainment."
 
Microsoft won't share its sales expectations for "Halo 3" whose MSRP is akin to that of other next-generation games -- $59.99. But Kim believes "it will be the biggest thing we've ever done and certainly bigger than how past Halos have performed, which is saying something since we've sold 15 million units of the first and second Halos combined. 'Halo 2' set records back in 2004 when it did $125 million dollars on its first day. Compare that to the $150 million that the 'Spider-Man 3' movie did in its first weekend. And we believe 'Halo 3' will be even bigger." 
 
While industry observers don't always agree on what it takes to create a video game blockbuster, lots of time and money are essential, they say.

"Just as there is that unknown quantity that makes movie magic," says UBS' Schachter, "the same goes for video games. One can say that 'Halo' is just a first-person shooter and there are hundreds of those on the market. But 'Halo' took shooters to the next level and became the shooter. And 'Grand Theft Auto' came along and really changed the way we think about action games, especially with its nonlinear gameplay where gamers are free to explore large cities with no restrictions."

Schachter believes that blockbusters become blockbusters because they're simply great games. "Fewer than 5% of all games get higher than 90% critics ratings [on Web sites like Metacritic.com, for instance], and high scores correlate strongly with top-selling games. Marketing always helps, but you can't just market anything and expect blockbuster results."

Microsoft's Kim agrees that it's the quality of the gameplay that counts for a game's success, not the intensity of the marketing effort. "You can't put lipstick on a pig," he says. "Bungie Studios [the Microsoft-owned developer of the 'Halo' series] is a master at creating fantastic gameplay by focusing on intangibles like story, emotion, and character development -- all the things that make gamers care about what's happening. It's layer upon layer upon layer of interactive elements, which is a very challenging thing to do."

And a costly thing. While Microsoft, like most publishers, eschews discussions about its production budgets, Kim says it took three years to create "Halo 3," a process that began even before "Halo 2" shipped.

"Let's just say that 'Halo 3' cost us tens of millions of dollars," he adds. "It's like making a medium-sized movie. Naturally we don't spend $20 or $30 or $40 million on every title we develop; that just doesn't make sense. But we do pull out all the stops on our 'Halo' games."

When it becomes apparent that a project of that size isn't going to be completed by its fourth-quarter deadline -- as was the case with "GTA4" -- making the decision to delay its release by four to six months is a decidedly painful one.
 
"Meeting the deadline on a blockbuster game is incredibly difficult," explains Kim. "It's not like the old days where you could get 10 guys together in a garage and turn something out in nine months. These titles are more complex than you can imagine; it takes staffs that range into the hundreds to create a world that's hi-def, online, and multiplayer. Not only that, but they're interactive, which adds a variable you don't find in other forms of entertainment. To balance all of that and, at the same time, hit a deadline date is really like trying to capture lightning in a bottle." 

The decision to skip the all-important year-end sales period is so impactful on a game maker's revenue that it's one that's usually made at the very top of the company, by the CEO, says Schachter.

It's quite a choice. Delays usually mean people working for extra periods of time generating costly expenses that take longer than usual to recoup. Delays, however, can also mean taking the time needed to get the game just right.

"The truth is that any game can be released on deadline, but you really don't want to do that until it's good enough to be released," says Schachter.  " 'Grand Theft Auto' is an incredibly important franchise to Take-Two, a company without a breadth of offerings that, until it recently came out with 'BioShock,' was generally considered to be a one-trick pony. They surely don't want to rush this game. Nor do they want their developers to do what developers everywhere like to do -- and that is to continue to work on their games for 10 years if they could in order to make them better and better."

Microsoft's Kim concurs: "In the end, it's about balancing the business realities with the creative element," he explains. "I mean, you don't want to ship a wine before its time because a mediocre game can damage the brand value of the property."
 
Surprisingly, despite the absence of "GTA4" from the year-end mix, analysts like Schachter are bullish on what the season will achieve. He believes there will be enough high-quality, triple-A titles -- including "Halo 3" -- to neuter some of the negative effects of Take-Two's decision.

For instance, he cites "Super Mario Galaxy" from Nintendo which is scheduled to release for the Wii console on Nov. 12, and Activision's "Guitar Hero III: Legends of Rock," which is scheduled to release for all the major platforms on Oct. 29. 

"I suspect there won't be the same negative impact there might have been if there weren't these really great games coming out all at practically the same time," he says.

Indeed, adds Kim, this may wind up to be a positive thing for publishers who had been concerned about "the tidal wave that might have hit in the form of first 'Halo 3' and then 'GTA4' -- a one-two punch, if you will. Now, with 'GTA4' out of the year-end running, there'll just be that many more entertainment dollars available for other titles and other publishers. So I think there may be quite a few publishers who are actually relieved," he chuckled. "The Take-Two guys aren't, I'm sure, but other publishers are."
 
Paul Hyman was the editor-in-chief of CMP Media's GamePower. He's covered the games industry for over a dozen years. His columns for The Reporter run exclusively on this Web site.
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