Playing for Billions : No Longer Just Kids’ Stuff, Video Games Go Hollywood
Video game publishing companies seem more like movie studios these days. They employ camera operators, producers, sound experts, artists and production crews. Creativity, glamour and adventure brew in every corporate cubicle.
They tap the talents of computer cowboys--programmers, three-dimensional animators and well-paid joystick jockeys who “analyze” games in front of a screen all day. And with technology emerging to enhance the realism of their games, these companies hope, one day, to outdo Hollywood.
“An ambition of mine was to run a movie studio,” said Martin Alper, president of Virgin Games Inc. in Irvine, Orange County’s biggest video game company with 250 employees and an estimated $50 million in game sales last year. “This is the next best thing. If you believe the hype, it could be more important than a movie studio.”
Orange County has become a fertile nest for these video entertainment entrepreneurs with a half-dozen companies employing hundreds of people and generating estimated annual sales of about $100 million--a figure that could easily double this year.
As a region, the game industry in Orange County is no rival to the scores of video game publishers that have sprouted near the headquarters of Sega of America Inc. in Redwood City and Nintendo of America Inc. in Redmond, Wash. But Orange County has attracted its share of game makers who want to be near Hollywood and the principal U.S. link to the Pacific Rim.
Once considered kids’ stuff, those who develop and publish today’s video games are on the edge of a revolution in entertainment known as “interactivity,” where audiences will participate in cinematic-quality games. You won’t just watch the characters--you’ll join them: “The Last Action Hero” comes to your living room.
These software developers and publishers are the best hope that one day video games, like movies, will appeal to a wider audience. Despite efforts to diversify, 70% of video game players are 8- to 14-year-old boys, according to Nintendo.
“This business is changing drastically right now,” said Brian Fargo, president of Interplay Productions Inc. in Irvine, the county’s No. 2 independent video game publisher, where analysts project sales of $60 million to $80 million this year. “Most people still think of ‘Pac Man’ or ‘Super Mario Bros.’ But now we have new stages of interactivity.”
Video games have come a long way from “Pong,” which launched an arcade game craze in the 1970s that saw its pinnacle with “Pac Man.” In the mid-1980s, video hits like “Mario Bros.” and “Super Mario Bros.”--which feature fast action, music and dynamic, changing backgrounds--helped Nintendo and Sega steal away the home video game market from Atari Corp., inventor of “Pong.”
Today’s game systems offer multiple levels of action that can keep players busy for up to 100 hours, three-dimensional animation, better controls, more complex story lines (that change based on a player’s split-second decisions), and sometimes even video footage and stereo sound. Such features have helped expand the U.S. market for game cartridges and hardware to $8 billion in annual sales.
Companies such as Orange County’s Interplay and Virgin Games could benefit from a coming industry transformation known as the “convergence”: a merging of the industries that create delivery systems, technology, and the video game’s entertainment content. These industries include consumer electronics manufacturers; entertainment, telecommunication and computer companies; cable TV operators and, of course, video game designers.
“It’s really exciting to think you might be part of (the) new media,” said Johnny Wilson, editor of Computer Gaming World, a monthly publication for game fans based in Anaheim Hills. “It might take the rest of the decade, but it will happen.”
Alliances among various industry players have made headlines recently. The game industry gained attention when Strauss Zelnick, president of 20th Century Fox, left the studio in June to head Crystal Dynamics Inc., a start-up game in Palo Alto.
Virgin Games received less notice last month when it hired Tom Allen, a Fox Broadcasting Inc. executive, as its chief operating officer and changed the name of its London-based parent company to Virgin Interactive Entertainment.
A transplant from England, Alper founded the game company in the United States in 1986. The Virgin Group, flagship of Richard Branson’s London-based empire and owner of Virgin Atlantic Airways and an international music store chain, bought Virgin Games from Alper in 1988.
Virgin’s list of video hits includes games based on the “Dune” science fiction series, “Double Dragon” street fighting, the Monopoly board game, “The Terminator,” and “Robocop.” At any given time, the company has about 90 titles on the market.
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Over the past several years, both Alper and Fargo at Interplay have quietly structured their companies into studio-like enterprises. They say they must marshal all the technological know-how they can to compete with Hollywood, cable TV companies and media giants, such as Time Warner Inc.
“There is a new generation of games coming, and there are a lot of companies that won’t make that leap,” Fargo said. “We just shot some scenes for a game that uses a 42-piece orchestra.”
The video game industry is full of hype, and skeptics recall the financial ups and downs that befell video arcades before and after the rise of Nintendo in the 1980s. Some video game firm executives are afraid to invest in new formats for game hardware, such as interactive TV control boxes, and believe that consumers may face a big disappointment.
“If the bet that consumers are willing to spend more money on interactive games is wrong, a huge amount of money is going to be lost,” said Sean McGowan, an analyst at Girard, Klauer & Mattison, a research firm in New York.
Because most of the privately held game publishers do not disclose sales or profits, it is difficult to determine who has the upper hand. Japanese companies have long held the lion’s share of the game hardware manufacturing market, whether in earlier arcade games or in the home systems of Nintendo and Sega.
But as the entertainment content--the games themselves--becomes more sophisticated, a cultural gap favors U.S. companies that develop the game software for use with the Japanese-produced hardware, or game systems.
“How many Japanese movies become hits worldwide?” asks Alper. “I don’t think the strengths reside in Japan. As CD-ROM (compact disk with read-only-memory) takes over, the cultural differences become very apparent.”
One trend is clear: Small video companies face trouble. Several publishers of games for IBM-compatible computer disks have laid off many workers nationwide in the past several months.
“Consolidation has to happen. Our vision is (survival) for six to eight major studio-publishers,” Alper said. “It’s a metaphor that worked in the record industry and the movie industry.”
Weaker companies must scramble to get hip by adapting games developed for Nintendo or Sega systems to compact disk systems, which can store 600 megabytes of data--a far richer volume of details than game cartridges. CDs also cost only a few dollars to manufacture, compared to $26 for cartridges.
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Games based on CDs can store entire sequences of video, sound or full-motion animation. Such game systems practically catapult players from the video dark ages, like moving from silent films to modern motion pictures with their mind-numbing special effects and superior sound.
“This transition from game cartridges to CD is going to close the gap between the (higher) quality of arcade games and the quality of home video systems,” said Larry Castro, former sales director for Atlus Software Inc. in Irvine, a subsidiary of a Japanese game company. Despite the rapid growth in overall retail video sales, the road ahead is treacherous because game development costs are rising too, as companies try to create unforgettable interactive, multimedia experiences on CD.
Selecting which game projects to develop--and for which specific formats--can be a big gamble. Sega and Nintendo have several formats of their own for home systems and hand-held playing devices. Compact disks can also be played on computers or with TV set control boxes. And cable TV may soon be able to pipe a channel of interactive video into Sega Genesis machines. Game makers are taking a shotgun approach, remaking the same game on a variety of formats.
“You can always expect a shakeout if companies make the wrong choices on licenses, wrong formats and the wrong game,” said David Siller, product development director at SunSoft Inc., a video game producer in Cypress. “It’s easy to create good animation, but not good game play. Movie studio people don’t always understand what it takes to make an interactive game.”
The most popular games are those that offer multiple levels of play that can keep a player occupied for more than four days--nonstop. They also offer story lines that draw the player into an illusion, much like a good movie, Siller said.
More complex compact disk games can take longer than a year to produce, compared to about six months for cartridge games, such as those used on Nintendo and Sega systems. The CD games require a production team with multimedia talents--sound experts, musicians, artists and film crews in addition to programmers--and budgets of more than $1 million.
It takes a full day to scan a minute of video footage into a $40,000 computer, which must figure out the best way to compress the data so that as much as possible can be stored on CD.
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Interplay’s game wizards weaved more than 20 minutes of footage from the Ralph Bakshi film “Lord of the Rings” as well as stereo sound effects into a CD adaptation of the fantasy adventure game. Altogether, Interplay said it has invested $3 million in equipment and talent over the past three years to develop games.
Such investment pays off in enhanced realism. But so far, with fewer than 1 million such systems in U.S. homes, the CD market is a “wait-and-see” opportunity, according to a study released earlier this year by Infotainment World, a publisher of several industry trade journals in San Mateo.
And some CD games can be disappointing because of this trade-off: Enhanced graphics can slow down the speed of the game, thereby dulling enthusiasm.
Sega, the only major game manufacturer with a CD game system available now, is expected to upgrade to more powerful CD technology in the future; Nintendo may also launch a CD system next year, but such systems are not expected to be common in homes until 1995.
By that time, new companies such as 3DO Co., a widely publicized San Mateo start-up with backing from huge electronics companies including Matshushita Electric Industrial Co. Ltd., will be possible contenders as purveyors of game formats.
3DO’s “interactive multiplayers,” which sit atop a TV, are expected to begin shipping in October under Matshushita’s Panasonic label. The multiplayers will play CDs and eventually play games via cable TV.
But a breakthrough hardware format that can satisfy the imagination of the mass market--much like Nintendo did in the mid-1980s--hasn’t arrived yet, said Wilson. Industry analysts are calling this as-yet-undiscovered format the “black box.”
Lee Isgur, entertainment analyst at the Volpe & Welty Co. investment bank in San Francisco, fears that consumers will grow impatient awaiting the multimedia age. Using an analogy of the fight over videocassette recorder formats (VHS versus Beta) more than a decade ago, Isgur suggests consumers may become embittered about investing in game systems that disappear within a couple of years.
“CD games could be caught and surpassed by something else,” Isgur said. “What is that something else? That’s the $64 question.”
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The larger independent video game publishers say they are not scared by changes in the game formats because they have invested their resources in developing something that everyone will need: content.
“We are an entertainment content provider and we adopt a policy of hardware neutrality,” said Alper of Virgin Games. “If cable companies become the definitive format, we’ll be distributed on that system.”
Virgin’s deal with Sega and Disney Studios to produce “Disney’s Aladdin” video game is a sign of the company’s clout. The game will have characters from the animated film and 2,000 new hand-drawn scenes, much of it by 18 Disney artists.
Costs are expected to run $1.5 million for Virgin to develop the game and $4 million for Sega to market it. The game, which is designed to rival the film in animation quality, is expected to sell more than 1 million copies.
Belatedly, movie studios have come around to a simple fact: video game cartridge and software sales (not counting arcade games), revived in the 1980s by Nintendo and Sega, could hit $4 billion this year in the United States, as large as movie box office sales, said analyst Isgur.
Nintendo and Sega have sold more than 35 million game systems, according to market researcher Link Resources in New York. Paul Rioux, executive vice president at Sega, boasts that “Sonic 2” game sales are more than $300 million, well above “Jurassic Park” box office sales, which hit $260 million.
Those numbers have persuaded Sony Pictures, Paramount, and 20th Century Fox to begin making their own video games or arranging licensing agreements to develop games based on their movies.
In partnership with Warner Bros. studios, Virgin Games is working on a game based on “Demolition Man,” a Wesley Snipes-Sylvester Stallone action movie set for release this fall. The producers are shooting additional scenes for use only in the game, even as the movie is being shot.
“The scenes you see in the game will be authentic to the movie,” Alper said.
SunSoft Inc. scored its biggest hits with games inspired by the silver screen. It sold more than 1 million copies of games based on Warner Bros.’ “Batman” movies and Looney Tunes cartoons, including Bugs Bunny and Daffy Duck. The company said that it tried to faithfully reproduce the cartoons’ animation in its games.
But those movie-studio relationships have not yet enabled the company to produce a game so that it can be released on the same day as a new film.
Two games based on the Disney “Beauty and the Beast” characters, the next major release from SunSoft, are due out for this Christmas season, almost two years after the animated film’s release.
“The difficulty in shooting at the same time is that the movie can flop,” said Rita Zimmerer, executive vice president of SunSoft, which has an estimated $50 million in annual sales.
Still, the battle to lock up the rights to popular movies can be fierce, and analysts predict studios will try to acquire additional game companies or otherwise control game content.
Zimmerer said she balked at the estimated $1-million bidding price for rights to “Jurassic Park,” which was picked up by Sega and is due out by Christmas on CD.
“Those without licenses can find themselves at a competitive disadvantage,” McGowan said. To stay competitive in the American market, Japanese-owned SunSoft uses about 100 outside subcontractors to develop its games. It releases about a dozen games a year.
“We don’t rely on Japan for ideas,” he said.
Video game entrepreneurs know that anyone can produce a blockbuster game that sells 1 million copies so they are pushing their own creativity, not just piggybacking on Hollywood hits.
“The 7th Guest,” an original gothic horror murder mystery, is the most popular game on CD, with sales estimates ranging from 50,000 to 100,000 copies. The game was published by Virgin and developed over two years by Trilobyte, a game company in Medford, Ore. Alper hopes to sell several hundred thousand copies by mid-1994. A sequel is already in the works, for release next year.
“The 7th Guest” story line--a mystery written for the game about disappearances of guests at a haunted mansion--and the quality of its three-dimensional art, has drawn “ahhs” from rivals such as Interplay’s Fargo. Game players can feel like they’re walking into an animated film in the role of the the seventh guest at the mansion.
“The hobbyist wants a showcase game to justify a top-of-the-line system,” said Wilson, the editor at Computer Gaming World. “For CD, ‘The 7th Guest’ is that kind of showcase game. People said the game would lose money. It bodes well for the future that game companies will take these kinds of risks.”
Interplay has its own massive projects under way: the dungeon-theme game “StoneKeep,” which has been in production for almost three years. The game, in which a player searches through a dungeon for magic orbs and fights skeletons and dragons, combines digitized, live-action footage with animated backgrounds, a feat that Wilson says Hollywood special effects companies would love to learn to do.
“Hollywood is hit-driven,” Fargo said. “We can experiment more.”
Video Games: Not Just Kids’ Stuff Anymore
As video games become more sophisticated with compact disk technology, more adults are being drawn into an entertainment realm dominated by youngsters.
Sales Up
Revenue continues to climb. Figures do not include sales of CD video games written for use on PCs. Software estimates are wholesale figures. Hardware estimates are retail. Revenue in Billions
Year Software Hardware 1987 $0.5 $0.5 1988 1.1 0.8 1989 1.9 1.2 1990 2.6 1.2 1991 2.5 1.5 1992 4.0 2.0 1993* 4.9 2.3
*Projection Unit sales in millions
Year Software Hardware 1987 17.1 4.1 1988 36.8 8.2 1989 57.4 11.7 1990 75.6 12.3 1991 78.5 13.0 1992 87.8 18.9 1993* 122.5 21.4
*Projection Sega Leads the Way Sega of America, a Redwood City firm, was the first out with CD-based game hardware and software. Industry analysts say Sega’s CD sales have fared well since their 1992 introduction. Software estimates are wholesale figures. Hardware estimates are retail. Retail sales in millions
Year Software Hardware 1992 $20 $54 1993* 189 248 1994* 361 300 1995* 229 300
*Projection Unit sales in millions
Year Software Hardware 1992 0.4 0.2 1993* 3.8 0.9 1994* 9.0 1.5 1995* 9.2 2.0
*Projection Top Five Computer CD-Rom Games The top five selling PC-based, CD-ROM games, based on number of units sold by 10 national retail chains: Game: Company “Seventh Guest”: Virgin Games “MPC Wizard”: Aris Entertainment “Cinemania”: Microsoft “Lightning”: Lucid “CD Speedway”: Bloc Sources: Volpe, Welty & Co., PC Data survey; Researched by JANICE L. JONES / Los Angeles Times
