• The expense of graphics innovation to developers is directly related to the high cost of interactive entertainment to consumers.
• Consumers have come to only know and expect high-end graphics from next-generation video games; however, consumers are also concerned with the high prices and lessening value of next-generation video games.
• Reducing investment in graphics innovation while expanding corporate and product brand experiences allows organizations to capture higher returns by offering lower prices and more value.
• Branding enables organizations to break from the blockbuster business model, paving the way for nontraditional distribution channels.

Challenge

At the 2006 MI6 Game Marketing Conference, Frank N. Magid & Associates published the results of a study into the game purchase process from a consumer’s perspective. The research suggests graphics, price, gameplay, and features are the characteristics of games considered most influential in the process. The research also suggests consumers are least influenced by incremental and radical innovation, franchise authenticity, and the corporate brands of the associated publishers and developers.

Following the panel discussion What Makes A Next-Gen Game? produced in March 2007 by International Game Developers Association, San Diego, in association with Qualcomm, Rockstar Games, and High Moon Studios, we determined the product attributes that define the “next generation” of video games are precisely what consumers have learned to expect: bigger environments, better graphics, and more of the same old games.

Using data from the Magid study, we created a value curve that correlates the research to the discussion, illustrating the expectations of consumers that producers of video games seek to satisfy. The disparity between the most and least influential characteristics of games indicates that the resources spent on graphics innovation (i.e., technology used to create ultrarealistic visuals) are disproportionate to the investment in the corporate brands and people behind the curtains.

The fixed and variable costs of graphics innovation surmount all costs associated with other aspects of a video game. Those costs, which include engine and software licensing, platform development hardware, specialized training, staffing, and technical support, can rival the minimum annual production cost of games for next-generation platforms.

Because graphics innovation is costly to new product development, consumers suffer a premium for video games, a premium three times more than the price of a new movie DVD, four times more than the price of a new music CD, and up to ten times more than the price of a New York Times Best Seller. With the combined price of a new platform and game, consumers also face higher minimum barriers to entry at between US$300 and $600 (or $1,000+ for subscription-driven online games) excluding the costs of a display, peripherals, and Internet services. The luxury of video games is more expensive than all other entertainment media combined!

Regardless of the costs to both developers and consumers, most developers (particularly those involved with developing console games) continue to focus on graphics innovation. This persistence is driven by the industry tradition of innovating graphics technology in pursuit of providing players a deeper sense of immersion in the game environment. The results in practice have largely failed to deliver real value to consumers and are partially responsible for the industry’s widely criticized blockbuster business model. Adding insult to injury, only a handful of video games that employ state-of-the-art graphics, such as Gears of War, have been successful.

Solution

While reducing investment in graphics innovation without investing in branding results in lesser quality products as developed for and perceived by their target markets, simultaneously evoking an integrated brand experience (i.e., an emotional message communicated at every point of interaction with consumers) eliminates that risk, evolving the value network to more effectively address the heterogenous marketplace.

By challenging and redefining the shape of the value curve for interactive entertainment through integrated branding, organizations capture higher returns on investment. In conjunction with decreasing the cost of new product development, consumer sensitivity to price lessens, enabling organizations to offer significantly lower prices without hindering the perceived value of their products.

Perhaps more important for the long-term health of the industry, the low-price/high-value organization pushes new product development outside the traditional blockbuster model of the entertainment business. Instead of relying on one-hit wonders made possible by massive teams and astronomically extreme financing, these organizations gain more freedom to innovate in the areas of gameplay, features, and social connectivity—all of which should be viewed as opportunities for competitive advantage.