The business of gaming: It’s bigger than you might think, and it’s growing

If you still think video games are for teens in the rec room, it might be time for a closer look at what’s become the biggest entertainment phenomenon since television.

Like an unstoppable, kaleidoscopic alien invader in an Xbox sci-fi title, video games are multiplying and spreading across the landscape, working their way into phones, televisions, iPads and every digital device. Video games are played in two-thirds of the households in America, where people spent nearly $19 billion last year on games ranging from 99-cent iPhone titles to $400 consoles with ultrapowerful graphics processors and exotic motion-control systems.

It’s not just kids playing, not by a long shot. The average age of gamers is now 34—with 26 percent of players over the age of 50, according to the Entertainment Software Association trade group.

Some people may not even realize they’ve become gamers, because the general perception of video games hasn’t caught up with their proliferation and popularity.

“We have the data to prove it,” says Christopher Natsuume, ’07, who co-founded the Singapore-based game company Boomzap in 2005, after getting his M.B.A. from the Foster School of Business.

Boomzap makes puzzle games that are played mostly by women aged 50 and above, some of whom are spending 20 or 30 hours a week playing the company’s downloadable puzzle games, such as the 19th century mystery-themed Death at Fairing Point: A Dana Knightstone Novel illustrated with painterly European settings.

“You take a 65-year-old woman living at home, playing our games, and you ask her ‘Are you a video gamer?’ and she’ll tell you no because she doesn’t self-identify as a gamer,” Natsuume explains. “In her mind a gamer is an 18-year-old with an Xbox.”

If you look at the hours people are spending on it, the money they’re spending on it, we’re the largest form of entertainment in the world.

Christopher Natsuume, co-founder of Boomzap

The reality is that more people than not are playing video games, and they’re spending more on games than they do on movies. People now spend about twice as much on video games as they do on magazines, books and newspapers, not to mention music, sports activities and movie rentals.

“It’s insidious,” Natsuume says. “If you look at the hours people are spending on it, the money they’re spending on it, we’re the largest form of entertainment in the world.”

It’s still growing, despite a few down years during the recession. Total industry sales fell 6 percent last year to $18.58 billion in the U.S., according to the NPD Group, but it may have turned the corner. Sales should grow 10 percent in 2011 and 2012, boosted by new handheld gaming devices from Nintendo and Sony and the growth of games on Google’s Android software for mobile phones and tablet computers, according to a January report by Lazard Capital Markets.

To get your mind around the scale of the game industry, consider its different forms. Insiders divide the industry into categories—casual, core and mobile—based roughly on the type of game, their business model and where they are played. The most attention—and marketing dollars—goes to traditional games that appeal to hardcore players using PCs and consoles such as Microsoft’s Xbox 360 and Sony’s PlayStation 3. Microsoft, Sony and large independent game companies may invest $30 million or more developing blockbuster titles with rich story lines, photorealistic graphics and original music.

These games blend animation, art and music with software programs that interpret and display players’ action on the screen and generate digital opponents whose behavior varies depending on what players do, while rendering a richly detailed, 3D virtual world where branches wave, streams ripple and landmarks explode as the action unfolds.

Most of these games can also be played online, through networks that match players around the world based on their past achievements and enable them to chat—or curse at each other—through headsets as they compete.

It can take 50 to 200 developers several years to build high-end games for consoles, but the payoff is potentially huge.

Meanwhile, game companies are watching for the latest computer science research, looking for ways to make their games faster, more realistic and more fun.

When Redmond’s Gas Powered Games was building the new version of its Supreme Commander battle strategy game released last year, an engineer came across research into modeling the flow of crowds that was published in 2006 by UW Associate Professor Zoran Popovic´ and graduate students Seth Cooper and Adrian Treuille, ’04, ’08. The UW team had figured out a way to efficiently simulate moving through crowds of people, which is a challenge to do realistically because, in real life, “humans constantly adjust their paths to reflect congestion and other dynamic factors.”

Gas Powered drew on the research to build a complex system for directing the movement of huge armies, which players control in the game. Instead of having to generate paths for 100 tanks at a time, the system creates a single flow model that 100 tanks use at once to move across the game’s map.

This made the game more realistic—units move seamlessly through each other on the battlefield and change direction on the fly. But it was a gamble—with costly developer time—for the company to pursue the new technology, CEO and Founder Chris Taylor said at the time.

“You have to have this kind of stuff in your back pocket to keep driving the bar up in a space … if you’re going to be in this industry you have to have a technology that is your own, that’s your proprietary trademark,” he said.

It can take 50 to 200 developers several years to build high-end games for consoles, but the payoff is potentially huge. Last year’s biggest seller, the Vietnam-era military shooting game Call of Duty: Black Ops, had sales of $650 million in the first five days it went on sale in November. The game’s publisher, Santa Monica, Calif.-based Activision, boasted that its five-day run was better than any movie or book and showed how mainstream video games have become.

Those games are reaching people who didn’t used to play games.

David Edery, CEO of Spry Fox

“The title’s success illustrates the mass appeal of interactive entertainment as millions of consumers are choosing to play Call of Duty: Black Ops at unprecedented levels rather than engage in other forms of media,” Activision Chief Executive Robert Kotick crowed.

Microsoft’s Xbox also has been particularly successful with these hardcore action games, starting with the sci-fi shooting title Halo, which was created by a Chicago game studio called Bungie that Microsoft acquired and moved to the Seattle area before the first Xbox was released in 2001. Bungie is now independent again and developing games for Activision in Bellevue.

Meanwhile, Microsoft’s trying to extend the appeal of the Xbox to a broader audience, with the introduction of its Kinect motion-control sensor that lets people control games by moving around in front of the sensor. Similar to the Nintendo Wii’s motion-sensitive remote control, this system makes the games more accessible to children and people unfamiliar with the buttons and triggers on traditional console controllers.

Another new category is social games such as Farmville that are played primarily on Facebook and other social networking sites. According to Farmville creator Zynga, a San Francisco company started in 2007, more than 50 million users a day play its games, and the company has reportedly raised more than $500 million from investors.

Even if the frenzy around social games has tempered some, they are still growing along with the overall industry, says David Edery, a former Xbox manager who is now a consultant and chief executive of a new Seattle-based game studio, Spry Fox.

“Those games are reaching people who didn’t used to play games,” he says. “Some of those people are people who maybe, at best, were playing Solitaire or Minesweeper before, maybe Tetris if they’re really wild and crazy. So there’s no question they’re expanding the market, which is very exciting for everyone in the industry.”

Natsuume’s Boomzap is in the “casual” category that includes easy-to-learn, PC-based games that are distributed by websites online and also sold packaged in retail stores. The most popular game in the casual category is the version of Solitaire that’s included with Microsoft’s Windows operating system. It was originally included as a way to help people learn to use the computer mouse, but the familiar and addictive title also became a gateway to computer games.

Over the last decade, Seattle has become the world hub for casual games, with dozens of companies in the business.

The casual industry blossomed after 2001, when Seattle studio PopCap Games had a breakout success with Bejeweled, a colorful game in which players find matching clusters of gems as they cascade down the screen. PopCap’s winning formula was offering a free online version to hook players, who would then pay to download the full game. More than 50 million people took the bait and paid for the game, and they’re now spending 1.1 billion hours a year playing Bejeweled and other PopCap games.

Over the last decade, Seattle has become the world hub for casual games, with dozens of companies in the business, ranging from tiny studios to large development and publishing companies such as Big Fish Games, founded by RealNetworks veteran Paul Thelen, ’89, in 2002.

Thelen started out writing games himself and asking his mother to test them; now Big Fish employs around 450 in Seattle; Vancouver, B.C.; and Cork, Ireland. Last year Big Fish had sales of more than $130 million and Thelen expects growth to continue as the company expands to new platforms such as smartphones and tablet computing devices.

Games have been played on mobile phones for years, but the category took off after the arrival of smartphones such as the iPhone, with large screens and application stores that make it easy to find and download games and other programs.

Last year 10.9 billion mobile “apps” were downloaded by phone users around the world, and that should increase to 76.9 billion app downloads in 2014, when sales will exceed $35 billion, according to research firm IDC.

Rovio’s “Angry Birds” is the most successful mobile game to date.

The most successful mobile game so far is Angry Birds, a cartoonish puzzle game that Finnish game company Rovio released for the iPhone in 2009. Players slingshot birds sideways across the screen to demolish the castles of pigs who stole the birds’ eggs.

It may sound silly, but Rovio’s made serious money with the game, selling more than 12 million copies. The company also makes around $1 million per month from advertising placed on a free version of the game, which has been downloaded more than 30 million times.

Rovio was started by three students at Helsinki University of Technology who won a game development competition in 2003. It grew into a major studio, producing games for companies such as Nokia, Vivendi and RealNetworks before Angry Birds.

The marketplace is getting bigger so each need can be satisfied and become a market unto itself.

Paul Thelen, founder of Big Fish Games

Games are the most frequently used apps, but so far only about a fourth of American consumers have started actively using apps, according to a Pew Internet Project survey last year. For game developers, that means there’s a big opportunity to reach new players as more people acquire smartphones and start using mobile applications.

“I think mobile is still emerging,” Thelen says.

He believes the iPad in particular is an opportunity for the industry to expand. Its screen is large enough to play the same sort of games played on a PC, but the device is portable so players don’t have to be seated in front of a computer. That could lead to an increase in the number of minutes per day people spend gaming.

As has been demonstrated firsthand in the Thelen household.

“When I’m sitting with my wife and she’s watching a TV show that I’m not too enthralled with, I break out my iPad,” he says.

Looking ahead, Thelen sees more segmentation in the industry because the market is so huge and new platforms are emerging. That’s giving people more ways and places to play games.

“The marketplace is getting bigger so each need can be satisfied and become a market unto itself,” he says.

Game categories aren’t set in stone and they tend to overlap, with people trying and playing all sorts of games. A February study by Dutch research group Newzoo found casual games are played by 66 percent of the online population in the U.S.—141 million people—and 46 million of them play on all the major casual platforms—social networks, Web sites and mobile phones.

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If it’s connected, consumers want to play games on it. There’s evidence everywhere you look—phones are the obvious ones, the Kindle, the back of airplane seats.

David Edery, CEO of Spry Fox

While this evolution continues in the U.S., gaming has attained a higher status abroad. High-profile game developers in Japan and Korea are considered celebrities, and game competitions are televised events. Pacific Rim countries are also aggressively courting game companies with incentives and seeding the industry with grants and educational programs to train game developers.

“These governments proactively spend money on the industry,” says Edery, who has consulted with the state of Victoria in Australia, on nurturing its game industry.

“Not only is it good to have cultural exports like that but this is an industry that attracts engineers to an area, it attracts talented artists … there’s a lot of good reasons to have a game industry.”

To compete with these locations, an economic development group called Washington Interactive Network was formed in 2004. Its most recent study of the region’s competitiveness said the Seattle area “is poised at the forefront of the industry” with more than 150 game companies employing more than 15,000 people generating $4.2 billion a year in sales.

The city trails only Los Angeles in the number of game companies, which draw on the roughly 45,000 computer programmers and engineers in the area. In addition to longtime giants Microsoft and Nintendo of America in Redmond, Sony now owns two studios—and has close ties with a third—in the Seattle area producing top-tier titles for the PlayStation 3 and PC.

Yet several industry veterans say it’s still challenging to find work in the industry, which is known to have an intense work ethic.

“The problem is everybody wants to be in entertainment,” says Natsuume. “It’s really hard to drive up their salaries or working conditions when there’s a line of people out the door, willing to work for free.”

Edery also says there’s an oversupply of people wanting to get into the industry. But there’s always a shortage of engineers with the technical skills needed to create games.

“Those are the ones who break in most easily and with the highest starting salaries,” he says. “Everyone else ends up like the old saying, stuck in the mailroom—if they’re lucky and can crawl their way into the mailroom.”

Natsuume actually left a job developing games in Germany to get his M.B.A. at the UW, hoping to settle down and find a management position at a software company like Microsoft or Google.

But halfway through the program he was inspired by a guest lecture by James Gwertzman, founder of a casual games company that was acquired by PopCap in 2005.

“I kind of left the lecture thinking wow, I could do that, that sounds like a really cool entrepreneurial opportunity,” says Natsuume, who is now based in Yokohama, Japan.

Working with a partner in Singapore, Natsuume put together a plan that was refined through several UW business plan competitions before he graduated and started running Boomzap full-time in 2005.

They now employ 35 people in the Philippines, Siberia, Malaysia and Indonesia. The company produces multiple games a year, with groups of five or six producing a game about every six months. The games are published by Big Fish and other distributors of PC games, but the company is increasingly turning its attention to games for the iPhone and iPad.

Eventually most every digital device will have games. It’s inevitable when people have time to play and disposable income, Edery says.

“If it’s connected, consumers want to play games on it. There’s evidence everywhere you look—phones are the obvious ones, the Kindle, the back of airplane seats.”

“They want to be entertained,” he says, “wherever they are.”