A New Front in the Console Wars

The downloads gaming market is opening up a new avenue of competition for console makers and giving indie game developers a shot at the spotlight

by Matt Vella

Junko Kimura/Getty Images

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Recent shifts in the gaming landscape have made it easier for small companies to have a big impact. Even as the industry consolidates, creating massive new companies such as the ever-larger (BusinessWeek.com, 10/29/07) Electronic Arts (ERTS) and the newly formed Activision Blizzard (BusinessWeek.com, 12/4/07), smaller independent game developers have gotten a boost from console download services such as Sony's (SNE) PlayStation 3 Network and Microsoft's (MSFT) Xbox Live. Smaller development budgets and the relative simplicity of offering download-only titles is benefiting even the smallest developers.

At the Consumer Electronics Show in Las Vegas earlier this month, Microsoft crowed about the success of Xbox Live, revealing it now has 10 million subscribers, a milestone reached in part thanks to robust holiday sales. During the last quarter of 2007, Microsoft sold some 4.3 million Xbox 360 consoles. It was originally launched in November, 2005. Sony released PlayStation 3 a year later and some of the most talked about games on the system were available for download. Nintendo (NTDOY), meanwhile, offers the "Virtual Console" service for its Wii system, which also provides pay-to-play downloads, though the company has been tight-lipped about sales.

Encourages Publishers to Take Risks

The market for console downloads is booming. According to an October report released by financial analyst IDC (IDC), online console revenue in North America—including downloadable software sales—was expected to total $583 million in 2007, up from $133 million the year before. According to the same survey, about a third of the Web-capable consoles in North America are active online, drawing some 14 million players for the first time—and creating one of the biggest potential growth spots for this generation of consoles. "The trend is just ramping up," says Matt Leone, the previews editor at the popular games site 1Up.com. "And a lot of smaller companies are starting to ride this wave."

Gamers typically pay between $5 and $15 to download titles directly to their Internet-enabled console gaming systems. In comparison with the $60 sticker-shock price of conventional retail games, this price tag gives publishers more leeway to take risks on titles. Hedged from taking big risks by massive development budgets, blockbusters such as this year's mega-hit Halo 3 for the most part stick to tried formulas. But this new, less restrictive forum encourages fresh takes on game design.

And the downloads market is opening up a new avenue of competition for console makers, putting an emphasis on attracting buzz-worthy titles to each service. So far, each service has developed a different style. Microsoft's service emphasizes old-school arcade play. In 2007, according to figures released by the Xbox division, the 1989 arcade hit Teenage Mutant Ninja Turtles was the most played game of the year. Nintendo, meanwhile, has recycled titles from its now defunct Nintendo 64 system. Sony has tried to cultivate a more innovative, arty set of titles.

Going Beyond Teenage Boys

That's where companies like thatgamecompany come in. The fledgling indie developer was co-founded in the spring of 2006 by Jenova Chen and Kellee Santiago, two recent graduates of the University of Southern California's Interactive Media MFA program. Following the success of a series of free titles made while the founders were still at school, the company recently inked an exclusive three-game development deal with Sony.