Bob Cooney of Global VR (San Jose, CA) is a heretic.
Daring to challenge the orthodox view that innovation is badly needed to bring players, sales and profits back to the amusements industry, Cooney boldly declares: "The industry does not need new innovative ideas. All the innovation you could possibly ask for is right there in front of you. In fact, there's never been more innovation in the videogame industry than there is today."
In Cooney's view: "The problem is not lack of innovation. The problem is that we're still using a business model that harkens back to the days of Pong."
As other industry visionaries have done in the past (notably uWink's Nolan Bushnell and the late, great Joe Dillon of Midway), Cooney called for the coin-op industry to hitch its wagon to the still-rising star of the consumer videogame market. "We need to start thinking of new ways to utilize the innovative ideas that are being poured into the home game market," Cooney urged. "[The consumer videogame industry today] is threatening to bypass the segment of the industry that gave birth to the industry itself."
The Global VR executive made his case at a brisk, upbeat, and sometimes humorous seminar titled "PC and Console Games: Is That Light at the End of the Tunnel, Or a Train?" Cooney was the sole speaker at the session, which took place during last fall's Fun Expo (Las Vegas, 2001).
A synergistic marriage of coin-op and consumer video has frequently been proposed by many industry leaders. But to date, no one has come up with a precise prescription to accomplish that goal (at least, not one that large numbers of participants in either market were willing to follow). Cooney did not appear the least deterred by this disappointing history. Pointing to the success of his own company and one or two others as viable examples, he outlined what he called "a new business model" that he believes can reinvigorate the amusements trade.
(Global VR, manufacturer of the Vortek VR platform, specializes in licensing and adapting successful consumer software such as Syn and Beachhead 2000 to arcade applications. Their latest acquisition is the rights to a Tiger Woods golf game; please see separate story elsewhere in this issue for details.)
CONSIDER A NEW STRATEGY
Before offering his own proposals to restructure the business, Cooney began by calling for a radical shift in the industry's mindset. "Why are we still making players that sell gameplay by time, quarter by quarter, token by token, minute by minute?" he asked. "In an age where I can get unlimited long distance for $20 a month, unlimited Internet access for $9.99 a month, and all you can eat shrimp at Binion's on Tuesdays for 99¢, why do I still have to pay for my fun in three-minute increments? [We are saying to players:] Hey, kid, you want three minutes of fun? That will be 75¢. Oh, yeah, I can break your hundred. Here's your change: 397 tokens."
Changing the current mindset also means breaking with the tradition of trucks, cabinets, and physical rotation, Cooney declared. "Would somebody please tell me why we are taking games that are made of bits of electronics that have no weight and dimension whatsoever, and shackling them to plywood boxes?" he demanded. "In this modern technological wonderland in which we live, I can stand up here with a Palm Pilot and beam you games on your cell phone, and you can put it in your pocket and walk home with it. But if I'm an operator, I've got to have a fleet of flatbed trucks to move a game from one location to another."
The industry's ironclad "traditions" have become deadly barriers to innovation, Cooney charged. "I think any time a new, young company tries to break into this marketplace with a new idea that goes against our old, outdated economic model, they are forced to succumb to the same mind-numbing revenue tests that our grandfathers invented at Coney Island...
"What really scares me is that there are probably lots of new companies out there, or even old companies with new ideas, that are afraid to bring them to market for fear they will not pass the old-school testing methodologies," Cooney continued. "How many companies in the past five years came out with a new, innovative product that went against the old business model, and then died because they didn't have the financial resources...to survive the skepticism long enough to get a hit software title in it, to earn the money and pass the old-school tests that allow people to jump behind it? If the industry wants innovation, we've got to support it when we see it. And we don't need to support it with praise but with money."
Developers are lured to release games to the consumer market first, or indeed as their only outlet, because that market runs on a business model that offers developers a much greater return on investment, said Cooney. He outlined the financial and market considerations that drive this decision, as follows.
Videogame development costs typically run $2 million to $10 million per title for either market. If a coin-op manufacturer realizes a 10% margin on a $7,000 game, the factory would have to sell 2,800 units to break even (representing 2% of 177,000 top locations). To make even a modest profit, the factory would have to sell 3,500 units. Last year, the only videogame in the industry to sell in that quantity, Cooney said, was Incredible Technologies' "Golden Tee Golf." Cooney's firm estimates that IT has sold something like 80,000 units of this game (counting sequels) over the past five years. Aside from this phenomenal exception, most good videogames now generate sales of 500 units to the coin-op market, he added.
By contrast, some 32 million Sony "PlayStation 2" units are predicted to be in the U.S. market by 2004, in addition to the 84 million units of other comparable consoles worldwide. Therefore, realizing $10 profit per game on a software title that enjoys a mere 2% market share creates a $6 million profit, Cooney said. Home game software costs just $2 per disc to replicate and sells for $50 per unit, creating huge profit margins.
IT'S BEEN NOTED BEFORE
As for specifics of how to integrate the consumer and coin-op video markets, Cooney called for game developers to be given "a piece of the ongoing revenue stream," saying that this is the only method that will generate sufficient financial incentive for developers to showcase their products in arcades and street locations. (Bushnell and Dillon said the same thing.)
Cooney acknowledged that this position is heresy in today's coin-op field. "The most recent survey suggests that only 17% of operators are willing to share revenues with manufacturers and developers," he conceded. "But the only way this industry is going to get healthy again...[and] the only way we're going to get consistent access to the best talent and the best games...is to attract the developers, and that takes money."
Only two ways exist to offer developers a sufficient financial incentive to enter the coin-op market, he said. First, in theory the industry could raise the average price of coin-op videogames to $20,000 and use the additional money to pay developers huge royalties. Clearly, he said, that is not a viable choice. The only realistic alternative, said Cooney, is to "give them a piece of the cashbox."
In practice, Cooney said a $2 million consumer title could be licensed to the arcade for $200,000 and a small percentage of the coinbox. This would enable factories to create solid ROI by selling only 350 units, and would lead in turn to more variety and better titles...resulting in more money in more cashboxes, he said.
IT's success with online "Golden Tees" provided more evidence to buttress Cooney's argument that revenue sharing is to the operator's financial advantage in the long run. The widespread popularity of the game among industry professionals also provides evidence that operators will accept revenue sharing if the profitability is high enough. Distributors and the manufacturer receive a portion of "Golden Tee" tournament fees; and online versions "make at least twice" what non-connected versions of the game earn, he said.
"I think you'll see more and more" factories using this model, Cooney said, indicating that Global VR would follow suit with its Tiger Woods game and others. He also called for linkage between online home play and online arcade-based tournaments to "drive more players to your arcades." This promising idea was earlier floated by executives at the now-defunct Interactive Light (Santa Monica, CA), but to date no factory has put it into action.
A replaceable software model is crucial for successfully licensing home software to the coin-op arena, Cooney said. Operators ideally should be able to replace software every six months to keep player appeal fresh. The capability to do this can also help reduce factory overhead, he pointed out: if software is provided on a CD-ROM or other removable media formats, the manufacturing cost of production will be "basically nil."
To house and present a constant stream of replaceable software, manufacturers must create hardware systems based on PCs or consoles, Cooney insisted. He cited SNK's Neo-Geo cartridge system and the Vortek VR platform as proven arcade successes based on this concept. The latter is reportedly earning $1,000 a week in high-traffic locations.
The consumer videogame market represents a broad demographic that would be entirely suitable for the coin-op experience, Cooney said. Citing statistics from the International Digital Software Association, he said 145 million Americans (60% of the population) play videogames. The average age of game players is 28 and 90% of the software is purchased by adults. The male-female breakdown is 60-40%. And 60% of all game players prefer to play with friends rather than alone.
"Anybody ever heard of Dave and Buster's?" Cooney asked. "That's their marketing plan, isn't it? Are they the only ones out there that are awake? Because you go to many arcades today and they're still dark and dingy. They are not female-friendly. They are not friendly to couples. Dave and Buster's built a fern bar with a million dollar arcade to appeal to women. I think those statistics are a testament to the viability of the arcade."
One-third of all Americans say playing games is fun entertainment, Cooney continued with the IDSA stats. "That's three times as many people as say going to movies is fun," he pointed out. He read an excerpt from a story in Newsweek that predicted videogames will be the most dynamic, exciting, and profitable medium of the 21st century, then asked the seminar audience: "Does that sound like an industry in need of innovation? It doesn't sound like it's dying to me!"
Cooney concluded his presentation with an affirmation of hope: "By opening our minds and our wallets, we can take advantage of all the great innovation that's out there today and reverse the doldrums in our industry."