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Issue Date: Vol. 41, No. 11 / September 25, 2001 - October 24, 2001 , Posted On: 9/25/2001


Arcade-Style Viddies Confront Challenging Future As Market Fragments And Shrinks


Marcus Webb

U.S.A. - How stands the U.S. coin operated video game market in 2001?

Today, as almost any operator or distributor will quickly explain, this category is dominated by countertops along with Incredible Technologies' "Golden Tee Golf" series of uprights. Both products are largely tavern-based games, designed primarily for adult players.

Yet, from 1980 up until just two years ago, the most profitable product in the U.S. industry was the arcade-type video game, often aimed at teenagers. How did arcade video slip from the mountaintop, and where does it stand now?

Any assessment of the genre must begin with one highly telling fact. The most successful U.S. manufacturer of these products , the creator of the "Mortal Kombat" uprights and the "Cruisin'" simulators , couldn't meet its goals in today's market. As industry members know, Midway Manufacturing pulled out of the coin-operated games arena last July.

In the wake of that blow, executives at several surviving factories offer up stark readings of the arcade video market these days, finding it "barely viable." Officials at other factories are still talking up the market in public. Privately, however, even these boosters admit to harboring deep concern.

Without question, arcade video is in serious distress. The number of non-countertop video games in U.S. locations shrank from 750,000 in 1990 to about 450,000 in 2000, according to the latest VENDING TIMES Census of the Industry. Arcade-type video earnings dropped 13% last year, V/T's survey indicates. Leading factory executives estimate annual sales have plummeted from 150,000 units a decade ago to 50,000 units today , at best.

Some observers believe this bleak picture is about to get even worse. Next-generation home game systems arriving this fall will offer even more powerful competition for the leisure dollars of U.S. players. Next year, after Microsoft's "Xbox" and Nintendo's "GameCube" are released, the consumer video market is expected to double from $8.4 billion to $15.8 billion, according to research firm IDC.

"It could take the last breeze out of coin-op video's sails," predicted one manufacturer.

Despite that grim prospect, the situation today is not all gloom and doom. Japan's two leading manufacturers of arcade videos appear unlikely to exit the market'in part because Sega and Namco still have massive arcade chains of their own to support. Japan's third leading factory, Konami, appears strongly committed to the video genre as well, even though it's not as large an operator.

Hopeful signs also include the increasing U.S. presence of manufacturers like Gaelco (Spain) and Andamiro (Korea). Japan's SNK, sole supporter of the system cabinet concept so popular with operators, is still chugging along and may even be due for a bit of a comeback.

THERE IS GOOD NEWS

Still more upbeat news on the arcade video front comes from president Elaine Hodgson of Incredible Technologies. IT has created hit fighting games in the past and also ventured briefly into driving simulators some years back. According to Hodgson, the company plans to re-enter the arcade video market in 2002.

"This market may be smaller than it used to be, but it's still out there," Hodgson ventured. "Midway may have found [this type of equipment] did not make enough profit margin for them, but I think we [at IT] could build and sell arcade video games and make a solid return on our investment. And, in fact, we do actually have some things in development for the non-tavern market." (See our related interview with Hodgson in this issue.)

For a niche whose annual U.S. sales have dropped at least 66% in the past decade, the arcade video arena is surprisingly alive with activity and new developments these days. Sega, the company which continues to release the greatest number of coin-op titles each year, is releasing another slew of titles this year. Of its new offerings, the biggest noise in the American market is being made by "Virtua Fighter 4," running on the "Naomi 2" platform. Sega also has plenty of simulators on hand. These range from "WaveRunner GP" to "Club Kart." The latter features a "Memory Card Reader & Dispenser" system that allows players to access and save challenging features.

Namco is well represented by "Tekken 4," and is supplementing its line with the planned release of more sports simulators, drivers, and perhaps shooting games. And while Konami's plans remain largely under wraps at press time, it is believed the company plans to release sequels to its popular dancing and shooting games as well.

The advent of "Xbox" and "GameCube" may change the arcade market in certain respects, but one element will remain constant. That is, the relationship between coin-op and consumer video continues to be a double-edged sword. On the one hand, many operators , and some factory executives , blame home video for devastating the coin-op video business. As one U.S. factory official publicly charged, several years ago: "You can't take four or five billion dollars out of an industry and not expect to feel it."

Paradoxically, some manufacturing executives portray home video as the savior of coin-op video. At some point, consumer games became so dominant that their profits were the main factor keeping the coin-op divisions going at many factories. Today, many Japanese arcade video games, perhaps most, run on systems that are close cousins of home game platforms.

Factory executives frankly admit this is because arcade video sales have fallen to a point where the return on investment does not justify a separate R&D budget, nor does it justify the development of separate technology platforms. Sega's Naomi boards and Namco's "System 246" are examples of games that employ a good deal of consumer-based technology.

THE COIN-OP ADVANTAGE

If coin-op video is increasingly consumer derivative, it is also true some of the most interesting and promising innovations in the world of arcade video clearly are designed to take the category beyond the technology , and the appeal , of consumer games. The most obvious example may be the latest evolution in physical-action simulators.

Leading this category is undoubtedly Konami's "Dance Dance Revolution," but there are others. The move-your-body gameplay of Konami's "Police 911" and "MoCap Boxing," along with that of recent Namco shooters, have commanded a degree of success in arcades (and sometimes sports bars) worldwide. Reliable sources say Namco and Konami plan to release more games in this class, including a possible surfing simulator.

The split between home vs. coin-op is not the only fissure plaguing today's arcade video market. Another split is increasingly evident between arcade video in Japan, versus arcade video in the rest of the world. This begins with the most fundamental issue of all, product design. A growing number of observers believe that Japanese manufacturers have begun making equipment aimed mainly at their own arcades and domestic market, with Europe and the U.S. seemingly reduced to afterthoughts.

Perhaps this is simply the flip side of having Sega and Namco staked to the coin-op market primarily through their ownership of Japanese arcades. But whatever the reason, the trend has grown steadily'and U.S. industry members are pained by it. "Once, the U.S. purchased enough coin-operated video games that we could drive game development worldwide," one factory executive lamented. "But now we simply take whatever is produced for another market."

It's also increasingly evident that certain high-profile Japanese technologies and marketing initiatives never make it to the States, or , at best , just barely surface here. For example, in Japan, "Virtua Fighter 4" comes with technology allowing players to use cell phones to find games on location and schedule matches with other players. No such option is yet available in the States and may not be for several years.

MEMBERS ONLY

Why not? Apparently it's not for lack of enough cell phone owners in America. With 40% of American consumers now using cell phones, consumer game divisions of Japanese companies, including Sega, have issued a flurry of press releases detailing plans to link cell phones and personal digital assistants to consumer games in the U.S. But the coin-operated division here, unlike in Japan, isn't following suit.

Another major "Japan only" development for arcade video is the advent of online arcades, linked with fiberoptic cable. This concept has become a focal point of Japanese video game development as Sony, Namco and Sega cooperate to build an advanced networked system. This concept was seen in rough prototype last year, when Sega launched a new chain of sites called Entertainment StageNet@. Once again, however, there appears to be little or no prospect for this development to arrive in America or Europe anytime soon.

Perhaps the most dramatic example of a growing Japan-U.S. marketing split in the arcade video arena is the apparent trend toward keeping more and more Japanese titles in Asia without giving them a full, official U.S. release. As one former factory executive put it: "Some of the overseas companies show lots of video game titles at American trade shows, but fewer and fewer of those games seem to ever actually make it to the U.S."

This trend may have helped spark a counter-trend this year, namely a sharp rise in parallel importing of the "missing" Japanese games. In some cases, mainstream U.S. distributors have become involved in parallel importing of certain arcade video games in recent months (see V/T August).

All of these developments may just be the inevitable fallout of a market that has shrunk drastically , so drastically, that even some of its biggest sellers and buyers question its staying power.

Arcade video represents "an increasingly difficult market, barely viable," according to Kevin Hayes, president of Namco America. To support his point, Hayes adds: "Look at the withdrawal of Midway Games. There is really only Sega and Namco that are fully committed to the arcade market. Konami has good products, but its lack of a serious operating base results in a lesser involvement."

Namco America's video sales in 2001 will top 12,000 units, Hayes reported. Of these, half will be 20-year-old software, the repackaged "Ms. Pac-Man/Galaga."

As for the possibility that coin-op factories will resume a serious R&D effort apart from consumer platform technology, Hayes frankly admitted: "I don't see this happening. The economics are not there today and will not be there in the foreseeable future."

NEW BLOOD

Although coin-op video game factories continue to piggyback on consumer R&D and technology, operators should not look for economies of scale to create lower pricing for arcade games, Hayes said. "With the size of the coin-op market shrinking, I doubt that there will be any meaningful price drops," he advised. "We're selling 'Tekken 4' today (a very high earning game) for the same price as we sold 'Tekken 2' several years ago."

Hayes' conclusion: "The industry needs new blood."

A similarly challenging picture is painted by Incredible Technologies executive vice-president Richard Ditton. The arcade video game arena, he says, is "not very viable. The kids are gone; they're off playing the home game systems. I don't expect fighting games to last; you have so few places to put them. There aren't enough location-based entertainment sites on the order of Dave & Buster's to sustain arcade videos by themselves. There is still room for driving and shooting games, but at this point, there is really demand for only one good title at a time in each of those categories.

"Succeeding in the arcade video niche has never been easy," Ditton summarized. "Today it's harder than ever."

Ditton believes grownup players remain the U.S. video game industry's most promising target. "The bar market is more than just standalone bars; you have bars in bowling alleys, hotels, and other venues," he points out. "Socially interactive games, with game play for grownups, is where we as an industry need to concentrate. The niche market that IT took up [with our golf games] is almost the only one you can sustain a company on. That's how we ended up on top , we chose the last foxhole. People will still go to bars and drink. They've been doing it since someone figured out you can ferment fruit and make adult beverages. And once they're in these places, people need something to do, so we have games."

The idea that consumer games can, in some sense, support the coin-operated game industry is viewed with skepticism by Ditton , who is an accomplished game programmer. "Game design of consumer and coin-op games is totally different," he asserts. "You can't really make money on a consumer game in the coin-op market. A good consumer title offers eight to 40 hours of a complete experience, while arcade video games demand money every three minutes. Arcade games are fun but thin."

IT's tavern-oriented videos make use of networking to download game software fixes and updates, and to upload player scores for tournament competitions. Some industry members foresee remote interactive gameplay among players in different locations as the next logical step. Indeed, Atari and Midway both experimented with such technology a few years ago. But Ditton believes this feature does not really fit the coin-operated game profile, both for reasons of player psychology and operator earnings.

INHERENT DIFFERENCES

"Using the Internet to link players remotely for live, real-time, head-to-head gameplay is really destined to succeed in the home, where people are already playing against remote competitors," he said. "In a bar or arcade, it means giving up the good-natured razzing of the guy on the next barstool, which is so much of the appeal for video game competition. The other problem with remote interactive game play for coin-operated video is that one-player games only earn half the money for operators that two-player games earn."

Leagues and tournaments have successfully kept pool and darts going, and a growing number of industry members believe leagues and tournaments may also prove to be the salvation for arcade video. Ditton's views on this subject are more cautious.

"I think it's true that video games are becoming products that require league support," he said. "Tournament play, leagues, and Internet posting of player statistics helps keep player interest high. More can be done with this and we have some ideas about how to take it further."

But leagues and tournaments can't do the job alone, Ditton warns. "What's needed is to create destination pieces," he said. "Designers have to invent games that people actually go to the location to seek out, find, and play. That requires overwhelmingly great game play, or it requires offering a potential financial reward for playing the game. Both are tough to accomplish for various reasons."

A strongly contrasting view was expressed by Roger Sharpe of Sharpe Communications. During his many years as a marketing and licensing expert at Midway Games, Sharpe was instrumental in conceiving and helping to develop some of that factory's most successful video titles. Sharpe believes the industry took a wrong turn when it began attempting to position video games and arcades as destination attractions that were supposed to command dollar play. He also does not advocate video leagues and tournaments.

Instead, Sharpe claims the industry needs to return to its roots. Video, he says, should revert to what made it successful in the first place: cheap, simple, incidental, casual amusement. As a published historian of the industry, Sharpe brings an unusually long-range perspective to his analysis.

"We are now experiencing a more deeply rooted malaise than anything I've witnessed in my time in and around the industry," he declares. "Tragically, our situation today is, I believe, also more serious than anything that befell the industry since the 1930s. We are tottering. The question is whether the entire industry will remain viable'not just one segment, niche, or type of product. What is our mission? We have lost sight of what it is supposed to be. Our role is to offer brief, affordable entertainment , amusement , diversion. We were never meant to be a 'necessity.'"

Sharpe emphatically rejects the tendency of many industry members to blame "the usual suspects" for the decline of arcade video. "The Internet, the consumer video games industry, and the weather are not scapegoats," he said. "We need to accept responsibility for allowing our market to lose its audience. We have driven them away. We overcharge for the entertainment value we offer."

His critique continues: "We stayed with business as usual, waiting for people to come in , too often, without doing any publicity or creating appealing environments to draw them in. Particularly with the wholesale switchover to redemption games and the associated ethic of 'quick-coin games,' we abandoned our player base. We said to players: 'We don't have to entertain you with fun game play. Just give us your money and get out fast.' As an industry, we should be ashamed."

Like many observers, Sharpe believes the arcade video market has become badly fragmented, in contrast to the days when virtually anyone might enjoy a game of "Pac-Man" or "Centipede." Video today is subdivided into a whole series of niches, each with its own dedicated cadre of players. These include tavern sports videos, countertops, low-end simulators, high-end simulators, fighting games, music novelties, video redemption , and now, perhaps, nostalgic video re-releases.

FRAGMENTATION

The proliferation of technology contributed to this fragmentation, Sharpe points out. "As video games began seeing more diverse themes and interfaces , joysticks, buttons, trackballs , the product has become more genre specific," he said. "That means you are cutting your audience into smaller and smaller segments. A player of sports-themed video games might not want to play puzzle games, for example. Few players transcend all categories; the audience tends to focus myopically on just one or two categories, asking themselves if they like the content and the control mechanism."

Not just a critic, Sharpe offers a list of constructive suggestions for the arcade video industry to achieve renaissance. "Rather than competing with the consumer video industry on technology," he said, "we should have focused on promoting our basics and expanding beyond our core audience." And he repeatedly calls for inexpensive, simple, fun games with depth of gameplay comparable to the classics of 20 years ago.

"Namco is having a success with 'Pac-Man' and 'Galaga' again this year because those games were just plain fun," Sharpe asserted. "We need more simple, easy games like that , games that you don't have to be a genius to play, but games that are so much fun we'll still be playing them 20 years from now."

Another dissent from the conventional wisdom is seen in the former Midway executive's take on tournament-based promotions for video. "Tournaments are fine for some players," he says. "But what if you just want to play short-term and have fun? If everything is centered on entering a tournament, you may be turned off. Tournaments are not a panacea. They are only an adjunct. Here again, we have strayed away from the average person who simply wants a brief, occasional, casual amusement experience. That is your hardcore audience."

Rather than tournaments, Sharpe believes the best promotion for arcade video is one that American consumers always respond to: price cuts. He believes the industry made a serious mistake when it endorsed high price-per-play strategies. "There is nothing wrong with lowering prices to increase play," he declares. "Video game play prices have been raised to foolish levels. Using smart cards and tokens to attempt to disguise the cost-per-play does not successfully create an anything-goes Vegas mentality."

WHISPERS IN A WELL

A further promotional avenue that the industry has failed to exploit, Sharpe said, is free publicity. "We don't expose our new products to people, aside from just putting them on location," he charged. "New equipment is not properly promoted on location with signage or in player-oriented newsstand magazines or with good Internet publicity. In too many locations, the 'new game' signs stay up for a full year."

Real-life evidence that Sharpe's prescription for cheaper, lower-tech video can succeed may be the ongoing saga of SNK. Despite , or perhaps because of , its refusal to provide cutting-edge technology, the Japanese maker of "Neo-Geo" system cabinets and associated software continues to endure.

SNK products are represented in North America by Apple Industries of New York. According to Apple president Allen Weisberg, "SNK's advantage is having 1.5 million system cabinets on site worldwide. This installed base guarantees a certain number of ongoing sales for software."

VOICE OF REASON

However, even the availability of low-priced arcade video product can't create growing demand in today's climate, Weisberg concedes.

"In this shrinking market, new systems are not going out and we do not see bright prospects for growth," he said.

"At best," he predicted, "we'll replace old systems and keep selling new software for the existing installed base. Last year was our first time to reintroduce the dedicated 'Neo-Geo' cabinet and we sold a number of them, built by Dynamo. We actually saw an increase in software sales to support the 'Neo-Geo' system. But our software sales performance consistently tops out at so many thousand units per title."

Also echoing Sharpe's prescription, Weisberg cites low software prices for SNK products as a key reason for the line's survival.

"Our software is reasonably priced," he said. "The operator's return on investment is substantially higher with SNK than with most other video products. A $15,000 simulator or a $5,000 upright doesn't make sense anymore. But a $2,000 product that earns its cost back in eight months does make sense."

The future of the troubled arcade video market remains an open question, with no obvious "magic bullet" in sight to cure its woes. As IT's Richard Ditton puts it, "Although I have always tried to take a visionary approach to the industry, I have to admit I'm baffled about what direction to try next." Ditton agrees with Roger Sharpe on at least one vital point: it's essential for arcade video to get back to basics. "Our industry has rediscovered the core truth that the game comes first, not technology," he said. "We have also rediscovered the core truth that a social environment comes first, too."

Ultimately, Ditton believes, the industry can only find its way back to the "arcade video game promised land" by focusing more on the ultimate customer, the player. "We have some ideas of our own about what to do," he said. "But we also know it's time to get reconnected to our market in a very real way."

The industry, Ditton emphasized must figure out what players want and how to give it to them.


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