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Stepping Up Their Game

Battle evil underworld creatures. Jam like a rockstar. Play sports without having to go outside. Those are concepts behind some of the best-selling video games of 2006.

With the video game industry marking its 10th annual Interactive Achievement Awards ceremony February 8, it was evident how much had changed from 1998 when it first started doling out honors. Sales now top $12.5 billion a year, versus $3.7 billion a decade ago. Moreover, the awards ceremony in Las Vegas reflected the industry’s evolution as well as several new forces, from the popularity of Wii and Guitar Hero to the huge success of "Gears of War," which took top honors and validated Microsoft’s status as a major industry player.

The awards are part of the Academy of Interactive Arts and Sciences’ D.I.C.E. Summit, a conference that brought together more than 600 of the industry’s top executives and creative minds, including icons Will Wright and Sid Meier.

A Banner Year

The $30 billion global video game industry is back to its winning ways. Despite a rocky transition into a new generation of consoles, consumer demand for video games remains strong.

Last year was a record year for the industry, boosted by the launch of the Sony PlayStation 3 and Nintendo Wii as well as sales of current systems like the PlayStation 2 and Xbox 360. In the portable segment, Nintendo's Dual Screen (DS) was the big winner.

U.S. retail sales of video games, which include hardware, software and accessories, jumped 19% to $12.5 billion in 2006, up sharply from the industry’s previous record of $10.5 billion in 2005, according to NPD.

"The industry was really firing in all cylinders," says Anita Frazier, entertainment industry analyst for the NPD Group. "A lot of growth in many areas led to the boost. The PS2 was the biggest platform of the year and gave a solid foundation for the industry."

Game makers release more than 1,000 game titles a year in retail outlets alone. The no. 1 selling game in 2006 was Electronic Arts' "Madden NFL ‘07" for the PlayStation 2. It sold more than 2.8 million copies. Nintendo’s "New Super Mario Bros." for its DS system came in second with 2 million units.The latest installment of Zelda, Activision’s "Call of Duty 3," "Gears of War" and "Guitar Hero II" were among the best-sellers in December.

Analysts say innovative casual games like Guitar Hero and Wii Sports are fueling a renewed sense of creativity and experimentation among game developers and opening new sources of revenue.

Hard-core gamers are still the ones driving sales because they are spending the big money on the expensive hardware, says Paul-Jon McNealy, who covers the Consumer and Gaming Software sector for American Technology Research.

Wii Changes The Game

"Hard core is the bigger market, the proven market," McNealy says. "The casual game market is still a few years off, but the Wii is bucking that trend early on."

But casual gamers aren’t the only ones buying Wii. Professional video gamer Johnathan "Fatal1ty" Wendel plays Guitar Hero and Wii Sports when he’s taking a break from competition.

"I brought it with me on vacation in Arizona. I love the bowling game," says the 12-time PC-game champ, who has won more than $500,000 in prize money and raked in $1 million more in sponsor deals. Wendel recently inked a deal with DirecTV to be a play-by-play commentator for its Championship Gaming Invitational, airing Feb. 10 and 11.

"The Wii has rejuvenated the industry from a creative standpoint and is inspiring designers to look at video gaming in a whole new way," says Nintendo spokesperson Beth Llewelyn. "We are excited about big and small developers bringing unique and innovative content to the system."

This demand for more content for the new consoles is partly why video game publishers are forecasting 13% to 18% growth year over year, analyst McNealy says.

Electronic Arts, Activision and THQ saw strong holiday quarters, reporting better-than-expected earnings. Activision, in particular, cashed in on its $100 million May acquisition of smaller publisher RedOctane, responsible for the hit "Guitar Hero II,” which sold more than 1.3 million copies in two months.

“Everyone gets the feeling of playing guitar without having to practice for hours,” says Ted Lange, associate producer for Guitar Hero at RedOctane, who’s been a guitar player for 13 years.

Activision is also expected to benefit from new games based on big summer movies, including "Spiderman 3," "Shrek 3" and "Transformers."

"We see another growth year as the PS3 and Wii ramp up supply, hardware dollars will go up and the market for software sales will grow and portable isn’t showing any signs of slowing," says Frazier.

Microsoft's Big Hit

New hardware technology initially raised concerns about surging development costs, with some designers fearing games would cost as much as $35 million to make. Take Two Interactive’s “Grand Theft Auto” reportedly cost $25 million to develop.

But Epic Games and Microsoft proved that was not the case with its blockbuster "Gears of War," selling more than 3 million copies in about two months. The game has been praised not only for its stunning graphics and technology, but also for its surprisingly low cost of $10 million.

"We designed cutting edge technology that enables us to create content in a reasonable period of time and at a reasonable cost," says Epic Games VP Mark Rein. "Over the next few years, the industry will find more efficient ways to capitalize on the capabilities of these systems."

"'Gears of War' has beaten our highest expectations," says Microsoft senior global product manager John Dongelmans, who also credits the success of the overall marketing campaign surrounding the game.

Dongelmans would not comment on Microsoft’s recent lowered forecast of Xbox 360 sales for 2007, but said the company is pleased sales have topped 10 million units and is looking forward to the release of more big titles this year.

"We’re going to see impressive, significant games across all three new console platforms this year," says Joseph Olin, president of Academy of Interactive Arts and Sciences, pointing to such highly-anticipated releases as Will Wright’s Spore. "And the quality of games in terms of depth of interactive experiences is always improving. That’s great for the industry and consumers."

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