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Digital Distribution: A Long Way Away for Video Games

The music industry was almost killed — and ultimately saved — by it. The home video industry is growing because of it. But when it comes to video games, digital distribution is not really making much of an impact.

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AP
Wii

No one expects that to remain the status quo, of course. Game companies have been flirting with digital downloads for years.

And while progress has been made, analysts say it could be another seven years or more before digitally downloaded content is a common distribution method for new titles.

That puts gaming, which is normally at the forefront of technological shifts, a bit behind its entertainment peers. Apple , through its iTunes store, made music downloads more popular than CDs. And Netflix is seeing tremendous subscription growth due to its “Watch Instantly” functionality.

Games, though, chew up a lot more space on a hard drive. Some of today’s big console titles can top 20GB — and console hard drives can’t support too many files of that size.

That’s assuming the system has one to begin with. Both the Nintendo Wii and Microsoft’s Xbox 360 Arcade model (that system’s biggest selling model) lack a hard drive – meaning the majority of homes with a game system don’t have anywhere to store the games even if they could download them.

The video game industry is hardly filled with luddites. There are, of course, some digital downloads currently available. Both Microsoft and Sony actively push relatively small game update and add-ons to customers, some of which have been extremely successful. Microsoft is even offering full game downloads of older titles as it dips its toes further into the digital waters.

But Ben Schachter, an analyst with Broadpoint.Amtech, predicts it will be at least 2017 before digital distribution hits any sort of critical mass. The current generation of consoles, he believes, will run through at least 2014.

And even if the next generation is able to overcome existing storage problems and bandwidth concerns (something he notes is unlikely), it will still be several years before the installed base of those game machines is significant.

“When this works, you probably won’t be downloading such a big file to your machine,” Schachter says. “By that time, the cloud model will work. … But to highlight how nascent this is, I always point to the ‘Grand Theft Auto’ digital content [which was offered on the Xbox 360]. The reality is it’s ‘Grand Theft Auto’ — one of the biggest games of all time. It had highly rated content. It was heavily promoted. And it didn’t sell.”

Take Two Interactive Software distributed two exclusive digital add-ons for “GTA IV” — and has never released precise sales numbers. Many analysts believe the number to be between 500,000 and 1 million. With over 13 million copies of the game sold, that’s disappointing.

Whenever digital distribution becomes a force in the gaming space, it’s going to have an impact on several retailers, with GameStop, the leading video game retailer, being the most notable. The company began positioning itself for the shift in August, hiring a new executive who will act as the architect of its digital strategy.

“Retailers need to get [planning for the digital changeover] now, because otherwise they will be bypassed,” says Billy Pidgeon of Game Changer Research. “It will take years to transfer the relationship they have with their customers in real life to online stores.”

The dawn of the digital distribution age will almost certainly impact the existing competitive landscape. Beyond dealing with threats from Best Buy and Amazon

, game retailers could face direct competition from companies that are their key partners today.

“The assumption is the console makers and publishers will be fighting over who has control of [the digital space] and the retailers will be pushed out,” says Schachter.

Whoever becomes the dominant force in digital distribution, they will have to reconsider the current pricing model. Production costs are lower on digital games — and consumers know it, making them reluctant to pay traditional prices.

“Publishers and vendor have got to think about the value proposition here,” says Pidgeon. “There are two extremes: Publishers are going to want the full buck for their package or you get the Apple situation where everything’s sold for 99 cents and the publishers are screaming. There has to be some middle ground. … They really need to think about that.”

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