Video game industry is making a big gamble next week

Key Points
  • The video game industry's big trade show starts Tuesday.
  • It will be the first time the general public will be allowed to attend the show.
Gamers test new games at the Xbox display at the Electronic Entertainment Expo at the Convention Center in Los Angeles.
Mark Ralston | AFP | Getty Images

E3, the video game industry's annual trade show, has historically been a closed-door affair.

Initially an event where back-room deals took place, the show later evolved into a more marketing-driven affair, where big games and game systems made their debut and fans kept tabs through an onslaught of online stories and live video streams.

This year, though, the Entertainment Software Association, which hosts the show, has opened the doors to the general public. It's a move that gamers have been clamoring for — but it's not one without risk.

E3, which officially kicks off Tuesday, will welcome 15,000 enthusiasts alongside game developers, executives and media attendees. (Last year, more than 50,000 game-industry insiders attended the show.)

That's a lot of eyes and hands on demos of games that won't be complete for (at best) several months. And that, say analysts, is where the potential trouble lies.

"This is a huge risk by the industry to expose unfinished code to the enthusiast market," says P.J. McNealy of Digital World Research. "You'll have to educate everyone who come through the door that this isn't the same code and games you will see that will ship this fall. At one level, you're meeting the needs of an enthusiast segment of the market, but it comes with risks. ... It may be a worst case scenario."

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The upside to letting the public in, though, is it's an easy way for publishers and analysts to get a sense of how buzz is building for an upcoming title. And the one everybody is curious about is Activision's "Call of Duty".

2016's "Call of Duty: Infinite Warfare" fell far short of its predecessor, both in sales and review scores. While the first teaser trailer for this year's "Call of Duty: WW II" has been more warmly received, analysts want to see people's reactions to the game itself.

"E3 buzz still matters," said Ben Schachter of Macquarie Capital. "I think you'll see a lot of industry types, like me, looking to see where the lines are. What are people looking at? Given the weakness around 'Call of Duty' last year, that's what I and a lot of investors will be focused on. Is there buzz or is it a damaged franchise?"

Beyond "Call of Duty," the industry will largely be focusing on two things: Microsoft's updated Xbox, code-named "Project Scorpio," and Nintendo's plans for its Switch console.

Microsoft has fallen to second in the console hardware market, as Sony's PlayStation 4 has captured the loyalty of many gamers this generation. Scorpio, though, is a beast of a machine with the latest graphical and processing hardware, which could lure hardcore gamers.

Nintendo, meanwhile, certainly has a hit on its hands with Switch, and seems to be positioned well for the holiday shopping season. But the company has had a history of failing to release software in a timely manner. Gamers and analysts are hoping for a look into the pipeline of games it has planned for the next several months to gauge what they could be playing on Switch (assuming they can find one at retail).

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McNealy, in particular, expects great things from Nintendo, which will showcase "Super Mario Odyssey," which takes the mascot plumber out of the Mushroom Kingdom and into a number of new environments.

"Anyone who wasn't aware that the Switch could be the number one selling console this calendar year should have gotten the message by the time [E3] ends," he says.

Amidst all of this, the video game world is one that's in transition. Virtual reality and augmented reality both show a lot of promise for transforming how people play, but hardware adoption has been fairly slow so far. And players, more and more, are bypassing physical game discs for digital downloads.

To put that in perspective, Electronic Arts last month said it expects revenues from digital downloads to account for 38 percent of its console unit sales during 2017. And CEO Blake Jorgensen said he expects the industry figure to be closer to 40 percent.

Gamers aren't worried about the numbers, though. They're interested in what games look the most appealing. They've got through June 15 to form those early impressions.

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