PC and Console Gaming: The End of the DVD?

PC and Console Gaming: The End of the DVD? Synopsis New report explores game buyers habits and choices as the gaming industry shifts toward digital distribution. The new report, PC and Console Gaming: The End of the DVD?, reveals U.S. game buyers attitudes and behaviors toward digital distribution and freemium games to help gaming publishers and distributors guide their overall strategy and marketing decisions. Based on an online survey of U.S. game buyers, the report presents the consumer perspective on digital game content including: > PC and console game buyers attitudes toward packaged and downloaded software. > Game play preferences and their impact on the pay-to-play model. > Spending patterns, payment drivers and channel preferences. > Usage of free trials and free-to-play games and conversion rates. Survey Background This 2012 study results from online polls of 504 U.S. adults over the age of 18 who have purchased PC/Mac or console games or gaming content in the past 12 months. The survey was developed to examine consumer attitudes and behaviors toward buying PC/Mac and console games. Executive Summary In the second quarter of this year, digital game sales grew 17 percent over Q2 2011 generating $1.47 billion, according to The NPD Group. With increases in online game play and the growing importance of online as a purchase channel the industry is shifting toward digital distribution. Now is the time for game publishers, distributors, and retailers to adapt to the shift and take advantage of the unique characteristics of the online channel to boost conversion rates and average revenue per user (ARPU). 1

11% 2 Although faster Internet services and full game streaming on consoles could accelerate the pace of digital distribution, game buyers are taking time to adapt to market changes. Many continue to show a preference for packaged software even as online sales and game play increase. To encourage consumer adoption, industry players must up the appeal of digital game content, whether through new technology or by addressing perceived negatives. Further, despite a $1 billion industry of high-margin add-ons, over a quarter of game buyers won t purchase downloadable content (DLC) in 2012, pointing to a potential missed revenue opportunity. To maximize sales and increase the lifespan of their titles, publishers should seek the widest possible distribution for their DLC. By providing access to game content through multiple channels and tailoring offers to the individual player, they can boost conversion rates and average revenue per user. Finally, while cost-conscious game buyers appear less willing to pay up-front for new software this year, they show significant interest in free trials and free-to-play games to experience titles prior to paying for content. Expect more publishers to gravitate toward the free-to-play model in particular to accommodate core gamers and casual audiences, following such sweeping successes as League of Legends and World of Tanks. Key Findings Over half of PC and console gamers play weekly. Of the gamers surveyed, 69 percent play online computer games, 65 percent play games installed on their PC or Mac, and 50 percent play console games every week [Figure 1]. While gamers come from diverse backgrounds, frequent console gamers skew younger (ages 18 to 34) and male, whereas frequent Web gamers are slightly more likely to be older (ages 35 to 54) and female. The integration of games with social networks, especially Facebook (e.g., CityVille or CastleVille), has expanded the audience for interactive entertainment beyond the core traditionally male PC or console gamer to the mass market. In comparison with multi-level or high involvement hard-core games, casual or social titles are virally promoted, easily accessible via players social networking profiles and often require no long-term commitment or special skills to play. Figure 1: On average, how frequently do you play games? On the Internet (using a Web browser on your PC or Mac) Installed on a PC or Mac On a game console (e.g., PS3, Xbox) 1 11% Every day 1 Every few days 28% 31% 3 Every week 3% 5% Every month 21% Every few months Less often 4% Never 8% 14% 23% 2

38% Online game play is up this year as traditional PC and console game time stagnates. When asked about their playing habits compared to last year, many respondents reported spending more time playing games online in 2012. Almost one quarter (24 percent) of those surveyed are upping their browser-based play this year, with just 16 percent decreasing their game play [Figure 2]. In contrast, the percentages of respondents who spend more time playing console games and installed PC titles, and those spending less time, were almost equal. This suggests that online gaming is becoming a viable alternative to traditional console and PC gaming as developers and publishers bring more titles to the Web. According to consultancy PricewaterhouseCoopers, online and mobile games are a growing portion of the $60 billion global video games industry and may overtake console and PC games spending in 2013. Figure 2: Compared to 2011, are you spending more or less time in 2012 playing games? On the Internet (using a Web browser on your PC or Mac) Installed on a PC or Mac 1% On a game console (e.g., PS3, Xbox) 2% 24% 21% 3% More time 1 20% 1 Same amount of time 23% Less time I do not play these games Unsure 1 48% 4 Online is gaining in importance as a purchase channel. Game buyers shop using multiple channels, but online shopping is increasingly important for game sales. Of those who had purchased new PC or Mac game content in the past 12 months: > 47 percent bought boxed computer games at brick-and-mortar stores such as Wal-Mart, 34 percent from retailer websites, and 13 percent from game studios or publishers online [Figure 3a]. > 41 percent bought game downloads on retailer websites such as Amazon.com, 24 percent from game studio or publisher websites, and 21 percent via digital platforms such as Steam [Figure 3b]. Of those who had purchased new console game content in the past 12 months: > 71 percent bought boxed console games in-store, with a further 49 percent from retailer websites [Figure 3c]. > 45 percent purchased console downloads through digital platforms such as the Xbox Marketplace [Figure 3d]. With Amazon bringing out an easy way to pay for virtual items in PC games online through Game Connect, and Google Fiber soon to offer a staggering 1,000 megabits-per-second download speed to customers for only $70 per month, online purchase channels are only expected to gain in importance. This could spell trouble for GameStop and other traditional retailers if they cannot adapt to changing buying patterns. 3

Figure 3a: In the past 12 months, where have you purchased new boxed PC or Mac games? Base: 350 U.S. new PC/Mac game and gaming content buyers Figure 3b: In the past 12 months, where have you purchased PC or Mac game downloads (no box or CD/DVD)? Base: 350 U.S. new PC/Mac game and gaming content buyers Figure 3c: In the past 12 months, where have you purchased new boxed console games (with disc)? Base: 278 U.S. new console game and gaming content buyers Figure 3b: In the past 12 months, where have you purchased console game downloads (no disc)? Base: 278 U.S. new console game and gaming content buyers 4

Gamers are not yet digital devotees. The video games industry has been pushing digital hard. Through PlayStation Network and Xbox Live Arcade, Sony and Microsoft have been encouraging console game downloads, with the pressure expected to intensify when the next generation of consoles arrives. In PC gaming, publishers are also actively promoting downloads Electronic Arts through its Origin online store and Activision Blizzard via the Battle.net platform. Despite the shift away from packaged titles, most game buyers surveyed would still take the boxed game over the digital download. 45 percent of PC or Mac game buyers usually prefer to buy the packaged version, as opposed to the 25 percent who choose to download. A further 23 percent have no format preference [Figure 4a]. Among console game buyers, 75 percent would choose the boxed game over the digital download [Figure 4b]. Still nascent, digital console games have been slow to catch on. Unlike lightweight music tracks, console games can run to multiple gigabytes and take several minutes to download on even the fastest of Internet connections. Figure 4a: Which format of PC or Mac games do you usually prefer to buy? Figure 4b: Which format of console games do you usually prefer to buy? 1 1% Boxed version with CD/DVD/disc 23% Digital download to my computer/console (no box or disc) No preference 45% 50% I do not buy this type of game 38% 3 75% 2 22% 25% Base a: 350 U.S. new PC/Mac or console game and gaming content buyers Base b: 278 U.S. new console game and gaming content buyers 2% 34% The instant gratification 5 of downloads is seen as a major plus. The major advantage of game downloads, noted by 57 percent of game buyers, is the ability to install them and play right away [Figure 5], followed by lower prices (42 percent) and the reduced need for storage (37 percent). Immediate play is especially appealing to those ages 35 to 54. Younger players (ages 18 to 34) value the freedom that comes with having no discs to lose or damage more highly than other age groups do. Figure 5: What are the top advantages, if any, of digitally downloaded PC/Mac or console games over boxed games? Can install and play them tight away 5 Lower price than boxed games Take up no room on my shelves 42% 3 32% Can re-download wherever/whenever I want Do not come with discs thatmight get damaged or lost 2 Other 2% I don't think there are any advantages of downloaded games over boxed games Not sure 5

1 Lack of physical media and ability to resell seen as negatives of downloads. The main disadvantage of game downloads over boxed versions, cited by 50 percent of game buyers, is the lack of backup discs [Figure 6]. No resale market (38 percent) or physical manuals (37 percent) were also named as major disadvantages, with younger buyers (ages 18 to 34) expressing higher dissatisfaction with the inability to resell software than other demographics. The trade-in business is a key source of revenue in the video games industry. In fiscal 2011, GameStop recorded $2.6 billion in revenue from boxed second-hand games, or 27 percent of its total revenues. As the industry shifts toward digital distribution, companies like GameStop and Valve are considering ways to resell downloadable games to maintain or augment their revenue streams and competitive advantage. Figure 6: What are the top disadvantages, if any, of digitally downloaded PC/Mac or console games over boxed games? Do not come with discs to use as backup 50% 38% 3 Cannot resell when I'm done playing Do not come with physical manuals Can take longer to download and install 2 22% Are not on sale or discounted as often 2% Other I don't think there are any disadvantages of downloaded games over boxed games Not sure Downloads represent a fraction of video game sales. Game buyers are spending much more on packaged software than on downloads. In 2011, 24 percent shelled out $50 plus for boxed PC or Mac games, while just 13 percent spent an equivalent amount on downloads [Figure 7]. The disparity between digital and boxed sales is even greater in the console market. Last year, 41 percent of game buyers purchased packaged console titles, with just 10 percent opting to download. While digital downloads are no longer a new trend, they are taking time to affect retail video games sales. Thanks to Valve s Steam platform, PC games started going digital almost a decade ago, with console games only following in the last few years. In 2011, the portion of video games sold through online distribution platforms represented a mere 10 percent of the market or $3.5 billion, according to Euromonitor International. Figure 7: In 2011, approximately how much did you spend on? 5 New boxed PC or Mac games (with CD/DVD) Downloaded PC or Mac games (no CD/DVD) New boxed console games (with disc) 42% Downloaded console games (no disc) 5% 3 35% 38% 53% 32% 2 2 1% 3% 1% 3% 2% 4% Over $150 $101 to $150 $51 to $100 $26 to $50 $1 to $25 14% I did not buy this type of game in 2011 20% Don t remember 1 2 1 6

24% Full game spending looks set to weaken this year. Game buyers appear less willing to pay for new PC and console games this year, in line with the disappointing results seen by the industry so far in 2012. Within a weak U.S. economy, overall consumer spending on video game content dropped 16 percent in Q2, according to The NPD Group. Of those surveyed, 18 percent plan to spend less on new boxed PC or Mac games in 2012 compared to 2011, and 16 percent will spend less on downloads [Figure 8]. In contrast, just seven percent said they would spend more this year on either format. In console gaming, 14 percent anticipate spending less than last year on new packaged software, with 10 percent planning to spend more. And 12 percent will reduce spending on downloads, with only seven percent budgeting more. Freemium business models that let individual players decide how much they want to spend on game content should increasingly find favor, following trends in Asian markets and mobile and social gaming. Figure 8: Compared to 2011, will you spend more or less in 2012 on? New boxed PC or Mac games (with CD/DVD) Downloaded PC or Mac games (no CD/DVD) New boxed console games (with disc) Downloaded console games (no disc) Will spend more 41% Will spend the same amount 34% Will spend less 40% I will not buy this type of game in 2012 45% Unsure 21% 34% 22% 14% 1 18% Downloadable content is growing gaming revenue. Of those surveyed, 55 percent had bought downloadable gaming content such as levels, weapons and expansion packs in 2011, with almost 20 percent spending $50 plus [Figure 9]. Younger and male game buyers exhibit more interest in DLC than other demographics. DLC increases the longevity of titles along with margins allowing developers and publishers to experiment with lower cost ownership models such as freemium and free-to-play. Two spectacularly successful PC games relying entirely on DLC revenue are Riot Games League of Legends and Wargaming.net s World of Tanks. The next big experiment in DLC is Activision Blizzard's Diablo III, where the game includes an auction house for players to upload and sell their own DLC to others for a flat fee. Figure 9: In 2011, approximately how much did you spend on downloadable game content (DLC) (e. g., levels or expansion packs, armor, weapons)? 5% 1 $1 to $25 $51 to $100 I did not buy downloadable game content in 2011 $26 to $50 Over $100 Don t remember 1 40% 7

Not all gamers are ready or willing to buy DLC. Some game buyers are showing signs of fatigue with DLC; although 10 percent stated they would spend more on this type of content in 2012, 14 percent planned to spend less [Figure 10]. Many gamers criticize downloadable content for being overpriced or a necessary evil to make a title playable or to compete with others. One reason for Riot Games success with League of Legends DLC is that they don't sell power or features that allow players to beat other players. Over a quarter (27 percent) of game buyers won t purchase DLC in 2012, pointing to a potential missed revenue opportunity for the North American games industry. According to research firm EEDAR s 2011 Deconstructing Downloadable Content report, privacy concerns are the main barrier to purchasing content online, followed by a no-return policy and high costs. For the DLC market to continue to grow in 2012, publishers, developers, and the console manufacturers must continue to address these concerns, collectively, the report concludes. Figure 10: Compared to 2011, will you spend more or less in 2012 on downloadable game content (DLC)? 1 Will spend more Will spend the same amount Will spend less 33% I will not buy this type of downloadable game content in 2012 2 Unsure 14% Channel preferences vary for DLC purchases. 27 percent of game buyers would prefer to buy DLC from an online retailer, followed by in-game purchase at 16 percent, and digital platforms such as Origin or PSN at 15 percent [Figure 11]. Those aged 18 to 34 have slightly different preferences: digital platforms are their channel of choice, followed by in-game and retailer websites. To reach the widest audience for DLC, developers, publishers and console makers should allow digital game add-ons to be purchased through multiple channels. Sony s European arm is even taking its digital wares to brick-and-mortar retailer GameStop, where customers will be able to use cash, gift cards or trade credits to purchase activation codes for PlayStation Network games and add-ons. "The ability to use cash and trade credits as currency is a powerful tool and SCEE [Sony Europe] recognizes that it provides a new channel for gamers to access and purchase exclusive digital content," said Mike Mauler, executive vice president of GameStop international. Figure 11: Of the following, which way would you most prefer to buy downloadable game content (DLC) (e. g., levels or expansion packs, armor, weapons)? From a retailer s website (e. g., Amazon.com, Gamestop.com, Gamefly.com) 2 2 From inside the game itself From a digital distribution service (e. g., PlayStation Network, Xbox Games Marketplace, Steam, Origin) 1 From the game studio or publisher s website 1% Other I do not buy downloadable content Game preview is critical to the purchase process. Three in four of those surveyed (78 percent) prefer to preview content before purchase [Figure 12]. As many PC and console games require a major commitment of time and effort, the availability of demos, trials and trailers can heavily affect game sales and shares. Gaikai s ability to offer live game demos has been wildly popular with game retailers such as Walmart.com who are keen to facilitate instant play without prospects having to register, download titles or upgrade their computers. Over half of game buyers (54 percent) also like to install and play games on multiple computers, pointing to the need to enhance game play across multiple devices. As an example of catering to this behavior, at the E3 trade show in June, Electronic Arts Inc. unveiled its plan to develop technology linking multiple versions of a single game across different hardware. Their intention is for a user to be able to start playing on one computer and pick up at the same place in their game on another machine. 8

33% 18% 3 30% Figure 12: How much do you agree or disagree with the following statements? I like to preview PC/Mac or console game content before purchasing I like to install and play the same game on more than one computer I would pay more for the boxed version of a PC/Mac or console game than the digital download I like to resell or gift PC/Mac or console games that I m done playing Strongly agree 23% 18% 24% Moderately agree 8% 2 Moderately disagree Strongly disagree 45% Unsure 1 24% 35% 8% Free trials and free-to-play games will drive game sales. When asked what might compel them to purchase more games, 70 percent of game buyers said free trials and 60 percent cited freeto-play titles [Figure 13]. A further 58 percent would buy more games if a broader selection of titles was available for download. With increases in online game play and the growing importance of online as a purchase channel developers and publishers are gravitating toward freemium and free-to-play business models to attract and retain audiences. Their affordability and ability to let gamers experience the product before they decide to pay for extra content has led to such notable successes as World of Warcraft and The Lord of the Rings Online. Figure 13: How likely would you be to buy more PC/Mac or console games and gaming content if each of the following were available? More free trials (e.g., with limited functionality, levels or modes) to preview games of interest More free-to-play games where you can play the basic version for free, but pay a small amount for each additional piece of content desired (e.g., clothing, vehicles, levels, power-ups) More games available as digital downloads to install and play instantly Very likely 1 2 32% Somewhat likely 22% Not too likely 14% Not at all likely Unsure 31% 38% 9

Conversion rates are high for free trials and free-to-play titles. Of those surveyed, exactly half (50 percent) had played an upgradable trial version of a game in the past 12 months, with 26 percent upgrading to a paid game. Among these gamers, females are slightly more likely than males to have played a free trial, but less inclined to pay to upgrade. A further 32 percent had played a free-to-play title, with 21 percent buying additional content to extend or enhance a game. Younger players (ages 18 to 34) are more likely to convert free trials and purchase add-ons. The majority of freemium gamers who opt to pay to upgrade their experience do so within the first month of playing a particular game, said Anita Frazier, industry analyst at The NPD Group. When designing a game, it s important to consider features that would drive quick conversion to pay. Figure 14: Have you done any of the following activities in the past 12 months? 50% Played a free trial of a PC/Mac or console game (e.g., with limited functionality, levels or modes) Upgraded a free PC/Mac or console game trial to the paid version 2 32% 21% 34% Played a free-to-play or cheap PC/Mac or console game that is fully functional but has additional paid content available (e.g., clothing, vehicles, levels, power-ups) Purchased any content for a free-to-play or cheap PC/Mac or console game (e.g., clothing, vehicles, levels, power-ups) None of these Microtransactions are still less appealing than up-front purchases. Despite the trend toward freemium models, many gamers prefer to spend up-front for their titles. Of those surveyed, 42 percent would rather pay a one-time fee for their games, as opposed to the 26 percent who selected freeware. A further 31 percent have no format preference [Figure 15]. Unlike a free-to-play game that requires gamers to pay for new content they want, paying a fixed price can be gratifying because players know exactly what they are getting. With the industry in flux, most pundits believe that asking for large sums up-front is no longer tenable, however. In a recent IGN.com editorial, PC Executive Editor Charles Onyett noted that "expensive, one-time purchases are facing extinction." The question now is how to get the free-to-play model right, to make players want to spend money rather than demand it from them, and to make it as easy as possible for them to do so. Figure 15: Which of the following is more appealing? Pay a fixed price up-front for a full-featured PC/Mac or console game with downloadable content (DLC) available later 31% 42% Play the basic version of a PC/Mac or console game for free, but pay a small amount for each additional piece of content desired (e.g., clothing, vehicles, levels, power-ups) No preference 2 10

Key Takeaways Players need encouragement to make the break from boxed games. As the video games industry is shifting toward digital distribution, game buyers attitudes and behaviors are taking time to adapt, with many continuing to show a preference for packaged software even as online sales and game play increase. To encourage consumer adoption, expect to see industry players continue to up the appeal of digital gaming, whether through new technology (such as EA s) aimed at linking game versions across machines, or by addressing perceived negatives, including the lack of resale value and backup. The rollout of Google Fiber might be a tipping point. Faster download speeds could vastly accelerate the shift to digital by giving online services like Steam and Origin the ability to offer true, on-demand PC gaming. At the same time, the streaming of full games to consoles is set to increase with the next generation PlayStation Orbis and Xbox 720 consoles, anticipated for late next year. With control over distribution shifting to manufacturers and publishers, traditional retailers who fail to respond can anticipate challenging times ahead. Downloadable content must be readily accessible and easy to buy. EEDAR forecasts that downloadable content such as extra levels, features and characters will generate more than $1 billion in revenues in North America this year. Despite the growing industry around high-margin add-ons, over a quarter of game buyers won t purchase DLC in 2012, pointing to a potential missed revenue opportunity. To maximize sales and increase the lifespan of their titles, publishers should work to familiarize gamers with the benefits of DLC, and make it easy to buy and trade. Those who do buy game add-ons exhibit no clear purchase channel preference. Publishers should therefore seek the widest possible distribution for their DLC and sell not only through third parties such as Amazon and GameStop, but also on digital platforms and within the game itself. By providing access to game content through multiple channels, and presenting offers tailored to the individual player at the right time, they are more likely to boost conversion rates and revenue per user. Free trials and free-to-play games In line with disappointing industry revenues, game buyers appear less willing to pay up-front for new software this year, but show significant interest in free trials and free-to-play games. The ability to let gamers experience titles fully before giving them the option to pay for extra content appears effective for driving conversion rates and has led to notable successes such as League of Legends and World of Tanks. Expect more publishers to gravitate toward the free-to-play model in particular to accommodate both core gamers and casual audiences, following trends in Asian markets and mobile and social gaming. If done right, and not as an attempt to nickel and dime the consumer, this model has the potential to benefit both players and developers. For gamers, free-to-play gives them control over how much they want to spend while extending and enhancing game play. And for developers, the model affords more control over revenue streams as they are able to adapt and generate new content over the lifecycle of the game in reaction to their fan base. About hybris, an SAP Company hybris helps businesses around the globe sell more goods, services and digital content through everytouchpoint, channel and device. hybris delivers OmniCommerce : state-of-the-art master data management for commerce and unified commerce processes that give a business a single view of its customers, products and orders, and its customers a single view of the business. hybris' omni-channel software is built on a single platform, based on open standards, that is agile to support limitless innovation, efficient to drive the best TCO, and scalable and extensible to be the last commerce platform companies will ever need. Both principal industry analyst firms rank hybris as a leader and list its commerce platform among the top two or three in the market. The same software is available on-premise, on-demand and managed hosted, giving merchants of all sizes maximum flexibility. Over 500 companies have chosen hybris, including global B2B sites W.W.Grainger, Rexel, General Electric, Thomson Reuters and 3M as well as consumer brands Toys R Us, Metro, Bridgestone, Levi's, Nikon, Galeries Lafayette, Migros, Nespresso and Lufthansa. hybris is the future of commerce. www.hybris.com sales@hybris.com Version: October 2013 Subject to change without prior notice hybris hybris is a trademark of the hybris Group. Other brand names are trademarks and registered trademarks of the respective companies.