Digital sales could be game changer

LOS ANGELES - The future of the video game business is playing out very differently at Pandemic Studios and Nexon Corp.

Nearly 200 people recently lost their jobs when Los Angeles-based Pandemic Studios, the maker of "Saboteur" and other gritty video games, shut its doors.

But 12 miles east, at Nexon Corp.'s U.S. division, bustling staffers are upbeat as they prepare to double the size of their work force. The South Korean publisher best known for its lighthearted game "MapleStory" saw sales climb 12 percent in 2009.

The difference? Pandemic makes games on discs that come shrink-wrapped in plastic boxes and sell for $60 at stores such as Best Buy and Target. Sales for that kind of video game fell 11 percent last year.

Nexon, however, distributes its video games online free of charge and generates revenue by selling virtual items such as weapons and costumes that players use in the game.

Whether it's $15-a-month-subscriptions to World of Warcraft, $10 downloads on a PlayStation 3, 99-cent iPhone games or ad-supported games on Facebook, digital transactions are growing fast and could be the future of the video game business.

"What a lot of folks miss is that when you add online services, micro-transactions and subscriptions, the whole industry is headed for strong growth in 2010," Electronic Arts Inc. Chief Executive John Riccitiello said.

Discs aren't going away soon. Retail video game sales are still a $45-billion-a-year global market, compared with an estimated $5 billion for online digital games. And game executives expect sales to remain strong for blockbuster titles such as "Call of Duty: Modern Warfare 2," which has raked in more than $1 billion since its launch in November.

But the long-term trend is clear.: Retail sales are declining, and online digital sales of games face rapid growth.

Valve Corp.'s Steam service, the largest seller of downloadable games for personal computers, reported a 165 percent jump in revenue in 2009.

Direct2Drive, owned by News Corp., grew 40 percent. Sony Corp. reported that sales of downloadable games and game-related content on its PlayStation 3 increased 139 percent, and Microsoft Corp. saw 50 percent growth for the same items on its Xbox 360. EA's digital revenue grew more than 25 percent.

There are still risks in depending too much on online revenue for games, however. Unlike the shelves at Walmart, there's no limit to the number of games that can be stocked in a digital store, making it difficult for individual titles to stand out. Apple Inc. alone sells more than 130,000 games and applications for the iPhone.

In addition, although people are spending more time playing games online, they tend to pay less for the experience, leading to lower revenue generation.

"Unfortunately, as with other media as they migrate from traditional distribution to online, you increase the amount of hours spent, but you decrease the amount of money you get," said Bing Gordon, partner at Silicon Valley venture capital firm Kleiner Perkins Caufield & Byers and former chief creative officer at EA.

Companies such as Playfish, Nexon and Zynga Game Network Inc. offer free versions of their games and generate revenue by "upselling" players on additional content.

Nexon has a catalog of more than 10,000 virtual accessory items for sale that run from $1 for colored contact lenses for characters to a $32.90 sniper rifle. Most players never touch any of it, but the minority who do buy the features are enough to make it a viable business, company executives note.