A 'Survivor' for gaming?
The maker of 'Grand Theft Auto' and its competitors see riches in games that are packaged and sold like TV shows.
By Mary Jane Irwin, Business 2.0 Magazine

(Business 2.0 Magazine) -- The video game industry is taking a page out of TV's script.

With production costs soaring, revenue growth flattening, and fresh ideas harder to come by, a number of game developers are starting to embrace a radically new business model: "episodic" gaming.

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Rockstar Games will offer two exclusive chapters of the next "Grand Theft Auto" for the Xbox 360.

Unlike a 20-hour stand-alone game whose shelf life can be painfully short, episodic games involve several 3- to 6-hour installments of the same game released over several months or even years.

The payoff for gaming companies: shorter and cheaper development cycles and the prospect of loyal audiences contributing steady revenues over time. It's the same basic model followed by the television industry.

Episodic games are still in their infancy, but they got a big boost last week when Rockstar Games, developer of the blockbuster "Grand Theft Auto" series, announced a push into serialized gaming. The Take-Two Interactive (Charts) subsidiary said it would develop two downloadable episodes of "Grand Theft Auto IV" for the upcoming Xbox 360.

Costs rise, squeezing profits

With its announcement, Rockstar became the biggest name in the gaming business to experiment with episodic gaming. Rockstar joins only a a handful of smaller players that have been developing serial games in recent years.

Analysts predict others will soon follow.

"The games business has been following the same tired model for too long," said Billy Pidgeon, videogame analyst for market research firm IDC. "New revenue streams are necessary to invigorate the industry."

The current model isn't necessarily broken. After all, worldwide revenues are expected to reach a whopping $26.2 billion in 2006. The problem is that growth has slowed. This year's intake will be a mere 2 percent higher than in 2005 - and well below the increases of recent years.

At the same time, development costs are rising fast as consumers demand more features and more complexity from games.

For instance, titles for the Xbox 360 by Microsoft (Charts) cost an average of $20 million to develop - triple the $7 million average spent to build games for the original Xbox.

Yet, for all of the time and money spent, gamers are exceedingly fickle. With the exception of megahits like "Halo" or "Grand Theft Auto," most games have a three-month window to recoup their development costs and turn a profit before they're passed over for newer, shinier releases.

Higher sales over time...

Analysts say episodic gaming could be the future, especially for small developers. Not only are development costs substantially lower and the time spent developing a game vastly shorter, but episodic games promise to create an emotional connection with users that few stand-alone games can achieve.

The more connected a gamer feels, the more likely he is to pay for subsequent episodes. Over the long run, instead of paying around $60 for a single game, gamers paying as little as $10 per episode could end up shelling out hundreds of dollars over the life of serial game.

And with episodic gaming, developers can sell new advertising in the form of product placement for each new segment - much like the TV industry sells 30-second commercials over the course of a season.

The pioneer behind episodic gaming is Valve, a privately-held company based on Bellevue, Wash. In 1998 the company came out with its hugely successful "Half-Life" title, which went on to sell more than nine million copies at retail.

The sequel, however, $40 million and several years to develop before hitting store shelves in late 2004.

Although "Half-Life 2" has sold five million retail copies worldwide, the company knew it couldn't afford the $60 million and five-plus years it would take to develop a third game, says Doug Lombardi, Valve's marketing director.

Instead, Valve released the first segment of an episodic "Half-Life 2" trilogy this summer and plans to release a second installment early next year.

"There's a lot of risk on the table [with traditional game development]," says Lombardi. "Now we're eliminating that risk."

...without the huge gamble

With episodic games, Valve will cut development costs by up to 70 percent, according to Lombardi. What's more, he says the company will be able to roll out new games four times faster than before.

Lombardi points to another big advantage: episodic games let developers introduce new features gradually and to alter the playing experience over multiple releases instead of starting from scratch with each new game.

Valve is one of only a handful of developers that have so far invested in episodic games.

Telltale Games, a two-year-old developer based in San Rafael, Calif., has built three episodic games with just $1.4 million in the bank, says CEO Dan Connors.

In two weeks the company will release online the pilot episode of its new "Sam & Max" game, which is based on the cult comic strip. Five additional downloadable episodes will be released from November through April.

Connors says the plan is to make changes to future episodes based on customer feedback from earlier episodes. Once its run is over, Telltale will package the segments into a box-set for sale at stories - just like TV series sold on DVD.

Connors knows that Telltale is betting on an unproven model. But given the cost and competitive pressures the industry as a whole faces, he's convinced that episodic gaming is the answer - and not just for Telltale.

"Taking the risk out of game production is huge," says Connors.

Rockstar, the "Grand Theft Auto" creator, seems to agree.

Correction: An earlier version of this story incorrectly stated that Telltale Games is based in Flint, Mich. The company is headquartered in San Rafael, Calif. Business 2.0 regrets the error.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.