JAN. 15, 2010 • Going back to the mid-1990s, DFC Intelligence has focused on the concept of “anytime, anyplace, anywhere” as a key driver of growth for the video game business.  Now “anytime, anyplace, anywhere,” along with concepts like “Nintendo Dads,” and the “user pyramid,” have been useful tools for both forecasting industry growth and explaining to a skeptical investment community why the interactive entertainment industry has substantial growth potential.

At a high level, DFC divides the game market into three broad segments: hard-core consumers, moderate consumers and mass-market (or casual consumers). Of course, the market is much more complex than this basic analysis. Hard-core consumers can be further subdivided into hard-core PC gamers, hard-core console gamers. These are two very different types of consumers. These groups could be further divided into such segments as hard-core simulation gamers, hard-core FPS gamers, hard-core fighting gamers, hard-core Nintendo fans etc. However, before understanding these smaller sub-segments, it is important to understand the broader classification of gamer types.

The most important point to note is that there is little movement between the groups. Think of it as a pyramid, with the mass-market gamer at the base and the hard-core gamer at the pinnacle. The majority of gamers will be at the bottom.  As a general rule of thumb, about 50-75% of the game-playing population sits at the base in the mass-market gamer category. Somewhere between 15% to 30% rests in the moderate gamer slots and the rest are the hardcore gamers. Of course, it will vary by type of product and market, but as a general rule of thumb the pyramid theory should apply to most analysis.

The challenge is trying to get movement among the groups.  It is very hard to take an established mass market gamer and make them a moderate or hard-core gamer.  However, that is not to say that the overall pyramid is not growing.  DFC’s entire forecast for the interactive entertainment industry are based on the premise that the overall pyramid is growing, although this growth is occurring slowly over time.  It is really a slow demographic change that can take years.

This is where concepts like “Nintendo Dads,” come into play.  In the 2004-2006 timeframe, DFC did some analysis for some large institutional investors that were concerned for the future of Nintendo.  Of course, at the time Nintendo was really struggling and many thought they should exit the hardware business.  On the contrary, our analysis argued that demographic trends actually looked strong for a Nintendo resurgence starting around the time of the Wii launch (late 2006/2007).

We described this resurgence as being led by a group we labeled “Nintendo Dads.” This is a moderate to mass-market user base that was familiar with Nintendo products from childhood.  This type of user base would supplement Nintendo’s traditional strength with their hard-core fan base and consumers in the under 14 year-old market.  Nintendo Dads are consumers that grew up with Nintendo and are now having children of their own.

In the 128-bit generation (Xbox, PlayStation 2, GameCube, Dreamcast), the video game market saw a growing number of parents (usually dads) actively play the game systems with their children.  We think that this trend really helped Sony and, to a lesser extent, Microsoft.  The PlayStation 2 had products to appeal to the whole family, whereas the GameCube content was specifically targeted towards a younger audience.  More importantly, parents for the 128-bit generation of systems were not as familiar with the Nintendo brands. Back in 2005, we used the example of a 33 year old dad:

“Look at a 33-year old dad buying a system for both himself and his 6-year old son.  In 2002, this dad would have been born in 1969 which would have made him 18 when the NES took-off around 1987. Back then, 8 year olds did not play video games in large numbers. Instead, this dad would most likely have cut his teeth on something like the Atari 2600.  The Nintendo name would not have meant much to him. Go forward to 2007 and this 33-year old would have been 13 in 1987 and would probably have been very familiar with Nintendo and its characters like Mario and Zelda.

A 33-year old dad in 2007 becomes one of the first generation of parents personally familiar with Nintendo products and thus possibly inclined to buy a Nintendo system for his children. Consumers in their teens and twenties tend to distance themselves from the products of their childhood, but such concerns over “being cool” can start to disappear with age, and soon replaced by nostalgia. This trend alone, which Nintendo is well aware of, could substantially benefit Nintendo going forward. Thus, they are putting a big emphasis on the nostalgia card and focusing on their historical software library, as well as games that have broad cross-generational appeal.”

Adults playing games has been the biggest growth driver for the game industry.  Obviously, this starts to benefit companies like Nintendo that have brands that were popular twenty-five years ago.  But also playing into the growth equation is what we call the concept of “anytime, anyplace, anywhere.”  DFC started talking about anytime, anyplace, anywhere in the mid-1990s to explain to nervous investors why the video game market was nowhere close to saturation.  At the time, the argument was that you could only sell so many games to 10 year-old boys crowded around a TV set.  In the mid-1990s, most people over the age of 40 had never played a video game and the thinking was that the industry was a fad for children.

As we mentioned it is hard to take a casual gamer and all of the sudden make them a hard-core gamer.  However, demographics naturally grows the pyramid over time.  DFC’s argument was a simple two-fold analysis where we said 1) there will be growth in the pyramid as the core audience ages and continues to play games when they reach adulthood and 2) advances in technology will allow for people to have access to games anytime, anyplace, anywhere.  In other words, gamers will not be limited to playing in front a TV set.  They can also play on a PC or all kinds of future portable devices.

When looking at the concept of Triple AAA, a key issue is what type of products will be suitable for specific platforms.  In other words, is a hard-core gamer looking to play first-person shooters on a portable game system?  DFC’s theory has been that hard-core gamers tend to play a wide range of products depending on location and availability.  Thus, delivering an intense FPS on a cell phone doesn’t necessarily make sense.  While it is difficult to get a mass-market gamer to play a hard-core gamer, hard-core gamers also like to play more mass market games.  This is especially true when it comes to playing on a portable system that simply doesn’t have the horsepower of a PC or Xbox 360.

To test our Triple AAA thesis, DFC recently conducted a survey of over 6,000 PC gamers in North America and Europe.  A major portion of this survey focused on the usage of portable devices and mobile phones.

The results clearly showed that most PC gamers are “multiplatform gamers.”  In other words, they also play console and portable games. Of course, the dedicated game platforms still dominate with this audience.  When it comes to portable systems, the Nintendo DS is the strongest yet it is closely followed by the Sony PSP. However, a surprising number of consumers also own an iPhone or an iPod Touch.

Furthermore, among these users the iPod Touch is very popular.  When specifically asked, over 22% of respondents said they either owned or planned to buy an iPod Touch.  In the recent DFC report on the iPhone game market we argued that the iPod Touch was an important driver for the overall iPhone market and is why the iPhone is a more compelling platform than other mobile phones.

DFC Intelligence has long argued that the mobile phone is simply not a compelling game platform. Of course, under our anytime, anyplace, anywhere theory there is no reason why a mobile phone could not become a game platform, considering most people own one.  Furthermore, among the PC game audience smartphone ownership is clearly on the rise.  About 43% of respondents indicated they owned a smartphone with email and Internet capabilities. It is also clear that a large number of users have actually tried to play games on their mobile phones.  When we asked about usage of games on a mobile phone, 58% said they had played a game on their mobile phone.  However, most of those were using games for free.  Only 17% of respondents said they had purchased a mobile phone game.  In other words, less than 30% of those that play games on their mobile phone have actually paid for those games.  Considering this is an enthusiast game audience that is a low conversion rate.

In the latest DFC Intelligence forecasts on the portable game market we forecast that much of the growth in portable games over the next few years will come from increased purchase of games for non-dedicated game devices like mobile phones and the iPod Touch.  However, it is important to note that this does not mean a decline in the dedicated game system market.

The growth in portable games is really about a growth in the overall pyramid and new technology that allows for play anytime, anyplace, anywhere.  The Nintendo DS has set all kinds of records for best-selling game system ever.  We think that it will be hard for other dedicated game systems to match the success of the DS in the next few years.  However, that does not mean that non-dedicated game devices and mobile phones will replace or overtake the dedicated devices.  The dedicated devices should still account for the bulk of revenue, even if total sales remain stagnant.  The iPhone/iPod Touch platform is a compelling alternative but it has a long way to come close to replacing a Nintendo DS or Sony PSP.  Nevertheless, the game market has grown to the point where multiple devices can co-exist, and even overlap in consumer ownership.