Casual Games May Be Recession-Proof; Companies Report Record Revenues, and Some Surprising Trends

11/24/08Follow @wroush

“Countercyclical” is a word you’re probably going to hear a lot in the coming months—from entrepreneurs professing that their businesses are not only recession-proof, but will actually fare better during lean times. It’s a word that the leaders of the casual games industry, which has a strong presence in both Seattle and Boston, have been using a lot lately. But in their case, so far, it seems to be true. Seattle-based Big Fish Games and Newton, MA-based WorldWinner both tell Xconomy that in October, while stocks were swooning and unemployment was swelling, they earned record revenues.

Casual games is the gaming industry’s term for break-time online games or small downloadable games like “Bejeweled” or “Diner Dash,” as opposed to console-based video games or all-absorbing multiplayer games like World of Warcraft. I’ve written about the Boston casual gaming cluster here, and Greg has covered Seattle-area gaming companies extensively.

Not all of the regions’ gaming companies are likely to be immune to the downturn. From talking with executives at gaming outfits in Seattle and Boston, it’s clear that there’s pessimism in the industry about Web advertising as a source of revenue, and about the prospects for survival for companies that get the bulk of their revenue from display ads. “For ad-based casual gaming companies, pretty much everyone agrees that it’s going to be tough for a while,” says Christopher Cummings, senior product manager for Gamesville, a gaming site owned by Waltham, MA-based Lycos. “Some startups probably won’t survive, and for others it might be lean times.”

But casual gaming companies with more ways to make money, such as charging customers for downloads or tournament play or licensing their games to other companies, may fare better—especially as computer owners turn to casual games as a less expensive diversion than going to a movie or eating out.

“One possibility in a downturn would be that people would have an aversion to games, because it’s discretionary spending,” says Jeremy Lewis, CEO of Big Fish Games, which gets most of its revenues from purchases of the downloadable games designed by its community of 650 freelance contributors. “But a second possibility is that people see it as an attractive alternative to other more expensive forms of entertainment. And a third would be that people who are out of work have more time to play games. We are certainly seeing the second effect, and maybe also the third.” Lewis says Big Fish’s October revenue was up a whopping 23 percent over September levels.

Gaming executives are also encouraged by surveys indicating that Americans plan to retrench during the recession by spending more time at home and less on activities like travel and theater-going. “Consumers are looking for entertainment options that they can enjoy at home with their families,” says Christian Meyer, chief marketing officer at WorldWinner. And that means “home entertainment is well positioned to withstand the downturn.”

Here’s a closer look at five major trends the gaming executives I spoke with are observing or predicting as the industry confronts changing economic conditions.

1. Game Players Spending More Time Online

Meyer says WorldWinner, where players pay a small fee to compete against other players in a variety of skill-based games, had more visitors in October than in any other month in its nine-year history, and is on track to set another record in November. But even at sites such as Gamesville, where traffic hasn’t increased as much, the people who do come are staying longer.

“The user base for Gamesville has been mainly flat, with a little bit of growth over the course of this year,” says Cummings. “But the amount of time that people are spending on the site has increased dramatically.” Not so long ago, the typical Gamesville user played for about 40 minutes; now the average visit lasts 90 minutes, an eternity in Web time.

And that means users see more ads while they’re on the site—which, along with the huge popularity of the site’s recently resurrected Bingo Zone, has helped to make the Gamesville division of Lycos profitable this year. “That’s a first in recent history,” Cummings says.

2. Casual Games Appealing to a Larger Cross-Section of Consumers

Online game companies have long seen women in their 30s and above as their core audience. WorldWinner and its sister site GSN.com, the online arm of TV’s Game Show Network, “tend to service Mom,” says Meyer. “It’s for those moments when the kids are in bed and she has a few moments to herself. It’s really ‘me’ time.”

Women may still make up the largest part of casual games’ user base, but at Gamesville, at least, those women are in a lower age bracket than they used to be. “We have noticed its been trending much younger over the past 12 months,” says Cummings. “As you might imagine, with Bingo being so big, our audience used to be a little older. Today, it’s more the college age group up to around age 54 that makes up the core audience.”

Lewis has observed something similar at Big Fish. “Our customer demographic skews from literally 5 years old to 95, but the peak is women 35 to 50 years old,” he says. But over time, the company has picked up many more users who are under 35 or over 50. “The bell curve is flattening,” says Lewis, who says the pattern is “consistent with the dynamics of other mass markets as they have matured.”

3. Casual and Mobile Gaming Positioned to Overtake PC and Console Gaming

With more people seeking inexpensive home entertainment, executives say, casual games could grow even faster than the red-hot console and PC game market, which pulled in more than $1.3 billion in October (a 19 percent increase over the same month in 2007). “Any industry sector with a B2B element is going to suffer,” predicts Xconomist Trip Hawkins, the founder and CEO of San Mateo, CA-based mobile game maker Digital Chocolate (and before that, founder of gaming mega-giant Electronic Arts). “With games, that means that brick and mortar retailers are cutting back on inventory purchases of boxed console games. Arguably, mobile games will fare the best, because it is not B2B—we only get paid when the consumer buys, and it is the lowest-priced form of gaming that does not have a free alternative.”

Jim Gregoire, vice president of marketing at Boston-based mobile social networking and gaming site MocoSpace, says his company is seeing that effect already. “We continue to see strong growth in our numbers through this downturn as the mobile Web grows in its influence and people look for cheap or free entertainment outlets,” Gregoire says. Page views for MocoSpace’s mobile games have been rising “on an equal plane with all other activity” on the site, he says. “It has come close to doubling since January”—helping to land MocoSpace at the top of Hitwise‘s most recent rankings of mobile entertainment sites.

David Roberts is CEO of Seattle-based PopCap, which just rolled out a sequel to its blockbuster casual game “Bejeweled.” He says the recession is likely to spook some gamers into avoiding “higher-priced items that feel more like luxuries”—including, perhaps, those $30 to $60 PC and console games. “Consumers will be looking for more value in everything they buy, and they’ll defer second- and third-tier consumption until they know what’s going on in their lives—essentially a flight toward quality that I like to think will benefit games like those we make at PopCap,” Roberts says.

4. Some Types of Advertising Revenue Remain Strong

Typical Web banner ads and other forms of display advertising are gradually drying up as a revenue stream, say gaming executives. “As far as ad-driven gaming goes, demand for free game-play will probably go up, but I expect decreased advertising budgets will lead to a decline in available sponsorships,” says Roberts. (PopCap itself relies on a mix of game purchases, display advertising, video advertising, and, in partnership with WorldWinner, fee-based tournaments.) “There is so much inventory available across the board, so it comes down to where you can access the demographic you want more efficiently, and in that context there is a lot of competition,” adds Meyer of WorldWinner.

But some forms of advertising are still pulling in good money. “Here at Lycos we do have some experience surviving economic downturns, and one of the things that we did pretty early on was to create a family of strong brands with diversified revenue,” says Gamesville’s Cummings. “That’s basically how we survived when the bubble burst last time. And we spent the first half of this year diversifying our own revenue sources beyond display ads.” In particular, Gamesville has started offering video ads, for which advertisers have been paying “pretty spectacular” rates, according to Cummings.

Meyer points out that opportunities for cross-media exposure can also attract advertisers. WorldWinner happens to be part of Liberty Media, which also owns the Game Show Network. “We are in a little bit of a unique position, because we can pull media packages together,” says Meyer. “You can buy ad inventory on TV and have that link to customized elements that show up online. That gives us a leg up when we walk into an ad agency or an advertiser.”

5. Gaming Companies Growing in Some Areas, Retrenching in Others

While many tech startups are being forced to lay off staff to conserve cash, several casual game companies are still hiring. Big Fish, which has 340 employees, will likely grow by another 60 positions in 2009, Lewis told TechFlash last week.

WorldWinner, too, is looking for more developers. “We are one of the few players, at least here in Boston, that is hiring,” says Meyer. “A lot of of the candidates that I have talked to recently say ‘Wow, you guys are one of the few companies that is this upbeat and charged up.’”

But that doesn’t mean gaming companies are spending money as loosely as they used to. At the same time as it’s adding staff, for instance, WorldWinner has scaled back efforts to rewrite its Windows-based games for the cross-browser Flash multimedia format, so that they’ll run on Mac computers and browsers other than Internet Explorer. “We pulled in some of the R&D work to refocus resources on those things that have more immediate return on investment,” says Meyer. “On the GSN site we have doubled the portfolio of Flash games, but at WorldWinner we have not moved forward significantly there.”

Lewis, a veteran of Goldman Sachs, says that in a recession, the most important role for the CEOs of gaming outfits—or of any other type of company—is to ensure that their organizations are ready to adapt to changing conditions, and that they are meeting their customers’ needs.

“We’ve always questioned whether the Big Fish Games business is a defensive one or a countercyclical one, and thus far the data demonstrates that it is countercyclical,” Lewis says. “But our focus ever since we founded the company has been on improving our understanding of our developer community and our game customers, and having that understanding reflected in the things we produce. That’s something we can control, irrespective of the economic cycle.”

[Update 11/25/08: CNET's Daniel Terdiman published a piece today entitled "Is the video game industry recession-proof?" It focuses on console and PC games rather than casual games, but comes to similar conclusions.]

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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