Despite new E3, the old stays in play

Surprises are always a key part of E3, the giant video game convention that opens its doors this week in Los Angeles. Innovative new game titles and hardware are essential for stirring up excitement among gamers, which keeps them emptying their wallets.

This week, details are expected about an update to Microsoft’s Xbox One console, called Project Scorpio, that will support 4K video and virtual reality. Super Mario Odyssey for Nintendo’s new Switch console will be another highlight.

But the outsize emphasis on the new at E3 disguises an important change in the game business over the past few years: The old has never mattered so much before.

It used to be that a game publisher would put out a big title and, if it hit all the right notes, the game would sell well for a few months. But over the past five years, publishers — especially those of the big console games that dominate E3 — have used the internet to keep their games fresh with new content, finding new ways of keeping players engaged with the games and spending money on them through sales of virtual goods. Old games seem less old because they are regularly being updated with new things to do and see, giving them a shot of digital Botox.

This reflects an important change in the game business toward providing a service that is constantly being enhanced, rather than selling discs wrapped in cellophane that mostly do not change after a customer purchases them.

“The games industry has followed the same example investors have seen with Netflix,” said Joost van Dreunen, chief executive at SuperData Research, a game research firm. “Entertainment in general is undergoing this tremendous shift.”

For an example, look no further than Grand Theft Auto V, the gritty action-adventure game from Rockstar Games, which first came out in September 2013, almost four years ago. Grand Theft Auto V was published so long ago that it was initially released on the last generation of console hardware from Sony and Microsoft, the PlayStation 3 and Xbox 360 (Versions followed for newer hardware in November 2014 and for PCs after that.)

And yet, there was Grand Theft Auto on the best-selling games list as recently as April, when it ranked sixth in the United States by dollar sales, right up there with games released this year like The Legend of Zelda: Breath of the Wild, according to NPD Group, the market research firm. More than 80 million copies of Grand Theft Auto V have been sold since it was released, according to Take-Two Interactive Software, the publisher that owns Rockstar Games.

Part of Grand Theft Auto V’s enduring appeal is that it is an exceptional game, with a 97 out of 100 score on Metacritic, which aggregates reviews from game critics. But the way Rockstar has kept the game performing at such a high level years after its release is through the internet.

Anyone who buys Grand Theft Auto V gets free access to Grand Theft Auto Online, a multiplayer internet version that was released around the time the game was first published in 2013. Rockstar routinely pushes out free updates to the online game — 12 major ones during the last fiscal year alone — that provide new scenery and action. Another big update, called Gunrunning, is expected next week.The constant refurbishing has kept the community of Grand Theft Auto players, who typically have to wait four to five years between totally new versions of the game, paying attention. “It allows us to stay in touch with consumers between huge, tent-pole releases,” said Strauss Zelnick, the chief executive of Take-Two, in a phone interview.

There’s a financial motive for Take-Two. While players can do many things free, there are plenty of opportunities for them to buy virtual weapons, vehicles and other items to make their online game-playing more fun. In April, Grand Theft Auto V ranked third among all console games in digital spending, according to SuperData Research.

In a significant milestone, Take-Two reported that for its last fiscal year, which ended March 31, slightly more than half of its revenue of $1.78 billion came from digital online sources.

Of that digital revenue, a little over half came from people buying full, downloadable versions of games rather than physical copies, while just under half came from purchases of virtual currency and add-on digital content. Grand Theft Auto V has generated digital revenue of $1.6 billion over its life, van Dreunen of SuperData Research estimated.

The funnel of digital revenue between major releases of games means the feast-or-famine cycle that used to characterise Take-Two’s financial results — huge spikes in revenue after big Grand Theft Auto releases, followed by deep troughs — is no longer as severe.

“We don’t see as much of that now because every two or three months you’re seeing new content being added to keep users engaged in the franchise universe,” said Yoshio Osaki, president of IDG Consulting, a market research and consulting firm focused on the game industry.

Digital revenue also carries higher profit margins than sales of physical game discs, because no manufacturing is involved and distribution costs are lower.

Electronic Arts and Activision Blizzard, among other big game publishers, have also heavily invested in expanding the internet side of their businesses, which has created longer legs for many of their games. As a result, stock prices of both publishers and Take-Two have increased by triple digits over the past four years.

Still, most copies of Take-Two’s games, including Grand Theft Auto, are sold on discs in stores. To make a lot of digital revenue on games, Take-Two needs to sell as many physical copies as possible. That means building buzz at events like E3 with new products.

“Physical distribution partners are terribly important for us,” Zelnick said, “and we expect that to continue for some time to come.”