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Can downloads save the video game business?

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Bastion (Warner Bros. Interactive)

For the most part, 2011 has been a pretty crummy year for video game sales.

Other than April, every month has shown declines. For the year, the industry is 10 percent behind 2010's pace. That puts video games retail on track for its third consecutive year of negative growth -- the first time that has ever happened in the gaming world.

As retail sputters, more and more publishers are looking to downloadable games to help fill the gaps.

It's not a bad strategy. In the first quarter of 2011, gamers spent $1.85 billion on games in spaces beyond the traditional retail segment. That includes used games and game rentals, but incorporates digital downloads as well.

While several companies are dipping their toes in the downloadable games waters, there are two who are fully immersing themselves: Microsoft and Electronic Arts.

EA, of course, bought PopCap Games recently in a deal that could reach $1.3 billion. As the makers of downloadable classics such as Bejeweled, BookWorm and Plants vs. Zombies, PopCap is arguably the leader in the downloadable casual space. The company has grown at a 30 percent annual rate for the past three years and had revenues of more than $100 million last year. Along the way, they've even won the hearts of the core gamer, putting them in an unusually powerful position.

And analysts say the purchase "has the potential to be transformative" for EA.

"This acquisition [is] a long-term positive," says Michael Pachter of Wedbush Securities. "Though the costs may be high, the opportunities in digital casual gaming are large and growing much faster than EA's traditional packaged goods business. PopCap strengthens EA's leadership in casual gaming and accelerates EA's progress toward its goal of $1 billion in digital revenue."

IHS Screen Digest, in fact, predicts that the PopCap buy will allow EA to break that $1 billion goal.

On a smaller scale, Telltale Games, makers of the Back the Future and upcoming Jurassic Park games, relies exclusively on the downloadable game model. It's worked well for them. In 2010, the company generated revenues of $10 million -- a 90 percent increase from the year before. And it's expecting to repeat that feat this year.

At Microsoft, the company is kicking off its Summer of Arcade once again, highlighting smaller games that might otherwise be overlooked, such as the critical darling Bastion.

Last year's standout game, Limbo, generated roughly $7.5 million in revenue. And its success there has prompted Sony to welcome it onto the PlayStation Network this year.

It's not just a windfall for smaller developers. Microsoft benefits as well.

"Microsoft gets about 30 percent of the revenues and it really costs them very little to put it on," says Pachter. "I would guess it generates a couple hundred million dollars per year. ... I think it really just supplements your experience. They want that Xbox on as much as possible."

There are a couple downsides, of course. The biggest is price. To equal the revenues of a single retail game, publishers have to sell anywhere from 6-12 downloadable games. And given the crush of titles competing for people's attentions on consoles, smartphones and mobile platforms, that's a tall order.

For now, at least, downloadable games aren't exactly saving the industry - but they're a pretty effective band-aid, helping staunch the retail bleed as companies prepare for the inevitable shift to pure digital distribution.

"[Downloadable games] aren't offsetting things," says Pachter. "We're probably still seeing a decline - but it's not as dramatic because of them."

-- Play Word Search II on Yahoo! Games --

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