Threat Level

Published as part of our sister-site GamesIndustry.biz's widely-read weekly newsletter, the GamesIndustry.biz Editorial, is a weekly dissection of an issue weighing on the minds of the people at the top of the games business. It appears on Eurogamer after it goes out to GI.biz newsletter subscribers.

Nintendo's Satoru Iwata is one of the most successful executives in the games industry - or, indeed, in any industry, having steered his company from the brink of irrelevance to global market leadership in the space of a few short years.

He's also a rather wonderful speaker, whose event keynotes, even when they haven't been laden with the announcements craved by the press and gamers, have generally been full of warmth for the games business and its creative process, and wisdom regarding Nintendo's rise to power and future strategy.

As a rule, I find it hard to disagree with Iwata when he speaks. It would take a fair bit of persuasion for me to want to drop my chips on a different square to a man on such an extraordinary winning streak.

However, while his widely reported talk at GDC in San Francisco this week unquestionably called the present state of play in the games business accurately, it's tough to agree with his conclusions - or the stark warning they seemed to present.

A core theme of the talk was a theme which has been widely explored in many different places, including these columns, over the past couple of years - namely the downward price pressure faced by videogames as cheaper competition bubbles up from the bottom of the market, in the form of smartphone and online titles utilising everything from cheap price points to freemium or ad-supported models.

Iwata's concern is that the existing retail games market is somewhat over-saturated with titles, whereas the app store markets are "drowning", with tens of thousands of options available to consumers.

The low prices of those titles reflect lower development budgets, he conceded, but he fretted that they still suggest very small revenue flows, painting a nightmare scenario of game developers being unable even to pay themselves wages with the money they make.

It's not a huge logical stretch that he's making, of course, but Iwata generalises too much. For a start, you couldn't tell it from the rhetoric, but he's talking about a threat to the business model Nintendo has adhered to in recent years, not a general threat to game development or the wider industry.

For another thing, he laid the blame at absolutely the wrong door in his speech - accusing the proprietors of app stores of cultivating this kind of market in order to sell smartphones with no interest in game quality or revenue streams.

Of course, that's true in an absolute sense - Apple (and Google, and Nokia, and RIM, and Microsoft's mobile side, and everyone else running an application store) doesn't really care about games in the way that a massive software publisher like Nintendo does.

However, neither has the company exactly had to push developers to lower price points. It created an open pricing model - developers themselves set the pricing, and they've almost universally settled low.

Why? Is it because, as Iwata's talk seems to suggest, they're all intent on running lemming-like off the edge of a cliff (not that lemmings actually do that, but you know what I mean), hurtling headlong into bankruptcy for the want of a decent cashflow spreadsheet?

Is the smartphone gaming market really a financial disaster in the making, one whose repercussions threaten to engulf the rest of the industry? Iwata didn't put it in quite those terms, but that's the logical endpoint of the argument he was making.

However, that simply isn't the case. The people who make business decisions on the mobile side are smart people, and the price points they've reached aren't arbitrary - they're based on exactly the same projections regarding costs, unit sales and supplementary revenue streams that every other successful business in the world employs.

On a platform that's wonderful at generating large-scale sales of low-priced content and absolutely excels at post-purchase revenue through DLC, in-app purchasing or advertising, as well as having a low cost of development, it just happens that the required price tag for profitability is relatively low.

Iwata doesn't like that, and that's fine. His company's business, like the business of a great many people reading this, involves selling more expensively developed software at more expensive price points, and they don't like seeing downward price pressure or the spectre of customer attention being grabbed by cheaper experiences.

It's a clear and obvious threat, and plenty of people have observed that the 3DS, as an extremely relevant example, is going to have to face up to some tough competition from iOS in the coming years. That doesn't, however, mean that it logically follows that the smartphone gaming business isn't making money, or is a threat to gaming as a whole.

If anything, this is an exercise in picking your battles. I'd draw your attention to another story that's been bubbling away this week - the release of the first gameplay videos from EA's upcoming Battlefield 3, along with some pretty strong rhetoric about taking on Activision's Call of Duty franchise.

These are multi-million-dollar games in their development phase which have the potential to turn into multi-billion-dollar games at retail - and there's seemingly plenty of space for them to duke it out in the market.

Meanwhile, we're being inundated with fresh information about gigantic, sprawling RPG title Dragon Age 2, and teased with the first trailer for another dragon-sporting RPG epic, Skyrim. Some of the first hands-on previews of Sony's The Last Guardian, five years in development, have hit the internet in the past couple of days. Killzone 3 and Bulletstorm are doing just fine in terms of sales, and Nintendo itself is about to drop the undoubtedly gigantic Pokemon Black and White on the UK.

Is the top end of the market in crisis? No, it's not. Break-out hit titles are still doing what break-out hit titles have always done - selling lots of units and making lots of money - and they're doing it in a host of genres and demographics from "core gamer" right out to the kids market.

The threat of smartphone and online downstream gaming has never been to those games, and it's disingenuous to suggest that that's the case. Certainly, any new form of entertainment - especially a cheap one - is never going to be welcomed by the existing media, but are shooter fans really going to eschew Bulletstorm because they're too busy with Angry Birds or another iOS treat? That audience exists. It's there. It's being served. It's not going away.

Rather, the threat is to the segment of the games space that can't quite justify itself in the face of 99p App Store offerings. It's not, ironically, Nintendo's key titles that are most likely to suffer, although the company will have to join the rest of the industry in re-examining how it handles development and pricing in the face of this new pressure. Rather, it's the countless shovelware titles which have made their way onto the DS and Wii that are seriously going to suffer when consumers cast a critical eye over where their gaming money is being spent.

It's a rough shout for the developers who are involved in working on those kinds of titles - because, let's face it, nobody joins this industry dreaming of making short-cycle shovelware - but ultimately, if your £35 Wii title doesn't entertain consumers as much as a 99p iPad application, then it's not some wicked conspiracy that's putting your job at risk. It's pure economics.

If another company can make a solid income out of entertaining consumers for a fraction of the price that you're charging, then in a purely evolutionary sense, they're fitter and they're going to survive.

Iwata is dead right on one point - one answer to this is to innovate and to progress the science of games design. Make better games, and do it in smarter ways that reduce cost and risk, so that you can tap into developers' creativity and pursue break-out hits rather than safe mediocrity.

That's going to be vital in the years to come - because with the absolute best online, smartphone and tablet titles being priced much cheaper than the absolute worst console games, the ability to launch something mediocre and make a return is going to dissipate rapidly.

Iwata's true concern is that with it will go a fairly sizable chunk of Nintendo's third-party catalogue and licensing income. How he steers his company through this challenge will be a major test of the creative thinking and business intellect that he has demonstrated so often in the past.