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Last Updated: Monday, 9 January 2006, 08:11 GMT
Game firms face challenges ahead
Person playing an XBox 360 game
The cost of making games is soaring
Plans for gaming consoles to become media centres and for gaming itself to engage a new mass market could be being overplayed by the industry.

That is one of the conclusions of a new report from research firm Forrester.

The study finds that a gradual evolution in the gaming industry is more likely than a revolution in the way people play games and use consoles.

Although gaming is a huge industry, the report warned that turning a profit will become increasingly difficult.

For players such as Microsoft, Sony and Nintendo the fact that the market is reaching saturation point coupled with the increasing costs of producing both games and consoles means profit margins may not be a big as they would like.

In-game advertising
3D worms and its Red Bull advert
Increasingly brands such as Red Bull are advertising in games

The report also warned that mobile phones and portable media players could supersede portable games consoles such as the Nintendo DS and Sony PSP.

"[Portable game consoles] look like one-trick ponies compared with multifunctional mobile phones that play games or game-capable portable media players. They could well be replaced in consumers' pockets," said report author Paul Jackson.

Convergence of devices has been the main theme of the recent Consumer Electronics Show in Las Vegas but Mr Jackson is not convinced the role of entertainment hub will be played by gaming consoles.

"While gamers will increasingly use their new consoles for non-gaming activities, this functionality will not be enough to convince non-gamers that buying a console is the answer to their digital convergence dreams," he said.

Game firms need to find new sources of making money as the costs of making both games and consoles rockets and the market becomes saturated, the report found.

Designing games for a wider audience, embracing online gaming subscription models and offering more in-game advertising are all ways of doing this, it suggested.

Male preserve

Gaming remains a multi-billion dollar industry and its influence cannot be underestimated.

According to the NPD Group, the industry generated $9.9bn in the US in 2004 and video gaming is stretching its influence with TV programmes, movie tie-ins and video game soundtracks.

Games on a shelf
Gaming is a multi-billion dollar industry

It remains dominated by young males - and Forrester found that in the US 77% of 16-25 year-old males regularly play video games.

Among the 12-17 age group, the figures are even higher - with a staggering 94% regularly indulging in game playing.

Visions of inclusive gaming - engaging those with no history or interest in gaming - remains some way off, Mr Jackson thinks.

"More young female gamers will use portable and home console platforms; older gamers will tap into game subscription services and casual multiplayer games like poker or bridge but it will only have an incremental effect on the industry," he said.

The report predicted good times ahead for the PC gaming industry which, following several years of revenue declines, will once again start to grow.

Despite the hype around games consoles, more consumers still play games on a home PC than on a game console with the exception of gamers in the UK, France and Spain, the report said.

Broadband gaming subscription services and mass-market online games will drive more consumers to their PCs and in the next two years Forrester predicts that another 4% of households will have taken up gaming in both the US and Europe.

Currently 40% of US households and 27% of European households indulge in PC gaming.

The growth in popularity of PC gaming is not a guarantee of profit though.

In fact many PC gamers play free online games and are unlikely to invest in new, full-price, boxed games or subscribe to game services, the report found.

Currently 15% of European consumers online consumers and 46% of US online consumers play web-based games.

These range from simple multi-player card, golf or racing games to more sophisticated games such as World of Warcraft.

The potential of games such as World of Warcraft is huge. It now has 5 million global subscribers, each of whom pays around 8 per month to participate.

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