The videogame industry is on track to have $82bn in sales in 2015. But it must overcome piracy to do so.
Declaration of war on videogame pirates
The videogame industry is facing the US$56 billion question of whether it can solve the growing problem of piracy.
On the surface, the industry appears to be booming. According to PricewaterhouseCoopers, the global videogame market was worth $56bn (Dh205.68bn) last year, with sales likely to grow to more than $82bn by 2015.
"In 2010, two giants in the videogame industry, Activision Blizzard and Electronic Arts, earned revenues of $4.4bn and $3.6bn, respectively," says Tim Shepherd, an analyst at the research company Canalys. "Recent game releases have continued to break records - notably Activision's Call of Duty; Modern Warfare 3, which broke the global sales record for a videogame in its first five days on sale, grossing $775 million."
But for games developers to continue earning this level of revenue, they must first deal with the worldwide problem of piracy. A generation of consumers has grown up with the notion that everything digital should be available free on the internet and that expensive videogames are no exception. The tendency of younger consumers to download online content illicitly to avoid paying for it has all but crippled the recorded-music industry.
"The videogames industry is greatly at risk from piracy … Pirated illegal games for consoles and PCs have been available for many years and have already cost the industry many billions of dollars," Mr Shepherd says.
But the problem is growing fast as popular games are distributed and downloaded across a widening number of devices and as the pirates become increasingly sophisticated at breaking the games developers' security codes.
"Piracy, rife in countries such as China, but by no means a problem exclusive to that part of the world, is a real threat," Mr Shepherd says. "The increasing connectivity of gaming platforms and consoles is making the dissemination of pirated content increasingly simple, while the hacking, unlocking, chipping or jailbreaking of gaming devices to allow them to run illegal or unofficial and unregulated content is, in some markets, now quite common."
Videogame piracy is reaching a level where it could severely restrict future growth by reducing investment in future production.
"Whether from pirated 99 cent games on a smartphone, or from $60 blockbuster titles for the Xbox or PlayStation that are the latest instalment in a highly valuable franchise, across the spectrum, small games developers to huge multinationals are losing revenues to piracy," Mr Shepherd says.
Another factor that is radically increasing revenue losses for games developers is the acceleration in broadband internet connection speeds.
"Broadband connection speeds have acted as a restriction on illicitly downloading games in the past," says Mark Little, an analyst at the research company Ovum. "Their large file sizes meant it generally took some time to download as the data needed to run games can often be measured in gigabytes. But with faster broadband connection speeds, it is now far easier and quicker to download games."
The videogame industry is increasingly finding that there is little it can do to prevent illicit websites offering its high-value content free to anyone with a fast internet connection.
"There is no easy solution, particularly in markets where a cultural expectation has built up that presumes software to be free, and piracy to be commonplace," Mr Shepherd says.
But the industry may still have one weapon left with which to combat piracy. The recent growth of social gaming coupled with games producers allowing internet-only access to parts of games held on their own computers may help to defeat attempts to play the games without paying for the service.
"Connection to the internet gives games publishers the opportunity to authenticate the user," Mr Little says. "In the case of games like World of Warcraft, the whole essence of the game is to be connected to other players. Some games producers also hold key elements of some of their game on their servers."
But Mr Shepherd says: "It is by no means a panacea to cure all of the piracy bug, but may help to encourage gamers to buy official products."
Some online games companies are also discovering that they can offer games free but generate income by selling add-ons designed to give players an advantage. It is reported that some players of games such as Bigpoint's DarkOrbit are prepared to pay $1,000 for additional software to enhance their space ship in the videogame.
However, as growing numbers of gamers learn that they can download many first-class games free, it remains to be seen whether the video industry's attempts to avoid the same fate as the music industry are a case of too little, too late.
"The lesson from the analogous music industry is clear," Mr Shepherd says. "Game developers, large and small, must innovate and embrace new business models in today's connected world or risk losing revenues from greater numbers of people."