Spurred by the advance of the CD, battle has broken out in the computer games industry. At stake is not simply a toy market but the global future of home entertainment.
In March of this year media conglomerate Pearson paid $462 million to acquire The Software Toolworks, a California-based publisher of interactive software. In July, Blockbuster Entertainment bought a 75% share of Richard Branson's Virgin Interactive (later increased to 90%) for $165 million. Other major companies such as Time Warner and Sony have also been conspicuously active in a sector that has traditionally been subject to casual dismissal as a mere 'toy' market. Something big is stirring in the electronic undergrowth.
Say 'computer games' to most people and the general reaction (besides a general rolling of the eyes and an irruption of disdain) will probably be to think of Sega's Sonic the Hedgehog or Nintendo's equally ubiquitous Mario. This may be a triumph of PR and advertising, but it doesn't tell the full story; it's like trying to characterise all television by one type of programme or all music by one style. On the contrary, the computer games industry is a thing of shreds and patches, a bewildering array of forms and formats which often have nothing in common save their incompatibility. In the 20 or so years in which it has existed the industry has grown up randomly and along parallel lines, unlinked either by common technical standards or even aims and aspirations. In fact, at times it has seemed less like an industry than an accidental confluence of special interests reluctantly sharing a single umbrella.
This is not so surprising when one considers that a great deal of the creative input has come not from the big corporate hardware manufacturers, but from individual enthusiasts producing software in a back room. This is how such companies as Sierra On-Line began.
Sierra, originally based in Los Angeles, was started by the husband and wife partnership of Ken and Roberta Williams. In 1979 Ken Williams was writing a mundane income tax program which necessitated communication with a mainframe computer 3,000 miles away. It was while scanning the mainframe in an idle moment that he encountered an item listed simply as 'Adventure'. The program that now came up on his screen was unlike anything he had ever encountered before: 'You are standing at the end of a road before a small brick building. Around you is a forest. A small stream flows out of a building and down a gully. ' It may come as a surprise to the uninitiated to learn that this paragraph of unadorned text is generally considered to be a prototype of today's high-tech computer games. It is an example of a genre known as the text adventure, an exercise in multiple-choice narrative where the player advances the story by typing in commands such as 'go south' or 'open door'.
The seminal contribution of Roberta Williams was the realisation that text could be allied with pictures to create a graphic adventure, and the breakthrough for Sierra came in 1984 when IBM commissioned it to develop a game to show off the then revolutionary capabilities of its new XT machines. The result was 'King's Quest', the first of a new generation of titles with sophisticated colour graphics and sound effects from which today's multimedia extravaganzas directly descend. For the Williamses, on the point of bankruptcy and making desperate mortgage repayments with their credit cards, salvation hadn't come a moment too soon. Today Sierra On-Line has grown into a highly successful international business with a turnover of $70 million and a near 20% share of the PC leisure software market in the US.
Designed on and for the IBM PC and Apple Mac, Sierra's first games were far from being mass-market products. The hardware was too expensive, and the perception of the IBM as an 'office machine', a prejudice still apparent today, retarded the development of leisure software. The mass-market explosion of the late '80s was triggered by a different breed of machine - the console.
Consoles, which at their most basic consist of a plastic board with a directional control stick and a 'Fire' button, plug directly into a TV and were designed to replicate arcade machines in the home. The arcades boomed during the 1970s after the launch of 'Pong', a primitive but astonishingly successful game in which two players moved little paddles to bat a fuzzy white blip across the screen. Since then the technology may have streaked into the stratosphere, but a symbiotic relationship with the consoles continues - currently the leading and jealously guarded arcade racing game is a Sega title. Because the console did not require a screen of its own (hand-held mini-machines such as the Nintendo Gameboy were a later phenomenon), and because it used only game-specific components, it was much cheaper than a multi-purpose PC. Furthermore, the software came in the form of a cartridge containing a dedicated printed circuit board, which gave it a significant performance edge over disk-bound PC products. A number of different machines vied for the fledgling home market before Nintendo and Sega established dominant positions by the beginning of the '90s. All that may be about to change.
'We've been cutting back on Sega/Nintendo shelf space,' explains Jerry Berkeley, computer games manager of retail chain HMV. 'They still account for 50% of our sales, but this is significantly down on last year.' At the beginning of October Hamley's, the world-famous toy store, announced that it did not expect any Sega or Nintendo title to feature in its top-10-selling products this Christmas. The tabloids reported the news with such headlines as 'Computer game boom over!' The truth, as usual, is much more complex. The computer games industry is in transition, and this autumn we have already heard the first shots in what is certain to be a long and bloody hardware war. The collapse in the cartridge market is likely to be a temporary blip, with both Sega and Nintendo due to launch enhanced platforms next year, but the focus has already been extended beyond the demographics of the school and early teenage audience. At stake is not simply a 'toy' market, but the global future of home entertainment.
The key buzz word is 'multimedia' and the key itself is the compact disc. The compact disc (or CD) is much more than the mere successor to vinyl and the cassette tape. It is a flexible storage device of immense capacity.
A single CD can carry up to 600 megabytes of code, compared with the 1.44 megabytes of a high-density floppy disk. 'It has made an incredible difference to us,' explains Leah Kalboussi of Sierra UK. 'The CD format is every operational director's dream.' A single CD will now suffice for games that, on average, used to require six or seven floppy discs. Not only does this reduce production costs, it also strikes a blow at the software pirates. And, crucially, the massive capacity permits the storage of up to 74 minutes of video footage on a single disc.
The combination of full-motion video and top-quality audio is the essence of multimedia. The launch of affordable CD-ROM drives for the PC has stimulated the market, with HMV reporting a 'three-or fourfold' increase in CD-ROM software sales for this year. It is now estimated that there are 10 or 11 million CD-ROMs in the home worldwide, from a base of zero only a couple of years ago. However, despite the rapid growth retailers are not convinced that this will ever be a mass-market product. The PC has yet to slough off its 'office machine' tag, and at around £1,000 for a basic multimedia platform it remains too expensive to have any hope of achieving domestic critical mass. When the PC does make it in to the home its natural environment is still the study. The battleground today is in the living room, and first into the lists this autumn are Philips and 3DO.
Actually the Philips CD-I (CD Interactive) machine has been around since 1992, but the original launch was a damp squib. It was classically ahead of its time, and while Philips obviously realised it was on to something, it's equally obvious that it wasn't quite sure what to do with it. The machine itself was excellent but there was virtually no supporting software. It didn't seem to be aimed at the games market; it didn't seem to be aimed at any market at all. It was a piece of hardware with an inbuilt identity crisis. So now Philips is making a superhuman effort to regain lost ground, and its new CD-I 450 is the centrepiece of a £6 million UK Christmas advertising campaign. At £449.99 with a DV (digital video) cartridge, it is described as a complete home entertainment system, on which you can watch a James Bond movie, listen to the Grateful Dead, or play a computer game as the inclination takes you, though not, perhaps thankfully, all three at once. In addition, there are reference CDs such as encyclopaedias and a line of children's educational software. It's fully compatible with audio CDs and there are over 100 other titles currently available. This year the worldwide user base of CD-I has risen from a stagnant 300,000 to a rather more buoyant half million.
Philips' immediate competitor, 3DO, has also aimed its product at the home, but there has been an intriguing difference of approach. Where Philips seems keen to stress the all-round capabilities of CD-I, 3DO is targeting the first of its machines, launched in the UK on 1 October, specifically at the games market. This may be partly because it is not yet manufacturing its own digital video card, or it may be as the result of experience: the American launch of 3DO in September 1993 was an unmitigated disaster.
'There's no mystery about it,' admits John Edelson, European director of sales and marketing. 'We just screwed up. Everything that could go wrong did go wrong; we refer to it as Murphy's Launch.' Edelson clearly believes that candour is the best policy. 'It's not a sprint,' he points out, 'but having said that, the first people out there with good technology usually win.' This does rather beg an obvious question - CD-I was a good piece of technology, and it had a clear field for a couple of years, so why hasn't it won already? The answer may lie in the marketing.
3DO learned a lot from the American debacle, and the Japanese launch in March of this year proved a tremendous success. The reason? Karaoke. Apparently the Japanese just can't get enough of it, and 3DO's home karaoke software has been selling like hot sesame cakes. Of course, what goes down well in Nagasaki isn't necessarily going to shift in Milton Keynes, but that's the point: 'This whole industry is a great deal more regional than people realise,' Edelson maintains. 'You've got to know your market, and in the UK the market is games, games, and games.' Unlike Philips, 3DO is not for the moment interested in selling us a balanced flexible entertainment system. That's for the future. In the meantime it is targeting the games community as a means of getting a toehold in the nation's living rooms. Games are the thin end of the wedge.
'Normal people don't buy new consumer electronics,' says Edelson. 'They buy what they bought last year, or maybe what they've just seen the neighbour buy. We're targeting what we call early-adoptor types; people who are evangelical about their toys, and want only the best.' This could be a shrewd strategy. The ultimate aim is to establish a mass-market standard, the equivalent of VHS video, but with other competitors lurking ominously in the shadows (notably Sony with its PS-X machine) the majority of consumers are going to wait before committing themselves. It's the Betamax syndrome all over again, but if 3DO can establish a niche market it should at least see itself dug in for the long haul.
The VHS/Betamax analogy is an obvious one, but it gives an incomplete picture. 3DO's backers naturally include the US games giant Electronic Arts, but also prominent are AT&T, Matsushita, MCA, Time Warner and Panasonic. The current batch of 3DO machines bear the Panasonic label, but at least six other companies are working on licensed designs. The actual badge on the system is secondary; the true prize is setting the agenda for the multimedia explosion anticipated in the home market.
This vision of the future embraces the full range of communications technologies: fax, telephone, television, cable and computer all share a standard interface; only the functions vary. Once universal standards are established, a single computer linked to terminals all over the house could control everything from the washing machine to the TV, perhaps activated by a voice recognition system.
It may all sound rather like science fiction, but the prototype technologies are in place. (Indeed, the 'Microsoft at Work' concept has already been pioneered for use in the office; how long before the ubiquitous software giant produces a complementary 'At Home' package?) While no single company can provide all the different services, a partnership of interlocking interests could easily cover the field. And in this equation of distribution and resources, computer games play a central role. It is against this background that the current corporate feeding frenzy begins to make sense.
'Games', maintains John Edelson, 'are where the cutting edge of technology is being developed today.' The expertise of the programmers is as important as the software they produce, and it has applications far beyond the remit of leisure and entertainment. Some are obvious (the design of an interactive shopping program will hardly tax the skills of someone versed in interactive games); others less so. 'Take the Taurus debacle in the City,' offers Matthew Stibbe of British software developer Intelligent Games. 'If they'd given it to us we could have sorted it out in a few weeks.' It's a startling claim, and it may just be the arrogance of the young (Stibbe is only 25 and none of his employees are over 30), but he argues a persuasive case: 'Programming games requires the facility to write tens and hundreds of thousands of line of code. All of our people have degrees in computer science; we can afford to employ only the best.' Stibbe wrote and sold his first two computer games while sitting his Oxford finals, and set up Intelligent Games after coming down. It's typical of the small but intensely creative entrepreneurial companies which drive the games industry, and which are now the targets of the corporate big fish. 'I'm not sure if we're ready to bait ourselves,' Stibbe observes, while admitting to some exasperation at past attempts to raise working capital in a blankly uncomprehending financial market. 'I think some of the larger companies may be gobbling up everything in sight just to stop anyone else getting it.' Stibbe is in no doubt that the complete penetration of the home market is a viable proposition. In fact, he believes that Internet ('or its equivalent') will be the next buzz word after multimedia. The high telephone charges may hold back development of the network in Britain, but with 84% of its revenue in dollars, Intelligent Games is not constrained by the domestic market. Cheekily, it has already applied for a Queen's Export Award, only to be told that it hasn't been trading for long enough.
So which way does it think the wind is blowing in the current format war? The answer is that to it, as to the majority of software developers, it doesn't actually matter. It has recently signed a contract to develop a game for PC CD-ROM and two other as yet unspecified formats. This is the rub. The designers, just like the consumers, can afford to sit on the fence until the dust settles. Fundamentally, for all the fuss about formats, this remains a software-driven industry.
In the interim, massive sums of money will continue to be poured into the hardware war, with still more combatants expected to join the fray shortly. To date 3DO has spent around $400 million developing its product; Philips closer to $500 million, over a much longer period. Victory won't come cheap, and whatever the outcome the casualty list will be extensive. It is, after all, a situation where the winner stands to take everything - except prisoners.