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Brier Dudley's blog

Brier Dudley offers a critical look at technology and business issues affecting the Northwest.

October 11, 2011 at 11:09 AM

TechNW: Best and worst of times for games, Valve vs Apple

It’s the best of times and the worst of times for the game industry, Ed Fries said during the game panel at the WTIA TechNW conference.

Fries, who became an investor in games companies after leading Microsoft’s game studios, said games are becoming the leading entertainment platform.

The Seattle area has more than 160 game companies, including several working on titles with budgets over $100 million, Fries said.

At the same time, retail sales of games are on track this year to be 40 percent below their peak in 2008.

So, Fries asked panelists, best of times or worst?

Gabe Newell, owner and president of Bellevue game giant Valve, said “it’s a very interesting time.”

“Our business is growing very rapidly both on the content side and on the service platform side so in that sense business has never been better,” Newell said. “The challenges we see looking forward are very rapidly evolving model for how value is created for customers.”

After broad pursuit massively multiplayer online games, the free-to-play model is emerging as “a really interesting opportunity,” he said.

But there are dark clouds forming, Newell continued, raising concerns about the closed-garden approach of platforms such as Apple’s iOS.

“On the platform side it’s sort of ominous that the world seems to be moving away from open platforms,” he said.

Platform providers that used to use their role to enable developers “instead view themselves as more rent guys who are essentially driving their partner margins to zero,” he said.

“They build a shiny sparkling thing that attracts users and then they control people’s access to those things,” he said.

Newell said “very large structural investments and structural changes” are coming over the next few years that will threaten people who create value bulding things like the open Internet.

After a quiet pause, Fries moved on to other topics.

Has the console business run its course, for instance.

Samantha Ryan, senior vice president of development and production at Warners Brothers Interactive Entertainment, said there’s plenty of life left in the console business and triple A titles are still selling well.

“There is a very strong console business and it’s going to be around for awhile,” she said.

Newell said there are four platforms, including the Internet, mobile, desktop and the living room.

The living room is the domain of the consoles, and it’s ability to exist independently from the other platforms is gone, Newell said.

Newell expects Apple to distrupt the living room platform with a new product that will challenge consoles, although he doesn’t have any particular knowledge of that new product.

“I suspect Apple will launch a living room product that redefines people’s expectations really strongly and the notion of a separate console platform will disappear,” he said.

Newell reiterated his concerns about a closed model being the “wrong philosophical approach” but one that people will emulate because of the success of Apple and Xbox Live.

“I’m worried that the things that traditionally have been the source of a lot of innovation are going – there’s going to be an attempt to close those off so somebody will say ‘I’m tired of competing with Google, I’m tired of compeitng with Facebook, I’ll apply a console model and exclude the competitors I don’t like from my world.'”

Fries asked Newell to clarify whether he sees Apple as being a closed platform.

“I consider Apple to be very closed,” Newell said. “Let’s say you have a book business and you are charging 5 to 7 percent gross margins. You can’t exist in an Apple world because they want 30 percent and they don’t care that you only have 7 percent to play with.”

Doesn’t Valve’s Steam service also extract a “tax” on game companies that use the platform, Fries asked.

Newell said Steam gets a commission if games are sold through Steam, but developers can use its free tools and services and sell their games elsewhere and “we don’t take anything.”

If Valve were to make a hardware platform, it would open it up to competing distribution systems because openness is important to the future of the entertainment industry, he said.

David Bluhm, president of chief executive of game company Z2Live, finally stood up for Cupertino.

“I would argue Apple’s system is very open but very proprietary … it’s open with their rules,” he said.

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