It was the downsized E3. The video game conference, formerly known as the Electronic Entertainment Expo, transformed itself into a lower key, invitation-only event. Last year, some 65,000 people headed to downtown Los Angeles, where E3 was among the city’s most popular events. This year, by design, E3 hosted just 3,000 industry insiders, analysts and reporters, who moved between hotels on the Santa Monica beach and the nearby Barker Hanger. Gone were the “⁠booth babes,⁠”⁠ used in tradeshows around the world to lure attendees, like so many trout. where they could be properly pitched. (In fact, E3 had already tried to enforce a dress code last year, with a $5000 fine levied against companies who featured scantily dressed women. Success was mixed.) The event was so low key that some industry observers question whether E3 will survive, or will give way to larger, noisier events, such as the Consumer Electronics Show in Las Vegas.

And yet, this tamer E3 in some ways reflects the industry itself. While the traditional gamer - male, young, testosterone-driven - remains still at the heart of video games, the industry is seeing a broadening in the kinds of people who play video games, the types of games they play, and the kinds of consoles they purchase―including the unexpected success of the Nintendo Wii. For successive generations of consoles, processing power, data storage, texture mapping and polygon display rates were the sole measure of progress. In this fast company, the Wii at first looked like a Honda Element in a Grand Prix race. The Wii controller with its motion sensor might have been new, but what about rendering? How fast was the processor? Where’s the high definition DVD? But as overzealous-players started to get “⁠Wii elbow⁠”⁠ the industry started to pay attention.

Presenting at E3, Nintendo executives said that the inventory of Wii consoles had regularly sold out but predicted, perhaps with some hubris, that the console would top the competition to become the number one platform worldwide―by appealing to more kinds of players. “⁠Our next challenge is to destroy the psychological barrier that separates veteran gamers from novice players,⁠”⁠ said Reggie Fils-Aimee, the president of Nintendo of America, according to a New York Times report. Fils-Aimee said that one out of eight guys over age 50 now regularly use the console. A report issued by NPD Group, which regularly tracks the video game industry, showed that Wii Play, a collection of “⁠mini games⁠”⁠ designed to get players familiar with Wii’s unconventional controller, ranked number one in Canadian industry sales for the first half of 2007.

Another company looking at the changing video game landscape is Electronic Arts, the largest game publisher, which is best known for its sports titles. John Riccitiello, who took over as head of EA last April, has concluded that the company is in a creative hole, with too many titles that require fast reactions and teenage testosterone, and too few titles for everyone else. “⁠'We've become a niche,'' Riccitiello told New York Times reporter Eric A. Taub. The CEO estimated that 80 to 90 percent of the company’s resources, as well as most of its competitors, have gone into “⁠building sequels of games that super-serve teenage boys with fast thumbs.'' He has campaigned within the company to begin looking at video games not just as a series of titles, but as an art form that can have global impact, much as television did in the 1950s. ''But we could also go down the path where we're just reinforcing what we've done in the past, and we need to reinvent ourselves.''

The demand for a different sort of video game entertainment can also be seen in the success of the Guitar Hero titles, which were developed by Harmonix of Cambridge, Massachusetts, whose do-it-yourself music-oriented titles also include Karaoke Revolution and Rock Band. The Guitar Hero series is published by RedOctane, based in Sunnyvale, California. Harmonix and RedOctane are now part of MTV Networks (owned by Viacom) and Activision, respectably. Electronic Arts now distributes Rock Band. Disney Interactive Studio is also competing here with its Hannah Montana: Music Jam series, as does the French developer Ubisoft with its Jam Session titles.

The idea of making your own music―the idea behind all these titles―is so vastly different than, say, Grand Auto Theft, that the two genres seem to come from different planets. At E3, the video game trade publisher IGN gave the Hannah Montana title its “⁠Best Game That Will Threaten Masculinity if Caught Playing⁠”⁠ award. The category itself is a nod to the idea, which is becoming patently obvious, that not all good games include use of weaponry, kick boxing, or even a scoreboard. As an accompanying explanation on IDG.com put it: “⁠There's no denying Hannah Montana's entertaining game play or impressive style. There's also no denying, however, that if you're seen playing this game in public you'll be dragged off to a dark alley and ‘⁠talked to⁠’⁠ by more macho gamers out there. Hannah Montana may not come with a free skirt for a game pack-in (at least if it does, Disney hasn't told us yet), but it does come with free heckling, embarrassment, and a general decrease of dude power. Still, it's a damn good game, and for that reason we encourage you to go out and buy a pink shirt, a pair of croc shoes…because you're cashing in your manhood to play this otherwise totally impressive licensed game.⁠”⁠

Third-party, multi-platform development

To some extent, each console has itself attracted a certain kind of game player and hence, a certain type of game. “⁠A PSP owner is quite a bit different than a Wii owner,⁠”⁠ wrote Eric Peterson, president and CEO of Vicious Cycle Software, in an email exchange. “⁠While many players enjoy a range of products, certain systems are definitely finding different audiences.⁠”⁠

Peterson said that the DS has succeeded with a shorter development cycle than the PSP as well as by attracting a younger audience. For third-party developers, the two platforms represent different opportunities. “⁠The DS is dominated by Nintendo products first and foremost,⁠”⁠ such as Mario, Pokemon, Metroid, and Nintendogs. By contrast, the PSP software market is “⁠definitely up for grabs in the third party publishing arena. Sure, Sony has their own set of hits on the system, but other publishers are selling equally as well, depending on the title that is being sold. Sports and third person action games seem to be the clear winners.⁠”⁠ Perhaps as a result of this third-party activity, the PSP game library has grown substantially, this year.

Developing a single game for both these handheld platforms can be a challenge. Vicious Cycle built the PSP, DS and PC versions of its Konami-published Marvel Trading Card Game simultaneously by outsourcing part of the DS work. “⁠It’s definitely not as easy as if you were developing for other combinations of platforms,⁠”⁠ Peterson said. “⁠The right platforms, if paired properly, can make life a lot easier from the developer’s perspective. For example, working on the Wii is a lot like working on the GameCube. The only major difference is the controllers.⁠”⁠ That similarity has given Wii development a jump start. But “⁠in general, next-gen verses old-gen/current-gen development creates major hurdles.⁠”⁠ For example, moving from PS2 to PS3 or Xbox to Xbox 360 can be challenging because the resource cost of supporting a next generation system is high. Tools must be upgraded, developers need to know more, and every department within the studio―audio, art, programming, design―is affected. For some projects, the company uses its own Vicious Engine toolset. Peterson credits the engine for getting the company’s Curious George title completed in four months on four platforms: PC, Xbox, PS2 and GameCube.

Still, multiplatform development is not for the meek. “⁠Challenges facing development teams include whether their tools work on all systems, whether the teams are versed on multiple platforms, whether there will be different assets for each individual console, whether all the work is done in-house, whether the property is licensed or an internal intellectual property. All of this can determine whether you have a fun product that ships on time―or a complete disaster.⁠”⁠

Sidebar: The Business of Game Play: A Conversation with Jon Goldman, chairman and CEO of Foundation 9

Jon Goldman heads Foundation 9, the largest independent game developer in North America, with 10 studios under its wing, including two he founded: Backbone Entertainment in Emeryville, California, and ImaginEngine in Boston. Foundation 9 is known for developing games on all platforms, including both the Sony PSP and Nintendo DS, with titles published by Konami, Ubisoft, Capcom, Activision and others.

An East Asian studies major at Harvard, Goldman attended the University of Kyoto between 1988 and 1990 on a Mombusho fellowship, and later worked for an investment banking and advisory firm specializing in partnerships between U.S. and Asian technology companies.

This year’s E3 seemed to represent some changes in the industry, in terms of who is playing, what they are playing, and why. What’s your take?

A lot of people have forgotten that first and foremost, games should be fun. I remember a few E3s ago when the industry disparaged the DS. They thought it was clunky, didn’t understand the value of two screens, didn’t think it was as good as the PSP, which was becoming known for its power, versatility and multi-functionality. But what the industry didn’t understand about the DS, and what excited us, was that it was fun. And once sales took off, people reevaluated it. Nintendo did a bunch of things right. The interactivity with the touch screen is really fun, the ease of wireless play is great, and the industrial design is cool.

Traditionally, adding memory, processing power, and polygons have all led to a better experience, so that each successive generation console provided, by definition, a better playing experience than its predecessors. But what we’re now seeing is that there is a lot of fun still to be had on the PlayStation 2. Perhaps we’ve moved into the next generation cycle not because of user demand, but because of Microsoft preemptively launching the Xbox 360, having learned from the last cycle how important it is to be first to market.

I think it’s clear that for the hard core gamer, performance and graphics continue to be very important. But fun, accessibility, and, as Xbox Live Arcade is proving, social connectivity are all driving factors in the growth of the industry.

You’ve said that one advantage of the Wii over, say, the PlayStation 3 is the lower cost of game development. Why?

It’s the cost of creating the onscreen art―that’s where the money is being spent. Once you have more photorealistic graphics capabilities, the amount of assets needed to create the images is huge. The processing power allows for many more frames per second, with higher polygon counts and higher resolutions, so that it just takes longer to create a photorealistic image than a cartoon. That means you’ll need a lot more person hours to create images, as well as to revise them.

Are there proprietary tools associated with each platform?

Yes.

Does that mean that there may be limitations in what kind of programming talent you can find?

Sure. And people tend to develop expertise in different genres. You might have somebody who really focuses on driving games, who has become good at using tools that are well suited for that class of games. That person may not be so well suited for doing, say, an arena-based fighting game. It gets even more specialized than that. Even within driving games, some people may be more experienced at track-based games as opposed to open environment driving games. Similarly, there may be people with sports expertise who are better at strategy games. In general, you want to have the most efficient technology so that you can spend your bandwidth on the art and game play. In many cases, that argues against general purpose tools and in favor of specific genre tools.

On the other hand, one of the side benefits of more powerful systems like the PlayStation 3 and Xbox 360 is that you can accommodate the overhead of more general purpose engines, such as Epic Games⁠’⁠ widely used Unreal Engine. A powerful machine can absorb the overhead of an engine and allow developers who don’t have proprietary technology to make games. But having proprietary technology is still a competitive advantage.

There’s a lot of consolidation in the video game industry, with small developers getting acquired by larger publishers. Foundation 9 is not a publisher, but you seem to be going in that direction.

For the past few years, we’ve grown through acquisition. We grew to the size where we could attract equity investment. Last year, for example, we bought Shiny Entertainment from Atari and acquired Amaze Entertainment, a large Seattle developer.

How do the studios work together?

Each studio is an individual P&L [profit and loss] unit, and as with any company with this structure, there’s always a delicate balancing act between how much autonomy each unit has. In general, our studios are responsible for their business and make use of central services such as finance and human resources.

How is the video game industry playing out in the United States, versus Japan?

One of the most interesting things in Japan is how stable the stockholder base is compared with the United States. We sometimes stereotype Japanese companies as not being as creative, but in this case, it’s the reverse. Because of the demands of being a public company in the U.S., stockholders here are focused on the near-term, expecting financial gains every quarter, and developers respond by staying safe. The result is genre calcification.

Meanwhile, innovative titles are coming out of Japan. Low stock trading volumes and favorable balance sheets give Japanese developers the stability to experiment more with the content―in a way that is difficult to do in the U.S. So for example, it would be very hard to pitch a game like Cooking Mama [developed by Office Create for the Nintendo DS and, later, the Wii] in the U.S., just because the idea of cooking as a game concept is so quirky.

Are we seeing increased collaboration between Japanese and U.S. companies?

Japanese companies like Sony, Nintendo, Capcom, Konami, and Square Enix are such important parts of the industry that there is inevitably ongoing dialogue and cooperation between the three major markets: Japan, the U.S. and Europe. Japanese companies have an added incentive to collaborate because their population is aging--they are making fewer babies. As a result, the market for interactive video entertainment in Japan is hitting a plateau in a way that’s not quite happening in the U.S. or Europe.

The Wii captured a lot of attention during E3, seemingly because of its broader demographic appeal. Does the Wii represent the future of the industry?

I think the Wii’s real advantage is that it’s a cheaper platform: both to buy and to create games for. So as a developer, you can recoup your investment more quickly. At the same time, the Wii does not appear to be dominating the market over competing consoles. Rather, it represents a very attractive opportunity that was undervalued by the industry. The analyst reports I’ve seen, and it’s still too early to tell, project that marketshare will be pretty evenly split, with the Wii, Xbox 360 and PlayStation 3 each selling roughly 30 million units. This kind of close horse race is a good thing for a maturing industry. It means there will be some games that play well with hard-core gamers, with people with kids, with people over 55, and with other segments. But I don’t think Wii is going to dominate the market and teach everyone a lesson about different types of game play. Rather, what we’re seeing is the Wii starting to find its place.

Where do you see the industry headed?

I think what’s exciting is the opportunity for online play and subscription play.

But hasn’t online play been touted for a few years now?

We just released a title, Castlevania: Symphony of the Night on the XBLA [Xbox Live Arcade, Microsoft’s online service] that sold 90,000 units on the first day. And of course, in Second Life, whole virtual economies are springing up. So it’s happening right now. We’ll see how PlayStation Network fares and what’s going on with the Nintendo downloadable system, but clearly, people are responding to network play because it’s social and fun.