(Reuters) SAN FRANCISCO - The $64 billion global video games industry, shaken up by the likes of Zynga (ZNGA.O) in recent years, may be on the verge of another identity crisis.
Hardware and software sales for consoles keep dropping, market-leading Activision Blizzard (ATVI.O), which makes the “Call of Duty” and “World of Warcraft” mega franchises laid off 8 percent of its staff in February, and a proliferation of games on app stores is making it costlier to stand. So, an estimated 20,000 video game industry types, executives and game designers will descend on this week’s Game Developers Conference in San Francisco looking for answers.
The interactive entertainment industry has been trying to cope with the rapid growth of online and mobile gaming for a few years, but now even the companies making games in these burgeoning areas are finding it harder to turn a profit.
Also, young companies that are not as big as Zynga or Electronic Arts (EA.O) are finding it difficult to stand out in increasingly crowded app stores on mobile devices without spending heavily on ads, executives say.
“The number of apps is growing exponentially and with that, costs of user acquisition is going up. If you are not a company with a series of franchises like us, it becomes a lot tougher,” said Ben Liu, the chief operating officer of PocketGems, the makers of hit casual mobile games “Tap Zoo” and “Tap Pet Hotel”.
The increasing marketing burden is driving some fledgling companies into the arms of deeper-pocketed partners.
Philip Holt, CEO of Row Sham Bow, said it has 5,000 daily active users but it was getting expensive to attract players to its Facebook strategy game “Woodland Heroes”, where raccoons fight to make the forest safe from an evil bear.
The Orlando-Fla.-based company said last week it had signed a revenue-sharing agreement with Zynga, where the gaming giant promotes the animal game on Facebook and on its own new platform, Zynga.com.
“Working with Zynga was better than going to spend money on Facebook ads to acquire users and spending per click. For an independent developer without a lot of cash, you end up with a significant marketing spend,” Holt said.
Even Zynga, considered a success story after a billion dollar IPO in December, is trying to reinvent itself to keep its 240 million users coming back.
This week, it will pitch its new games service, Zynga.com — which analysts say is an attempt to whittle down its heavy reliance on Facebook for gamers — when chief operating officer John Schappert gives the keynote speech at the conference.
Other companies, like Pocket Gems, believe the future is mobile. The company’s games, where players run zoos and hotels, have been downloaded more than 60 million times on Apple and Android devices.
But even then, the startup is hedging its bets, said Liu, the chief operating officer. The company is holding hackathons — marathon programming sessions — to develop for HTML5 technology, which allows programs to run in mobile Web browsers that people do not need to download. ABI Research has said that 2.1 billion mobile devices are expected to use HTML5 browsers by 2016.
Away from the development sphere, a battle is brewing between operating software players. Research in Motion RIM.TO RIMM.O is making its biggest gaming push to date at the conference, said Meggan Scavio, the director of the Game Developers Conference.
The Blackberry maker is hosting sessions on how to make games and turn a profit using its system, all in the hopes of attracting developers to its ailing tablet, PlayBook.
“They are trying to draw attention to their platform and their hope is to do what Google did with Android,” Scavio said, referring to how Google boosted the number of games on its system by appealing to developers at last year’s conference.
Google itself will be pitching its new “native client” technology that video game makers can use to bring games to the Internet. So far, 15 games on Google’s Chrome Web store use the technology, including one by Japan’s Square Enix (9684.T). Google has also been trying to woo developers to its “Google +” social network with more attractive fees for companies than Facebook and Apple, which take a 30 percent cut of revenue of games on its system.
While this week’s conference is all about predicting the next big thing in gaming, sometimes it just isn’t clear what is around the corner. Apple’s expected iPad 3 announcement on Wednesday, for example, being made just blocks away from the conference center, could usher in a whole new way to play games.
“Every two or three years, there’s a new trend, a new technology and a new way to make video games you never would have thought of,” said Colt McAnlis, a game developer advocate at Google whose job it is to bring game makers to the Internet giant’s platforms.
After all the changes he has seen working for the past decade at former employers Microsoft and Activision Blizzard, he has learned that, “if you manage to last 10 years in the industry, you’re that old guy on the porch.”
Reporting By Liana B. Baker; Editing by Bernard Orr