Before Nintendo and Sega, there were games on the PC. Now, 10 years after being upstaged by the wildly popular dedicated video game systems, the world of PC entertainment software is moving to new levels of competitive play. Three factors are converging to make the future of PC entertainment software look increasingly bright: the unparalleled speed of Pentium-class processors; the ease of use offered by Windows 95; and distribution channels expanding into the mass market.

A Market in Transition

But, dedicated game machines still represent a huge opportunity for entertainment software publishers and will continue to account for the majority of sales. The dedicated game market is in the midst of a transition: moving from 16-bit systems to high performance -- and higher priced -- 32-bit and 64-bit systems, and from the cartridge format to CD-ROM. Sega's Saturn and Sony's PlayStation, along with 3DO's Interactive Multiplayer system, have begun moving gamers to the 32-bit systems, but the masses have not yet flocked to the new platforms. As the dedicated game systems transition to higher performance platforms, an increasing number of multimedia personal computers -- that is, PCs with CD-ROM capabilities -- are broadening the choice of gaming platforms. With an industry that is projected to grow from $5 billion to $9 billion by the year 2000, the opportunity exists for multiple platforms to succeed.

Technological Innovations

Two major technology advances are working together to make the personal computer a viable game platform for the first time -- faster processors and improved ease-of-use. Pentium-class processors bring performance levels to the desktop that rival the dedicated video game platforms for fast-paced action and sports simulations. The importance of these processors can't be overstated: without them, entertainment software for personal computers would still be limited to very narrow game categories. Faster processors and high-speed CD-ROMs also enable new features like Dolby surround sound, advanced 3D graphics, and digitized video that enhance game play.

Reducing the Fear Factor

A primary barrier to home PC purchases in the past has been the complexity of hardware installation and software configuration. Approximately 70% of the calls coming into the customer support center at Electronic Arts relate to questions about PC hardware, not our software. Windows 95 promises to alleviate much of the fear of hardware and software installation. Consumers no longer have to know what sound card or graphics card they've got because the system will automatically recognize what resources are there and configure the software accordingly. As PC technology improves, prices go down. As a result, sales of more powerful multimedia PCs are increasing, creating an ever-expanding market opportunity for gaming software. According to the Software Publishers Association, 55% of all PCs being sold into the home market include CD-ROM drives. Forrester Research predicts that by the year 2000, the number of homes with multimedia PCs will have doubled from its current 15 million to nearly 33 million. The new operating systems on the multimedia PC will help drive the video game market from the typical teenage male to a much broader demographic base. Today's sports gamer is already an upwardly mobile professional in his mid-30s who is likely to also use a personal computer at work or at home. Younger consumers who grew up playing video games are beginning to realize they can purchase a system that helps them to organize their lives, manage their businesses, and still allow them to play state-of-the-art games.

Expanding Sales Channels

Without the fast new processors, improved ease-of-use, and reduced price points, entertainment software for the personal computer would still be available only in computer specialty stores. And that brings us to the third key factor propelling the PC game market to new levels: expanding software distribution channels. For the first time this coming holiday season, Toys 'R' Us, the largest retailer in entertainment game software for dedicated systems, will also be offering CD-ROM titles for the PC. And most of the major mass merchant retailers have also begun to offer PC CD titles on their shelves. KayBee Toys, The Good Guys, Sears, Office Depot, and Target are among those who recognize the growing market opportunity for multimedia software. To understand the significance of this channel expansion, just look back on our experience with the 16-bit cartridge market. In the first two years after these games were introduced into the toy and mass merchant channel, annual sales rose from 10 million to a staggering 40 million units. We see the potential now for explosive growth in the PC game market through these new and emerging sales channels. The dramatic growth of multimedia PCs internationally also provides an opportunity for publishers who are able to localize their products and distribute them worldwide. The potential for unprecedented sales volume will drive both developers and publishers to look for new ways to optimize the PC development platform.

Content is King

Although outlets are expanding, shelf space will remain relatively constant, and retailers will focus on titles that maximize return on investment. In this highly competitive atmosphere, content will be the deciding factor. Consumers will be driven by innovative titles, regardless of platform. Higher production values provided by advanced 3D visuals, sound, and full-motion video will become increasingly important. The most viable long-term strategy for publishers is to develop across multiple platforms, featuring a broad spectrum of products capable of capturing significant market share, while at the same time amortizing their investments in original content creation. Even Sega has announced it is developing PC titles. In this changing market, if a publisher is limited to one platform, they're likely to remain a niche player. This will necessarily lead to some shakeout in the marketplace, since only a few companies have the resources to publish and market titles for multiple platforms on a global basis. One advantage to publishing titles for the PC is that developers don't have to pay royalties to the hardware manufacturers, as they do with traditional video game systems. Dedicated game hardware manufacturers have enjoyed a unique measure of control over the video game market, creating proprietary formats and charging software publishers substantial royalties to "play" on their hardware. At the other end of the spectrum, however, is the "tax-free" PC development world, where the lack of platform standards could result in the abundance of poor quality software, thus impeding the natural evolution into a mass market.

Gaming, Shopping, and Cyberspace

One area that has been the subject of much speculation is the future of gaming online. Despite the technical advances for the PC, there are significant issues to overcome if online gaming is to reach more than a fringe group. Data transmitted over telephone lines is subject to delays. In fast-paced action and sports games, a delay of a fraction of a second can inhibit the seamless interaction between two opponents battling it out on either side of the country, or across town. It simply takes too long, after initiating a move, for the action to happen on the remote screen. The games being played online today tend to be strategy-oriented rather than action titles, yet 70% of all entertainment titles sold are fast-action and sports. New technologies are being developed daily, and in two or three years we will see a better environment for network-enabled games and modem play. Until the average household is equipped with high speed data lines, action-oriented online gaming will remain a difficult challenge. The dream of using the Internet and other online services as an exclusive method of distributing gaming software in the near term is unrealistic, and any reports of the death of the traditional retail channel are premature. Again, until there's higher bandwidth into the home, cyberspace will not provide a convenient channel of distribution. Downloading a full CD-ROM off a network service requires significant amounts of data storage -- and time. We believe consumers will still prefer packaged goods for the foreseeable future. Electronic Arts and other software publishers will continue to use the Internet as a marketing tool for presenting company data and posting demonstration software.

Summary

When Electronic Arts was founded in 1982, its mission was "to create software that makes a personal computer worth owning." In 1985, Nintendo introduced the Nintendo Entertainment System, the first 8-bit video game platform. By the time Sega introduced its 16-bit Genesis machine four years later, the personal computer had been reduced to minor status in the fast-paced and competitive video gaming market. Electronic Arts, seeing the market opportunity in publishing entertainment software for dedicated game platforms, led the charge into the uncharted waters of the 16-bit video game business. Along with others, we helped build the industry into a market category that reaps annual revenues in excess of $5 billion, rivaling even motion picture box office receipts. We continued to develop entertainment products for personal computers, but they couldn't match the performance of the fast-paced action and sports games. Speed, ease of use and a lower price point on the dedicated systems made for an unbeatable combination. Now, just as when video games hit the mass market, the pieces are in place for PC CD-ROM software to take off in a big way. With the exception of sports games enthusiasts, the booming video game market has been primarily dominated by teenage males. With the improved performance and ease-of-use of multimedia PCs, new 32-bit gaming platforms and mass market promotions, the video game world is poised to capture a much broader market. In the end, however, it will be the games themselves that determine how much the market will grow. In the world of television, viewers don't care which network is responsible for Home Improvement; they just channel surf until they find it. In gaming, the ability of publishers to captivate and challenge users with innovative software will drive customers into the software aisles of their local mass merchant, regardless of platform. As long as developers and publishers provide that steady stream of hot games, in both existing and new categories, the personal computer will realize its enormous potential in the gaming market. It's an opportunity that is not going away, and a technology that will only get better with time.

So watch your scoreboards. With more opportunities to access the most popular games, entertainment software is poised to set some new records.