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Someone recently asked me how the game industry lost the attention war. Paradoxically, interactive entertainment has never been more popular or lucrative, but the game industry— narrowly defined here as the major consoles and game publishers— is now, with one notable exception, but a sliver in a much larger interactive entertainment pie. Why? There’s a simple explanation, but first consider this recent litany of failure.

* Milestones of an Industry On the Road to Irrelevance

* Inside an Insular Industry

* A Future Business of Games Without a Single Industry

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Milestones of an Industry On the Road to Irrelevance

* EA in Crisis: The industry’s largest publisher defenestrates their chief executive, citing sequel-itis, then drastically scales back its profit estimates, citing a failure to develop enough titles for the Wii.

* Nichification of the Next Gen Console: Xbox 360 eclipses Playstation 3, sending Sony into a tumult. But that conflict belies a more crucial truth: this generation, the console war is actually a duel between midgets. Selling in the low millions, each has little chance of reaching anything near the PS2’s truly massive installed base.

* Wii Victorious: At its E3 2006 debut, fanboys praise the Wii for its innovation, but because it lacks HDTV and hardcore gamer titles, dismiss it as a sideshow to PS3-versus-360. Instead, the Wii vastly outsells both and becomes a disruptive technology, forecast to eventually reside in nearly 1 of 3 homes.

* Rise of Non-Game Virtual Worlds: World of Warcraft premieres in 2004 and three years later, retains an uncontested monopoly on the fantasy MMO. The industry keeps churning out fantasy MMOs—all of which fail in comparison. Meanwhile, a slew of non-fantasy online worlds— Gaia Online, Club Penguin, Second Life, and more— attract millions of users, extensive media coverage, and investment dollars. None of them are produced by the game industry—which, after developing virtual worlds for some 20 years, represents a spectacular missed opportunity.

* Casual, Web-Based Games Rising: Dozens of free game sites like New Grounds and MiniClip rank in Alexa’s top 1000, attracting millions of casual players, especially women. Few have any relation to the game industry. Among the only fantasy MMOs to succeed post-WoW is the Web-based RuneScape—once again, not from a major publisher.

Inside an Insular Industry

Why is all this happening? The unifying explanation can’t be conveyed by strict business analysis, for it goes to a deeply rooted corporate culture: The game industry is Hollywood for Lost Boys.

It’s a business comprised almost entirely of young gamer dudes, serving an audience of young gamer dudes, covered by a gaming press of young gamer dudes, all of whom are only interested in creating, playing, and covering games that interest young gamer dudes—which they believe to be the pinnacle of entertainment. (For a cruelly accurate, street-level sketch of its oblivious insularity, read this excerpt from Smart Bomb, or immodestly, my own report from E3 2001.)

So of course EA would under-develop for the Wii: its low res graphics aren’t appealing to Lost Boys. Of course the industry would be slow to grasp the Wii’s disruptive power and fixate on the 360-versus-PS3 sideshow, since both can run the Hollywood-worthy epics like Halo 3 and Gears of War they’re interested in.

Of course they’d fail to capitalize on the rise of Flash-driven casual games, which appeal to women and older gamers. Of course they’d keep churning out fantasy MMOs they like, and ignore the rise of non-game virtual worlds, which they don’t. (As Will Wright once told me, developers are hobbled by a “moviemaker wannabe” streak: “You know: ‘Well, George Lucas made his world — here’s my world!’”)

And of course they’d be indifferent to user-created worlds like Second Life: the idea that amateur-produced content might provide a new and in many ways superior experience to traditional MMOs is entirely alien to them. Their peevishly incurious reaction is pretty much what you’d have got from a movie producer in the 90s, if you told him that film and TV would soon start losing their audience to a video clip site featuring stupid dog tricks and a dancing bald guy.

A Future Business of Games Without a Single Industry

Can the industry regain the attention? Not as it exists now, not without brutal changes to its gamer-centric culture. A few publishers, notably Ubisoft, are trying to steer their corporate ship out of Lost Boy territory, developing more Wii titles, more games for families and casual players. So the PS3 and the 360 will continue underselling, and as more publishers shift their dollars to the Wii, become even more niche.

As traditional MMOs besides WoW go extinct, user-created online worlds will thrive, and budget-conscious game studios will turn to Multiverse, Areae, Second Life, and other open platforms. Individual developers willing to make do with a little less geek glamor in exchange for more independence will leave the industry, and follow after the Flash-enabled success of games like Desktop Tower Defense.

After speaking at this year’s Game Developer’s Conference, venture capitalist and tech visionary Joi Ito described an industry steadfastly ignorant of the changing world outside, “making the same mistakes that the content guys have been making since the beginning of networked computers. They ALWAYS over-estimate the importance of the content and vastly underestimate the desire of users/people to communicate with each other and share.”

So in the short term, nothing will change for most of them; occasional tent pole hits like Halo 3 will soothe their cloistered delusions. They’ll keep ignoring non-traditional gamers, Web 2.0, and the user-created revolution, assuming like Hollywood that their core product has enough global appeal to get them through the latest media revolution.

And that will be their final disastrous turn. Because unlike the real Hollywood, there are only so many Lost Boys in the world willing to pay attention to them for so long.

Update, 6/6: Some replies to reader comments here.

Update 2, 6/7: Esteemed veteran game designer Ernest W. Adams offers his take here. As it happens, Ernest has related thoughts in his latest Designer’s Notebook essay for Gamasutra, “Is it Time to Dump EA?“