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For video games, discs are here to stay

Online games are becoming more popular, but retail stores, like this GameStop in Manhattan, are still where shoppers buy the majority of their games. Don Hogan Charles /The New York / Redux Pictures
/ Source: The Associated Press

Music and movie downloads are pushing the entertainment industry online, but don't expect video game discs to go the way of the CD any time soon.

Even as more people get their games online, retail is still the bread and butter of the multibillion-dollar video game industry. But, especially when it comes to PC games, downloads and subscriptions are becoming more prevalent and a bigger chunk of revenue for the companies that sell them.

U.S. retail sales of video game software reaped more than $8.6 billion in 2007, according market research company NPD Group. In comparison, Lazard Capital Markets analyst Colin Sebastian estimates the online market for PC and console games was $1.1 billion last year, up from $780 million in 2007.

"It's an evolving market," Sebastian said.

Last month, the NPD Group announced it has begun tracking paid online subscriptions for software, video and computer games. The market researcher called the reports "valuable tools for any games or software company that includes subscription revenue as part of its business model."

"The biggest deal in the short term is that retail sales of PC games have been pretty flat, flat to declining," said Martin Zagorsek, vice president of games and software at NPD. "But in the background, anecdotally, a lot of people have been saying that the online side is where all the growth is. But with no standardized numbers out there, it's been hard to back up."

The first set of data, for the current quarter, will be released in late April or early May.

It's nearly inevitable that as technology improves, content — whether it's music or movies — moves toward digital distribution. But how fast this happens depends on the size of the files to be downloaded and stored. Music is the easiest to download, followed by movies, then video games.

For now, the most efficient way of distributing video games is through discs, Sebastian said. The move online, he added, will happen, but at a much slower pace than music or even video.

"It is, to some extent, inevitable," he said. But it could take many years.

For many big video game companies, not to mention consumers, extra online content is helping enhance games sold on discs. For "Grand Theft Auto IV," considered by many to be the year's most-anticipated console game, this means extra episodes available for download exclusively through Microsoft Corp.'s Xbox 360.

Gamers who have been holding out to buy a next-generation console until a worthy game like the latest GTA hits shelves will likely flock to the 360 over Sony Corp.'s PlayStation 3, which will not offer any extra episodic content.

Wedbush Morgan analyst Michael Pachter estimates that GTA IV will sell 9 million units during publisher Take-Two Interactive Software Inc.'s current fiscal year, which ends in October. Of this, he expects about 6 million will be sold to Xbox 360 owners.

When it comes to online-only business models, Sebastian said a lot of casual game makers are ahead of the curve. For one, the file sizes of simple puzzle games and brainteasers are smaller. And many of these games are played on computers, which is where most online gaming revenue is generated.

The online market for consoles is growing, but much slower than for PCs, which are already connected to the Internet.

"It's only a recent phenomenon that people have even plugged in their consoles to a network," Zagorsek said.

Video games are harder to pirate, which means brick-and-mortar stores like GameStop Corp. are safe. The recording industry has blamed illegal downloads for plummeting CD sales and closing music shops, and the movie industry is also reeling.

"Consoles all have a fairly robust rights management," Zagorsek said. "You can pirate console games, but you have to put new chips in the consoles."

For most people, this means they wouldn't know how to play pirated games even if they had them. So for the foreseeable future, buying a disc will be the only way to get your hands on the next "Grand Theft Auto."