A stark warning about the finances of the games industry has been aired at the Edinburgh Interactive conference.

The sector had suffered "significant disruption" to its business model, Edward Williams, from BMO Capital Markets told the industry gathering.

"For Western publishers, profitability hasn’t grown at all in the past few years and that’s before we take 2009 into account," he said.

By contrast, he said, Chinese firms were still seeing improved profits.

What makes the difference between Western firms and Chinese developers was the way they went about getting products to players.

Western publishers, said Mr Williams, still relied on the traditional develop methods of putting a game on a DVD and then selling that through retail channels.

Chinese developers focussed primarily on the PC market and used direct download, rather than retail stores, to get games to consumers.

Those Chinese developers were also helped by the low number of console users in South East Asia (other than Japan) which meant developers there did not have to pay royalties to console makers.

Future models

Three factors, said Mr. Williams, were forcing the operating costs of Western firms to spiral upwards:

• Games are getting larger, which meant longer development time and larger staff costs.

• In the 1990s the PlayStation accounted for 80% of the market, today the console space is very fragmented, so developers have to work on many platforms at any one time.

• The cost of licensing intellectual property or gaining official sports body endorsement (such as FIFA or FIA) has gone up.

These factors, said Mr. Williams, explained the stagnation in overall profitability despite sales in the games sector increasing by $30bn (£24.17) over the past four years.

Recent figures suggest sales are also coming under pressure. US game sales fell by 29% in the last 12 months suggest statistics from research group NPD.

Speaking to the BBC, Peter Moore – president of EA Sports – said that while the Chinese and Western markets were still very different, he expected to see some significant changes in the way Westerners buy games in the future.

"In China, PC and mobile platforms will continue to dominate," he said. "There isn’t the necessity to buy other pieces of hardware and it is our job to service that."

"In Europe we are going to see more content that’s delivered electronically, be that through Steam, Xbox Live or whatever."

Mr Moore added that while this may have some impact on retailers, the future of the high street shop was still bright, especially if you factor in sales of hardware, peripherals and game-time cards.

"The release of Tiger Woods online as a free to play experience will be the real test of the Western consumer’s appetite for digital downloading," he said.

The game, scheduled for release in late 2009, has a segment which gamers can play for free online but can also pay for additional content as required.

Now in its sixth year, the Edinburgh Interactive Conference brings together industry figures, developers, publishers and the media to discuss issues facing the interactive game sector and to try to promote creativity.

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