The Amazing Video Game Boom

By Philip Elmer-DeWitt

The kids get it right away. Nobody has to explain to a 10-year-old boy what's so great about video games. Just sit him down in front of a Sega Genesis or Super Nintendo machine, shove a cartridge into the slot and he's gone -- body, mind and soul -- into a make-believe world that's better than sleep, better than supper and a heck of a lot better than school.

Grownups, as a rule, don't get it. Which may be why the video-game craze has been seen by most adults -- including the captains of the entertainment industry -- as a dead end. For 20 years they have watched the advent of Pong and Pac-man, the rise and fall of Atari, the arrival of the Japanese, and have dismissed videogaming as a temporary detour far removed from the mainstream of modern American culture -- which is to say, movies and prime-time television.

Until now. What once seemed like a passing fad for preteen boys has grown into a global moneymaking machine that is gobbling up some of the most creative talents in Hollywood and tapping the coffers of media and communications conglomerates eager to get in on the action. Video games rake in $5.3 billion a year in the U.S. alone, about $400 million more than Americans spend going to the movies. Globally, game revenues exceed $10 billion each year, and the worldwide sales of a single hit can top $500 million. Last week players from Times Square to Paris to Tokyo queued up in stores to buy Mortal Kombat, one of the hottest (and most violent) games ever made. In the next few weeks, Disney/MGM will release the game version of Aladdin; Propaganda Films will debut Voyeur, a new kind of adult-oriented interactive movie; and a start-up company named 3DO will launch the riskiest merger of games and multimedia yet, with a $699 superpowered machine designed to blast the market into new levels of graphic reality and financial risk.

The video-game industry is being propelled forward by a technological imperative that is reshaping most forms of entertainment. America's telemedia giants -- from AT&T and Time Warner to Tele-Communications Inc. and the proposed Paramount-Viacom combo -- are spending billions to turn today's passive television broadcast system into a two-way, interactive information highway capable of delivering not just movies, sitcoms and news on demand, but the world's greatest video games as well.

Suddenly a new medium -- and a new market opportunity -- has opened up in the place where Hollywood, Silicon Valley and the information highway intersect. Games are part of a rapidly evolving world of interactive amusements so new that nobody knows what to call them: Multimedia? Interactive motion pictures? The New Hollywood? And like the proverbial blind men feeling their way around the elephant, everybody involved in it has a different idea of what this lucrative beast is, depending on what part of it touches them. Hollywood executives tend to see the emerging market as a way to distribute movies and TV shows. Computer types see it as a way to get their machines into every home. Cable TV companies see it as a Pied Piper that will lure a generation of young viewers onto the data superhighway -- and get their parents to pay for pricey service connections and set-top cable boxes that might otherwise seem intimidating.

But right now, it's the video-game designers who have the electronic ball. The rapid advance of technology in the past decade has given them a set of tools with almost unimaginable power: high-speed computer-graphics chips that can create millions of bright colors and flash them on a screen in a fraction of a second; digital compression schemes that can squeeze the equivalent of a complete set of an encyclopedia onto a single silver disc; fiber-optic cable that can beam limitless quantities of data around the world at nearly the speed of light; simulation techniques that can immerse players in a three- dimensional world of illusion.

Like children with a new box of crayons, video-game makers are taking up these tools and using them to transform the cartoonlike earlier hit games -- Super Mario Brothers, Sonic the Hedgehog, Street Fighter II -- into something with lifelike action and plots. Meanwhile, the programmers have been joined by a new generation of Hollywood executives who, having tasted the power of computerized special effects, are eager to create a whole new form of entertainment that can be beamed over a cable line, bought in a cartridge or played from a compact disc. Both sides talk excitedly about making interactive movies with synthetic actors, of allowing players to take full control of the character's action and even, with the proper equipment, to enter a virtual reality in which they are the character.

Over the past 18 months, two groups, one representing Silicon Valley, the other Hollywood, have been meeting at trade shows, visiting labs and quietly ! cross-fertilizing. Several prominent executives have jumped ship -- most notably Strauss Zelnick, who quit his job as president of 20th Century Fox Film Corp. this summer to head a video-game company called Crystal Dynamics. This fall dozens of these ventures are at last starting to roll out real products. Among the attractions coming soon to a living-room screen near you:

-- Mortal Kombat, whose release last week in a $10 million Hollywood-style media blitz set off a nationwide debate about the escalating violence in video games (see box). The brutal kick-and-punch game is expected to bring in more than $150 million by Christmas -- roughly equivalent to ticket sales of a hit movie like The Fugitive.

-- Aladdin, which may be the most beautiful video game ever made, features the first game characters hand-drawn by Disney's studio artists. Aladdin's release will be closely tied to that of the home-video version of the movie, which Disney predicts will be the best-selling videotape in history.

-- Voyeur, a kinky murder mystery created by the Hollywood production company that made Madonna's Truth or Dare, stars Hollywood veterans Robert Culp (from the old I Spy series) and Grace Zabriskie (from Twin Peaks). A true hybrid, it shows real motion pictures on the screen while players control which of hundreds of twists and turns the plot will take.

The most closely watched video-game event of the season is not a game at all, but the arrival of a new game player. Next week Panasonic will introduce a VCR-size black box called REAL Multiplayer, designed by the hot Silicon Valley start-up company 3DO. With a 32-bit processor, packing twice the punch of the 16-bit Super Nintendo and Sega Genesis systems, and two special-purpose graphics chips, the Multiplayer is the most powerful video-game system ever marketed to the home. That in itself is no guarantee of anything. Other companies have tried and failed to use sheer power to steal the hearts and minds of the Nintendo generation, and this machine carries the added disadvantage of a price tag seven times as large as that of a Sega or Nintendo. But the industry -- and Wall Street -- is taking 3DO seriously, in large part because the company is backed by some of the biggest players in the information-highway business and headed by one of America's most charismatic entrepreneurs.

Trip Hawkins, founder and chairman of 3DO, was one of the first to see that Hollywood and the video-game industry were headed toward a happy collision. With his salesman patter and show-biz smile, he has for years been telling anyone who would listen that video arcades were more popular than movie houses -- and he would rattle off the numbers to prove it. As chairman of Electronic Arts, a leading maker of video games (and the first to treat its programmers like rock stars), he also railed against the electronics industry for failing to agree on a single video-game standard -- a failure that kept the industry locked in the Beta-versus-VHS stage. When nobody appeared interested in building the machine of his dreams, he set out to build it himself. He kept thinking, he says, of an old New Yorker cartoon showing two vultures sitting glumly on a limb. "I'm sick and tired of waiting," one says to the other. "Let's go kill something."

Hawkins set out to combine the visual power of a Hollywood movie with the interactivity of a video game. His solution, whether it succeeds in the marketplace or not, points in the direction that all interactive media are likely to go.

Hawkins will sell his games on compact discs -- the same silver platters that have taken over the music business and been adapted as storage devices for machines built by Sega, Philips, Commodore and all the major computer manufacturers. But unlike most of his competitors, Hawkins sees CDs as a temporary solution. Ultimately, he says, interactive motion pictures will be delivered to home game machines not on a disc but through the fiber-optic networks being built by cable and telephone companies. This summer he announced plans to sell a new version of the Multiplayer that plugs directly into a coaxial cable, where it can serve both as a cable TV and VCR controller and as a gateway to the information highway.

It was in part the clarity of Hawkins vision of that highway, and how video games fit on it, that made him so attractive to investors -- and to more than 350 of the cleverest video-game designers in the business. His early backers include AT&T, Time Warner and Matsushita (which owns Panasonic and Universal, one of the biggest Hollywood studios).

Unfortunately for Hawkins and his partners, he is not the only one with his eye on the information-highway prize. Atari has announced a $200 game system called Jaguar that could steal some of 3DO's sparkle this fall. Both Sega and Nintendo are rumored to have 3DO-class machines in development. And last month Nintendo announced plans to leapfrog ahead with a game machine built around a % 64-bit chip, which has twice the power of 3DO's.

Sega, meanwhile, has made a couple of deals that could prove prescient. In one, Time Warner and Tele-Communications Inc. have agreed to create a special Sega channel on their cable-TV systems that would give subscribers access to 50 games each month. In another important pact, Sega has allied itself with AT&T to create a special cartridge called the Edge 16 that would enable Sega Genesis owners to compete with similarly equipped players anywhere in the world over ordinary telephone lines.

John and Shelly Bain already have a pretty good idea of what that's like. Almost every night after dinner, instead of clicking on their TV set and waiting to be entertained, they sit down at their computers and entertain themselves. Dialing a local access number from their San Francisco living room, they enter the virtual amusement park of the ImagiNation Network, a combination Las Vegas, Nintendo and Sunday-afternoon social club, where they can compete against fellow computer users in everything from bridge and blackjack to medieval role-playing fantasies.

The Bains are video-game addicts by almost any definition of the word. Shelly, 40, pays $129.95 a month to spend unlimited time on the network, while John, 43, a police officer, pays $79.95 for a 90-hour-a-month package. The two of them spend hour after hour perched in front of their computer screens playing games and exchanging E-mail messages with old friends, newfound acquaintances and even, sometimes, each other.

The Bains may not know it, but their nocturnal habits are of intense interest to the entertainment industry. What Hollywood needs to know is whether the Bains are a curious exception or the wave of the future. If videogaming is going to be one of the popular attractions in the mix of entertainment offerings on tomorrow's interactive TV systems -- and many are gambling that it will -- the people who create and market those games will have to know what makes people like the Bains tick. What do they want to play? Why? And, most important, how much are they willing to pay?

Until now the core audience for video games has been boys ages 8 to 14. It is with this group that the power of interactivity can be seen in its purest form. Unlike young girls, who seem to be able to take video games or leave them, boys tend to be drawn into the games at a deep, primal level. Many simply can't tear themselves away, to the detriment of their schoolwork, their eating habits and their health.

What is going on? According to psychologist Sherry Turkle, author of The Second Self, the key lies in the rates of development of young boys and girls, which to their mutual pain and embarrassment are usually out of synch. Girls in their pre-teen years tend to mature faster than boys -- socially and sexually. Normal day-to-day interactions with these girls can be stressful and troubling for the boys, who tend to withdraw to a safe place -- sports, scouting, computer gaming -- where they can hang out until they are ready to hold their own with the girls, a process that can take years. Most home video games, unfortunately, are derived from coin-operated arcade models that were designed not to build up a lad's fragile ego but to defeat him and take away his quarters.

Over the past decade, video-game companies have struggled to extend the market beyond that audience of preteen boys. Games built around characters such as Barbie and the Little Mermaid are clearly pitched to girls. On the other end of the spectrum are sports games like John Madden Football (an early Trip Hawkins hit) designed to give older boys and men an excuse to extend their game-playing habits well into adulthood.

But nobody has yet found a way to make video games broadly attractive to that part of the market that consumes the biggest share of books, movies and television drama: adult women. That's where Hollywood comes in. The idea is that nobody knows better than moviemakers how to put stories on a screen and bring them to life. "My own belief," says Voyeur's Zabriskie, "is that the sooner the better actors and the better directors get involved, the sooner this will be a medium that everybody will want to get into."

The Hollywood-Silicon Valley connection goes back to the early 1980s, when movie companies and video-game makers found it mutually convenient to license cartoon and film characters (usually for a modest 5% to 10% of net sales) for use in video games. At one point Atari had deals lined up to make video games out of Peanuts, Mickey Mouse and the Muppets. Then in 1982 Atari licensed E.T. for $23 million and proceeded to turn it into one of the worst video games ever made. The resulting disaster, known in the industry as "the crash of 1984," brought Atari into bankruptcy court and nearly dragged down its corporate parent, Warner Communications, as well. Some of those unsold E.T. cartridges can still be found on the dusty back shelves of retail stores.

The licensing game never died, however. Now Hollywood is making movies and TV shows out of video-game characters (witness this summer's Super Mario Brothers feature and the two Sonic the Hedgehog cartoon shows coming this fall), and kids assume that any film or series with any action in it will come out in a game cartridge within six months. Besides Aladdin, vidkids this Christmas will be able to choose from games based on Cliffhanger, Last Action Hero, Ren and Stimpy, Bram Stoker's Dracula, Home Improvement, Jurassic Park and a whole subgenre of Bart Simpson adventures, including The Simpsons: Escape from Camp Deadly, Bartman Meets Radioactive Man, Bart vs. the Space Mutants, Bart vs. the Juggernauts and Bart vs. the World.

As the video-game business exploded over the past few years, people in Hollywood couldn't help noticing that their 10% cut was becoming bigger and bigger. "They started getting these huge royalty checks that were doubling every year," says Gilman Louie, chairman of Spectrum Holobyte, publisher of the popular game Tetris. "Finally someone said, 'Why aren't we in that business? Why are we leaving the rest of that money on the table?' "

Thus began a massive consolidation in which every major Hollywood studio either bought a video-game company, started its own in-house interactive department, or did both. "People used to ask, What's the risk of getting in this business?" says Steve Eskenazi, an analyst at the investment firm Alex. Brown & Sons. "This year the question is, What's the risk of not getting into the business?"

Now when a movie studio agrees to license a video game, it gets involved in the game's design from the start. When Steven Spielberg realized that a plot he was considering for a movie would work better as a game, he took it to his friend George Lucas, whose own video-game operation turned the idea into a spelunking adventure called The Dig. At Sony Interactive, every movie script that Columbia buys is screened by the video-game department for its game potential. If it looks promising, says Olaf Olafsson, president of Sony Electronic Publishing, a separate scriptwriting team develops the game version. In some cases the movie script is actually changed to add what Sony's creative team calls IPMs -- interactions per minute -- to make for a better game.

When film crews go out to the set, the video-game people are right behind. Sony used footage from Cliffhanger and Dracula to create the backdrops of the + CD versions of those games. Spectrum Holobyte is doing the same for a version of Star Trek: The Next Generation it is creating for 3DO. In some cases, extra footage is shot on location to provide additional material for the games.

To make the characters in video games more realistic, actors are being recruited to serve as models. Acclaim, the video-game company that made Mortal Kombat, has created a special "motion capture studio" for this purpose. A martial-arts expert with as many as 100 electronic sensors taped to his body sends precise readings to a camera as he goes through his moves -- running, jumping, kicking, punching. The action is captured, digitized and synthesized into a "naked" wire-frame model stored in a computer. Those models can then be "dressed" with clothing, facial expressions and other characteristics by means of a computer technique called texture mapping.

To make Voyeur, Propaganda Films shot live actors in an empty room and then combined their digitized images with computer-generated sets -- beds, desks, windows. To make Switch, an interactive motion picture to be released next year, director Mary Lambert rented Sound Stage 5 at the Hollywood Center Studios. Watching a scene in which actress Deborah Harry, dressed in a skintight dress with a plunging neckline, strides into a chamber decorated with ancient Egyptian props is like stepping back into the studios of the 1930s.

"Wow," someone says, as giant columns begin to crumble around her. "The whole place is a gigantic vault."

"And cut!" shouts Lambert. "Thank you everybody. That was nice."

Intriguing as such productions are, there is no guarantee that any of this will produce a game that is fun to play. The very best designers -- and there are only eight or 10 with track records for making video-game hits -- are as rare as Spielbergs and Scorseses are in Hollywood. They have to know how to design puzzles that are hard but not too hard. They have to pace the dangers and rewards and have an intuitive feel for the nature of the medium. "Hollywood knows nothing about interactivity," says Brian Moriarty, who designed some of the best-selling Zork games and is working on Spielberg's The Dig. "If they are looking for a quick killing, they are in for a disappointment. There are no quick killings here."

It remains to be seen which needs the other's talents more: Hollywood, with all it has to learn about computers, or Silicon Valley, with all it needs to discover about telling a story. But the tale of their meeting and their subsequent romance has all the makings of a terrific movie. And if someone can figure out how to make it interactive and put it on the info highway, it might even make a good game.

With reporting by John F. Dickerson/New York and David S. Jackson/San Francisco