Booming arcade game faces shakeup

 By NORMAN PROVENCHER

 Pirated machines, home video, overcrowding and a public image that conjures up visions of unsavory elements are all putting the once-booming video arcade business to its first real test.

Arcades were once the type of venture that could not go wrong - revenue had climbed by an estimated 600 per cent in North America since 1978, to an estimated $6-billion in 1982 - but operators are increasingly preparing themselves for a shakeout that could result in a new type of arcade, featuring a new type of machine, for the rest of the 1980s.

Arcade revenue statistics are difficult to pin down. A spokesman for Replay Magazine of Woodland Hills, Calif., a trade magazine for the industry, said the publication can rate game popularity only by a one to 10 voting system because arcade operators are reluctant to discuss the revenue of each game. "There's a question of competition, of course. But a big factor is also that the industry is so cash-intensive. One of the reasons people get into a cash business in the first place is often that they'd rather not discuss their incomes. With us or, perhaps, with the Government." One measurement, used by analyst Avner Mandelman of Gordon Securities Ltd. of Toronto, established that video arcades cost consumers up to $3 an hour, one of the most expensive forms of entertainment.

However, Mr. Mandelman said the arcades' high cost would not by itself endanger the high growth rate. "It's an interactive medium and it fulfils a social function like hanging out with the gang, as well as a strict entertainment function." Nevertheless, he said, the arcade scene has already reached the saturation point and a shakeout of existing arcades, as well as the introduction of technologically superior games, will be needed if the industry is to regain its past growth rates.

A recent analysis of the U.S. video arcade scene by the investment firm of Sanford C. Bernstein Inc. of New York said that one in four of the more than 10,000 video game rooms in the United States will probably go out of business in the next few years.

Especially vulnerable will be arcades without mall or campus locations, said Bernstein analyst Christopher Burke, as well as small operations that cannot spread costs over a number of sites.

Although the analysis included only U.S. arcades, Mr. Burke said his reading of the Canadian scene indicates similar conclusions for this country's estimated 1,200 game rooms - which range in size from two- machine operations to the larger arcades. "We are seeing the average hourly coin-drop rate falling dramatically and it's a direct result of an overcrowded situation, especially in the downtown cores where there can be up to 10 arcades in a single block." Complicating the situation is the growing number of pirated machines. These machines, built from copied or stolen circuit boards from the more popular games, are most often sold to small stores for about half the $2,000 to $3,000 price tag of the legitimate machines.

The practice hurts both the legitimate manufacturers - such as Bally Manufacturing Corp. of Chicago, maker of Pac-Man, the most popular (and most copied) series of games - and the arcades, which lose both customers and a depository for their older games. "It's true that a lot of arcades are getting pretty jammed up and the biggest single reason has been the proliferation of cheap pirated games," said Michael Watson, promotion manager for the Wizard's Castle arcade chain, which has 36 game rooms from Toronto to Vancouver Island.

Wizard's Castle is a division of Janda Products Canada Ltd. of Toronto, a privately held amusement company founded in 1955 by Jerry Janda and now run by his sons Jerry Jr. and Paul. A Janda subsidiary, New-Way Sales Co. Ltd. of Toronto, is one of Canada's largest importers of arcade games.

Piracy is a touchy subject. Mr. Watson and others among the larger arcade operators do not want to brand all so-called secondary and tertiary locations, such as convenience stores, as being pirate machine operators.

Indeed, many of these stores perform a valuable service by assuming some of the older, legitimate games when the large arcades receive new products.

There is also a deep-rooted controversy over the question of whether U.S.-held copyrights are binding in Canada.

This situation prompted a number of U.S. manufacturers - including Bally, Chicago-based Taito of America Corp. and Nintendo of America Inc., Redmond, Wash. - to seek and obtain search and seizure orders against Canadian companies making games based on U.S. designs.

The companies used the orders to enter homes and businesses in Toronto, Montreal, Winnipeg and Calgary, seizing hundreds of video games.

The Canadian companies have argued that Canada's copyright act makes no mention of video games. They say that while their practice may be morally wrong, it is legally correct. "All I know is there are an incredible number of pirate machines out there . . . with names such as Puc-Man or Pac-Gal instead of Pac-Man and Ms. Pac-Man," Mr. Watson said. "And when the small operators can get these pirate machines so cheaply, there's no place for us to sell our older, legitimate machines, meaning we can't get the newer games as quickly as we'd like. And the consumer is left to play inferior products, which can eventually sour the consumer on the whole experience." But the industry may be able to settle the problems of consumer boredom and pirating with one stroke with the introduction of the next phase of video game technology - the laser-video disc.

An offshoot of the audio disc, the video discs store game and image instructions on a plastic sheet encased in metal. They are read by a laser and translated to a picture screen and can retain much more information than the circuit boards now in use.

The larger storage capacity results in more realistic images, 3D effects and sound capabilities. One development already being tried with laser discs is movie-like games that can be "directed" by the player to a variety of conclusions.

Another technological advance could come from U.S. Defence Department developments, such as arcade adaptations of systems used to train pilots on jet fighters.

For instance, flight simulators for the F-18 fighters feature ultrarealistic pursuits of enemy aircraft, with true to life weaponry and communications, as well as a pilot's eye view of the ground terrain and sky while flying a mission. Much of this capability is based on microchip programs that could be brought to the video game field. "We are fully expecting games by Jan. 1 which will blow your brains out, so to speak," Mr. Watson said.

Mr. Burke agreed about the potential for high-tech improved games, but said the situation leaves manufacturers in a delicate position. "There's a real Catch-22 for the manufacturers because they're not about to spend a great deal of money manufacturing ultrarealistic, modern and expensive games if they are worried they aren't going to be able to recoup their investments (because of the current low usage rates). "And we feel they won't recoup investments until they move on to the next generation of games." The Bernstein analysis says video arcade game production will tumble to 250,000 units this year, compared with 480,000 in 1982.

Although the Ms. Pac-Man game remains the most popular in the short history of the industry (about 106,000 units having been shipped since its creation about two years ago, at between $2,000 and $3,000 each), U.S. market tryouts show that the hottest new machines are the Star Wars game and Pole-Position, a realistic racing car game.

The Star Wars game, made by Atari Inc., a unit of Warner Communications Inc. of New York, and Lucasfilm (originator of the movie) has no real technological edge over its competition, but it has the advantage of intense advance marketing, thanks to the phenomenal success of the Star Wars movie trilogy.

The first Canadian units are expected to arrive at a Wizard's Castle arcade this month. In a July 18 article on the arcade business, investment analyst Christopher Kirby of Sanford C. Berstein Inc. was incorrectly identified.