The Big Play: VARs See Dollars In Gaming

As president of Rich Green Ink., a Palo Alto, Calif., home theater installer and longtime CEDIA member, Green for years has evangelized to fellow dealers and vendors that an increasingly large portion of their business will soon revolve around PC and console gaming. His statements have fallen mostly on deaf ears. But as he and others start to see gaming-related sales encompass more than half of their business, the rest of the market is waking up.

Sales of console and portable video game hardware, software and accessories in the United States rose 21 percent during the first half of 2005 to more than $4.1 billion, according to The NPD Group. Historically, the vast majority of gaming sales has flowed through retail stores. But as the technology improves and demand increases for more immersive gaming systems, consumers are turning to integrators for help. Integrators face plenty of challenges to successfully serve this market, but for companies with savvy integration experience and business creativity the field is wide open. "There's a lot of activity now moving to connectedness, interconnectivity," Green says. "As new game consoles launch over the next few months, we'll see a huge influx in gaming technology in the home. We're preparing our clients for gaming as a huge opportunity."

Green serves mostly wealthy company executives and a few years ago began offering gaming consoles to customers as part of their $150,000 home theaters. "Customers snapped it up," Green says. Of the 12 installations his company now handles per year, four or five want gaming systems. In a few years, he expects half of his company's total business to come from gaming-related sales.

Lucrative gaming solutions, however, aren't exclusively for wealthy clients. Nathan Baney, co-owner of High Tech Hobbies, a home and small-business integrator in Mifflintown, Pa., is just one of many integrators who installs networked Microsoft Xbox gaming systems in middle-class homes and small-office environments, like doctors' waiting rooms.

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Numerous pieces go into a gaming installation—including the console or PC, software titles, accessories and controllers—and integrators increasingly look to distributors for product orders and integration advice. Since launching its gaming division during the middle of last year, D&H Distributing has seen sales of gaming-related products triple.

"[A gaming console] is a great attach product to create a larger sale. Adding gaming into a home entertainment system makes the whole experience much more enjoyable for the customer," says Jeff Davis, vice president of sales at the Harrisburg, Pa.-based distributor. In addition to gaming-specific components, D&H has seen increased interest in networking gear, plasma displays and HDTVs, sound systems, cables and other margin-rich gaming-related peripherals.

Tying these pieces together to create a complete entertainment experience is the key to integrator sales. The process gives integrators the chance to leverage their deep experience in high-revenue work such as lighting and audio design, control system integration, networking and room aesthetics. While integrators make almost no money on the console at the heart of a solution, they can garner 20 percent to 40 percent margins on the complete solutions. "The game console is an enabler, an enabler for us to do a sensational job for a client," Green says. "I don't care that I'm not making 40 points on a game console. It's a hub of activity that allows us to strut our stuff in all areas we're good at."

Green offers two main types of gaming installations. At the most basic level, he adds a console or gaming PC to a home theater rack and ties it into the room's display and audio system. In a more elaborate sale, he sets up a designated arcade room in the house with multiple gaming systems and consoles for competitive play. Green typically connects one large display and four small displays to any of four different PCs or consoles, which causes numerous video and format switching challenges that must be solved. The company must ensure smooth communication between each system and its wired and wireless peripherals. Finally comes lighting and audio, which can involve setting up 2.1 surround sound for the entire room, and a second 5.1 sound system and/or audio headsets for individual players.

Integrators also report strong revenue opportunities from much simpler gaming installations. David Gasaway, owner of Elizabethville, Pa.-based Gasaway's Computers, says 60 percent to 70 percent of his customers want gaming consoles. Gasaway encourages his customers to buy Xbox consoles themselves, then hooks the consoles to a wired or wireless network in the home. Gasaway installs one or two ceiling-mounted wireless access points from On-Q/LeGrand to provide wireless access to the Xbox. Gasaway buys each access point for $400 to $500, and resells it for $800 to $900.

There are also high margins for integrators building or selling custom gaming PC systems. Elite PC, a Tempe, Ariz., system builder, garners 20 percent to 25 percent margin on its gaming systems, compared with 12 percent to 15 percent on its business computers. While the company sells many more business computers than gaming systems, the higher margins on the gaming systems makes them worthwhile. The company also spends a disproportionate amount of its advertising budget on gaming systems, which he finds lends the company more credibility as a system builder.

"People tend to associate you with a higher-end system even if they don't buy the gaming system from you," says Aaron Richy, the company's vice president of sales and marketing. Elite also attends gaming trade shows and sets up high-end systems in its booth. While the kids are busy playing on the PC, Elite's representatives sell their parents gaming PCs and servers for home and business.

Gaming, however, is no longer just for kids. "The ages of our gaming clients is usually between 14 and 27, but I get a lot of corporate executives between 40 and 50 that like things like the Microsoft flight simulator and the World War II games," says Ed Frawley, president of Fireball PC, a custom-system builder in West Granby, Conn., that reaps at least 30 points on each system and often sells bundles that include a server for entertainment and home offices.

In addition to selling traditional games to adult customers, integrators report strong sales of sports simulators that are either stand-alone or tie into a console. High Tech Hobbies sells the VRX car racing simulator from vendor VR Gamer both directly to customers and through other integrators. The simulator includes a chair, pedals, displays and steering wheel and connects to Xbox or PlayStation racing games. While the current system has a price tag of about $2,500, VR Gamer recently launched a new version that will sell for between $499 and $599. Baney expects strong sales from his less-affluent customers, especially during the holiday season. The system is easy to use but challenging to set up, so integrators can garner high-margin installation fees as well. High Tech Hobbies makes a $400 margin on the original system.

Integrators report strong revenue from sales of add-on components for gaming computers. Dedicated gamers often pre-order new video and audio cards as soon as they become available, even if they don't yet need them for a particular game. Integrators can therefore gain solid ongoing revenue by informing customers of upcoming launches, and from ongoing service, upgrades and support of customer game systems. Custom-system builders also have expanded sales by creating e-tail sites that not only feature the latest components and hard-to-find parts, but help to build a community of loyal customers.

As rich as the current opportunities are, integrators say business will grow even more with the planned launch of the Microsoft Xbox 360 in late November, the Sony PlayStation 3 in mid-2006 and Nintendo's GameCube Revolution sometime after that (see related story). Nintendo has not yet revealed concrete plans for Revolution.

The U.S. console market is expected to grow to $11.7 billion in 2010 from $8.7 billion in 2004, according to Jupiter Research. Integrators predict the expanded features and capabilities of Microsoft's and Sony's consoles will enable them to become the cornerstones of elaborate home integrations and spark numerous add-on sales. "The Xbox 360 and the PlayStation 3 are really taking the whole technology to the next level," Davis says. "They will be more powerful machines, with more powerful graphics and lots of capabilities to expand and customize them."

Another benefit of the new Xbox 360 is that it will be available in two versions: the basic Xbox 360 Core System will cost $299 and will include a wired controller and standard AV cables, while the full-scale Xbox 360 will cost $399 and will include a detachable hard drive, wireless controller, wireless headset, remote control and high-definition AV cables. Integrators say the dual pricing scheme will help them target a greater range of customers. For customers that purchase the Core System, integrators will also have the chance to upsell components such as removable hard drives. One question mark in the new systems is the chance for modifications. Though Microsoft is strongly against the practice, integrators report strong interest and profits in modifications to current Xbox systems. Gasaway says 30 percent to 40 percent of his customers want their Xboxes modified, and Gasaway's Computers installs larger hard drives in the units and adds mod chips and software to make them into full entertainment systems. Other integrators add small LCD displays to the front of the Xbox cases. Gasaway says modifications sell themselves, as customers will show off the new capabilities to their friends, who will in turn ask Gasaway to install similar systems for them.

Another revenue-rich market is selling custom gaming PCs to the military. Elite recently sold 16 high-end gaming systems through one of its integrators to the nearby Luke Air Force Base for use as flight simulators. Alienware, a system builder in Miami, has also seen strong sales of systems for gaming simulations and visualizations to customers including Boeing, Lockheed Martin and the U.S. Army. The company's Area-51m 7700 notebook is used in the U.S. Army Aviation Center at Fort Rucker, Ala., for mission-planning, rehearsals and simulations, says Alienware Director of Marketing Brian Joyce.

A more challenging route to profit is running gaming LAN centers, and integrators say it is fraught with challenges. Mechanicsburg, Pa.-based custom installer World Premiere Home Entertainment ran its own gaming center for more than a year and made a few thousand dollars per month. However, Ken Bosley, president of the company, says the stress of catering to teenage boys was not worth the income.

Integrators with successful gaming centers say they need to offer other services and products through the centers to be successful. Both High Tech Hobbies and Elite PC run profitable IT training centers and convert them into gaming centers on the weekends. Profit on the gaming centers for both companies is very low and they make much more from the training than from the gaming. Baney, however, says High Tech Hobbies boosts the income of the center by holding frequent gaming tournaments and Madden Football leagues with entry fees.

Despite the challenges of gaming centers, integrators expect tremendous growth in the overall gaming market over the next few years. "Lots of entrepreneurs and system integrators don't play games, don't take them seriously, and so don't see why it will be a serious part of the home integration market," Green says. "[But if you can't do it], customers will find an integrator who will."