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STEVE INSKEEP, HOST:

And now, let's talk about the video game industry. Gamers have already spent more than $1 billion on the first three games in the "Gears of War" franchise. The fourth - "Gears of War: Judgment" - is fresh in stores right now. It arrives at a transitional moment for the industry because sales are down while mobile gaming is up.

And "Gears of War" tells you a lot about this moment, as Heather Chaplin reports.

HEATHER CHAPLIN, BYLINE: This generation of consoles will be remembered for over-the-top, knock-you-out-of-your-seat extravaganza games like "Halo," "Call of Duty" and "Gears of War."

(SOUNDBITE OF VIDEO GAME, "GEARS OF WAR")

UNIDENTIFIED ACTOR #1: (As Lt. Baird) Respectfully, sir, this is the only way.

CHAPLIN: These are hardcore military and sci-fi shooters. They're filled with spectacular graphics and epic stories.

(SOUNDBITE OF VIDEO GAME, "GEARS OF WAR")

UNIDENTIFIED ACTOR #1: (As Lt. Baird) Now it's up to me, Lt. Baird, to round up Kilo Squad and send those scrubs back down their holes...

CHAPLIN: And people play together and compete over the Internet.

Phil Spencer, corporate vice president of Microsoft Studios.

PHIL SPENCER: "Gears of War" specifically, to me, was a game that defined the HD generation of gaming.

CHAPLIN: Industry analyst Billy Pidgeon says Gears may be the swan song for this particular type of experience.

BILLY PIDGEON: It is one of a kind. And it is over the top. And it's like a great console game, no doubt about it, so in a way, it could be the last one of this generation.

CHAPLIN: Big changes are coming to the game industry. While the console market is still hugely profitable, recent declines have people buzzing about what the future may be.

In 2008, retail sales of videogames in the US were $21 billion dollars. Last year, that number dropped to $13 billion.

Analyst Billy Pidgeon.

PIDGEON: Well, I would say the console market has peaked. Certainly. I would. I would say that. There are a lot of places that hardcore gamers can go to get, you know, hardcore games.

CHAPLIN: Pidgeon is saying something pretty radical there. The hardcore separated from their consoles? A smartphone or tablet is fine for Angry Birds," but surely an over-the-top, knock-you-out-of-your-seat extravaganza like "Gears of War" can't be replicated on something you carry in your pocket.

(SOUNDBITE OF VIDEO GAME, "GEARS OF WAR")

UNIDENTIFIED ACTOR #2: (As character) You and your men will die.

CHAPLIN: "Gears' " maker, though - Epic Games - they're already placing their bets on mobile.

MARK REIN: I'd like to think that at each time we've released something big and new, it's kind of guided the industry to where things could be going.

CHAPLIN: Mark Rein is Epic's co-founder and vice president. And while he's not modest, he does have a point. Ten years ago, Epic made PC games - this was back when hardcore gamers were still on PCs. But when the Xbox 360 came out, Epic took a chance - they used their PC game engine to make "Gears of War" for the Xbox. It was a bet that the hardcore would migrate to consoles. And it was a bet they won to the tune of a billion dollars. Now, Epic is helping lure the hardcore to smartphones and tablets.

(SOUNDBITE OF VIDEO GAME, "INFINITY BLADE")

REIN: With "Infinity Blade," we turned, once again, and this time we set our sights on mobile.

CHAPLIN: "Infinity Blade" is a franchise for iPhone and iPad made with the same engine that made "Gears of War," and so far its earned about $56 million, which is a lot of money for a mobile game.

Besides, there's another way companies like Epic - and Xbox - are earning money. Billy Pidgeon.

PIDGEON: So I get "Gears of War," and I'm playing it, I've played it through, and I'm playing with all my friends and then a new map comes out.

CHAPLIN: And that map - it's not free. It's downloadable content, or DLC, as industry insiders call it: additional maps, weapon skins, hats. Pidgeon says hardcore players easily spend an additional 60 bucks on DLC - on top of the $60 they've already plunked down for the game.

Phil Spencer, the corporate vice president for Microsoft Studios, he says these changes have completely altered the way people like him even think about the video game business.

SPENCER: Fifteen, 20 years ago, we used to think about the end of a bunch of production and creative work, now your relationship really starts with your consumers when you launch the game.

CHAPLIN: Spencer isn't too worried about the future though, no matter how different it may be.

SPENCER: People have always found time for entertainment - time and money.

CHAPLIN: So really, it's just a matter of figuring out how exactly, and where exactly to best collect that money.

For NPR News, I'm Heather Chaplin.

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