I heard the rumors over the weekend and hoped that they were not true. But they were. "E3" the video game industry's amazing annual trade show, is going to be scaled back starting next year. The big, beautiful, booming spectacle of hundreds of gaming companies coming together to show off their amazing new games, platforms and other inventions... is no more. It will be replaced by a smaller show at a smaller location with a smaller crowd.

As a gaming fanatic, it is sad news to be sure. I may be a 37-year-old father of two, but when I was walking the aisles of the "E3" show this May, it was a non-stop, "kid-in-the-world's-greatest-(eye & ear)-candy-store" moment for me. (My complete review of this year's show can be found here).

But, after the news set in -- and after I had time to kill the pain by getting on XBOX Live and kicking a good friend's butt in a heated match of "NCAA Football 2007"! -- I started thinking more rationally about the economics of trade shows. Specifically, why do industries host trade shows at all? Is it really worth it for them?

Now I'm no expert on the history of trade shows, but I imagine that many (if not most) of them got their start as a small gathering of industry insiders who wanted to talk shop and potentially make some deals. Then, they gradually evolve into bigger and bigger shindigs as a bigger circle of industry friends was invited. And then folks from upstream or downstream industries got invites. And then customers and media reps got invites.

At some point, somebody got a really big idea: "Geez, if I put up a booth over here and highlight some of my new stuff, I bet I could attract some serious attention" That's probably the point when all hell breaks loose for a trade show because then everybody feels that they need a booth, and that their booth has to be bigger, brighter and louder than the next guy's booth. A sort of "arms race" then develops between industry rivals to see who can top each other year-in and year-out. The media even starts talking about who "won" or "stole" the show. It's all a big contest; a high-tech beauty pageant.

And the fans love it. The spectacle of the arms race attracts tens of thousands of 'em who must live with the constant fear that if you're not there, well then, you're just not with it, man!

But at some point this model probably has to break down. It's just too big and too expensive to sustain. At this year's E3 show, I certainly saw the signs that this was the case. The Los Angeles Convention center was practically busting at the seams from the overflow crowd of 60,000+. Exhibitioners were setting up booths in basements, hallways and even outdoors. Inside the main halls, the booths were massive, and massively expensive, too.

For example, I will never forget my time inside the Electronic Arts (EA) booth this year. It was a wonderful example of technological excess intended to impress the fans and the media. And impress it did. The EA booth featured a fully-immersive gaming chamber that wrapped a giant 360 degree screen around the crowd and placed a rumbling floor beneath our feet. Characters and images whizzed around the room. Superman was doing laps around my head. Bombs rained down all around us when the new "Metal of Honor: Airborne" game was debuted. Virtual stocks cars roared around the room. Virtual football players collided with bone-jarring impact. The floor shook with each exploding bomb, car crash or ferocious tackle. I could literally see the shirt on my arm vibrating.

At the time, I just stood there soaking it all in, but each time I left the booth (I must of visited it 5 times!) I just kept thinking to myself: "My God, how much did they spend on that?!" I've seen reports that say many companies budget tens of millions for the show, but I have to imagine that the really big booths cost many multiples of that.

This is probably how the economics of trade shows begin to make less and less sense for an industry: per exhibit operating expenditures greatly exceed potential short- or long-term gain. The cost-benefit analysis for a company cannot be easy. How much is the exposure worth? Creating a "buzz" about a new game, console or product is certainly important, but these days there are many ways to create a "buzz" with spending nearly as much money. Heck, just leak a little news and couple of photos or video clips to a few select websites, and your new product will be plastered all over the Net in a matter of hours.

Of course, much the same thing can probably be said of the other shows like the Consumer Electronics Association's massive "CES" show each January. It's much bigger than E3 and (at least for now) still going like gangbusters. But how long is it sustainable? I missed last year's show but heard some of the same laments I have heard for years: long lines, big crowds, big expenses. Will the CES show ever downsize? I don't know. At the rate it's going it's going to take every other convention hall in Las Vegas to accommodate it. At some point, further growth is just not sustainable and all it takes is a few big names pulling the plug on their participation to start unraveling the show.

That seems to be what happened with the E3. It sounds like the video game industry has decided to return to the original trade show model: small gathering of industry insiders who wanted to talk shop and potentially make some deals. They'll still be able to get the word out and create a "buzz" about new products in many other ways, and avoid bankrupting companies in the process!

But I'm still sad to see it go. Oh, if I could just stand in that EA chamber just one more time!