[Almost finishing up our E3 coverage, the ESA's address earlier in the week was interesting in its retail-specific nuances but general positivity, I think. I also filed a different story about Mike Gallagher's responses to my question about piracy, but here's what he said in his speech.]

In his keynote address in the Los Angeles Convention Center, Entertainment Software Association president Michael Gallagher, speaking at the launch of the ESA-organized E3 conference waxed effusive on the strength of the game market "in this difficult economic time".

In starting off, he referenced the the significantly expanded E3, commenting that, even through the recession, the upgraded event showcased the game biz's "exceptionally [good]" performance.

Gallagher then cited the 22.9% increase in U.S. video game software revenues in 2008, and the $21 billion overall market. He did contrast this with early 2009, especially March and April, where NPD retail results overall "were not favorable", and commented - "there is no silver lining" for the companies and individuals affected. But he believes that there are still plenty of opportunities for increased revenue -- especially in the key fourth quarter of the year.

Discussing the industry's growing influence, Gallagher claimed the video game industry has become "the entertainment industry's most highly-sought commodity", and big entertainment companies have moved to embrace gaming wholeheartedly. Video games are "the preferred medium" for creativity among many young makers, he noted.

Gallagher then praised Grand Theft Auto IV as an example of a title that had "received widespread acclaim for its artistic value", citing a Rolling Stone review that was highly favorable, and pointing out Rockstar's Housers being listed on the Time 100 list.

He also referenced Nitin Sawhney's complex soundtrack for Heavenly Sword as an artistic highlight, and mentioned the Into The Pixel art exhibit, co-curated by the ESA, and its prominent South By Southwest Expo appearance.

The executive then cited stats from a newly released ESA 'State Of The Video Game Market' report which reveals that 68% of U.S. households play computer or video games, 42% have video games in their home, and 63% of parents believe games are a positive part of their children's lives.

He pointed out in particular: "Games are a social activity", and noted that 62% of gamers play games with other people in person, up for 56% in 2007 and 59% in 2008, according to the ESA's new survey.

The positive address also cited film-makers, including Steven Spielberg and Jerry Bruckheimer, working in video games, and then mentioned musicians The Beatles and Aerosmith turning to games "to replace lost revenue from declining CD sales".

Gallagher noted the blurring of lines in the entertainment medium overall, suggesting that games are at the center of this digital integration. The ESA president also praised the perennial up and comer, in-game advertising, and citing the Obama in-game advertising buy in titles such as Burnout Paradise.

Continuing somewhat quaintly, Gallagher suggested that some individuals are "actively beginning to test what online distribution models will mean for our business", noting that the industry association has "recalibrated our dues structure" and bolstered its ranks in recent months in order to change its largely retail-specific model. He particularly cited Trion World Network, a new ESA member who is entirely an online MMO-based company, as an example of this change.

Gallagher then noted that "we will need support" from both government and academia, citing Texas Governor Rick Perry's work to increase incentives in Texas for video game development, noting that 18 states this year have considered expanding support for game development-based tax breaks and other incentives.

He then suggested that "there will remain some in Government" in North America that might "lay society's ills at our doorstep", but believes strongly that "standing up for our constitutional rights" is very important for those in the game industry. Referencing the ESA's Video Game Voters Network, he noted that 31,000 letters were sent to government representatives in the last fiscal year complaining over anti-game legislation, and 74,000 total over the lifetime of the Network.

Concluding, Gallagher praised games as the "entertainment industry leader", and particularly commented: "I encourage you to be confident about our future... you will see why video games are on every screen in our society."

In a relatively quiet Q&A period, Gallagher did answer in-depth on the question of piracy, as covered separately, and also took a question from Dennis McCauley of GamePolitics.com on whether the recent California state difficulties in getting its game bill approved would stop politicians from trying to legally regulate the game industry.

"No it won't", said Gallagher, commenting that there are 50 states, and each of which has "at least 100... decisionmakers" that could continue to propose bills at any time.

He did note that the ESA had been to federal court 12 times to have bills overturned, and commented that overall, "we'll face challenges", but suggested: "Our advocacy and the growth of our industry are beginning to turn that issue around."

He particularly suggested that co-proposers of bills have decreased in recent months, as legislators find less peers willing to back bills against violent or adult games.