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Online game makers seek key to profits

The notoriously bipolar online gaming industry must overcome some serious barriers to reach the billion-dollar revenue growth analysts expect over the next few years.

David Becker Staff Writer, CNET News.com
David Becker
covers games and gadgets.
David Becker
7 min read
Preston is the kind of customer who keeps game industry executives awake at night.

The 29-year-old freelance writer is a dedicated "="" creates="" its="" own="" economy"=""> patron of "Jeopardy Online," the multiplayer Internet version of the quiz show. He spends an average of 15 hours a week playing the game. But if Sony Online Entertainment ever asks him to pay for the game, he'll leave faster than you can say "potent potables."

"There are so many game sites out there," he said in an online chat. "Why pay if you don't have to?"

Preston, who would only give his first name, represents one side of the notoriously bipolar online gaming industry--a market that must overcome some serious barriers to reach the billion-dollar revenue growth analysts expect over the next few years.

On one side of the market are free, advertising-supported games such as "Jeopardy Online" and the myriad card and board games offered by sites such as Yahoo and Pogo. Squeezed by the same advertising pressures facing other online content providers, such sites are scrambling to find ways to make a consistent profit.

On the other side are online role-playing games, in which players pay monthly subscription fees to interact with other players in huge virtual worlds. Popular games such as Sony's "EverQuest" and Electronic Arts' "Ultima" have hundreds of thousands of paying players, generating steady revenue streams envied by other segments of the software business. But the complex fantasy worlds in which the games exist appeal to only a small minority of serious game players, compared with the overall game market.

"The challenge for companies focused on Web-based games is to try to bridge that gap and create a kind of crossover between the casual gamers and the hard-core gamers," Jupiter Media Metrix analyst Billy Pidgeon said. "The idea is to find a middle ground: people who don't play as much as hard-core gamers but are still willing to pay for a service."

Market researcher IDC predicts that total U.S. revenue from online gaming will increase almost 50 percent annually over the next few years, from $210 million last year to $1.8 billion in 2005.

Jupiter predicts similar growth, with U.S. revenue projected to hit $2.55 billion in 2006. Advertising revenue will continue to account for about 30 percent of the market, Jupiter forecasts, with the bulk of revenue coming from subscriptions.

Fantasy world
For the time being, most of that subscription growth is likely to come from variations on familiar role-playing game formulas. Sony is developing "Star Wars Galaxies," an online role-playing game based on the film series "Star Wars," while Vivendi Interactive has similar plans for "The Lord of the Rings."

Both expect the mass appeal of those franchises to broaden the potential audience for role-playing games. But David Cole, president of market researcher DFC Intelligence, warns that a strong brand won't be enough.

"I think it's a lot about game design and making it not so intimidating to the casual user. (Role-playing games) typically are games that take a whole lot of time for people to play; most people don't want to devote that much time to a hobby," Cole said.

"Brands are important. But if you have the same old intensive, 20-hour-a-week experience, people aren't going to stay around that long," he added.

Kelly Flock, president of Sony Online Entertainment, said the design issues are part of the company's strategy for expanding the audience for online role-playing games.

"The next games we're designing now are definitely done with the intent of being a lot easier to go in and out of," Flock said. "Particularly with 'Star Wars Galaxies,' the overwhelming majority of people who come to that game will probably be unfamiliar with the (role-playing game) category.

"The trick is to make it easy to get going and play at your pace, yet provide enough value and depth so the consumer feels they're getting their money's worth."

New ideas
Still, real growth in subscription gaming will mean going beyond role-playing and creating innovative new styles that intrigue people with an average interest in games.

Electronic Arts tried to do just that last year with "Majestic," which used media ranging from phone messages to online chat to involve players in an interactive mystery. The first episode of the game, offered for free download, attracted significant interest, but few stuck with it and became paying customers.

"'Majestic' was a really interesting experiment," Pidgeon said. "I don't think it spells doom for converting that casual gamer. There were just too many barriers for casual gamers to get over as far as accessing material online and waiting for stuff to download. It's kind of an example of the pioneer--as defined by coming back with a lot of arrows in your back."

Bryan Neider, chief operating officer of Electronic Arts' online branch, known as EA.com, similarly characterizes the game as a slightly painful learning experience.

"'Majestic,' while it wasn't commercially successful, did a lot of interesting things that I think we're going to see crop up in other games," he said. "What we learned is that people want to play at their own pace. We had an episodic format, and people didn't want to wait."

Electronic Arts' high hopes are perhaps more firmly grounded for the "The Sims Online," the online version of the smash PC game. The online version is expected to be ready late this year.

"The Sims" is widely credited with broadening the audience for PC games, particularly by attracting female players, and Neider expects the upcoming version to similarly widen the audience for online games.

"We believe the experience is going to replicate the very broad appeal of the PC product...and bring that breakthrough success to a new environment," he said.

Analysts are more skeptical.

"I'm being very conservative about 'The Sims Online,'" IDC analyst Schelley Olhava said. "The question is how many of the people who play 'The Sims' offline can they motivate to pay a subscription fee? I'm not convinced this is going to boost their subscription base into the millions."

No free ride
Although developers of subscription-based games try to calculate what will appeal to a broad audience, purveyors of free games already know what draws a crowd: card, board and other basic games that offer ample opportunities for players to chat with one other. The challenge, instead, is to figure out what might motivate advertisers.

Stung by the overall advertising crunch that has shuttered many content sites, operators of free game sites are scrambling for ways to make a stronger pitch to advertisers. One of the promising approaches is sponsorship, in which a game serves as a vehicle for promoting an advertiser's products. The advertiser typically pays for the development and hosting of the game and then promotes it, boosting overall traffic to the game site.

Microsoft's The Zone gaming site offers several sponsored games, starting last year with "Toyota Adrenaline," a racing game built around the company's latest truck.

Microsoft is also looking to create ongoing sponsorship opportunities with "OutSmart," a quiz show game in which players compete with a celebrity to answer questions based on the celebrity's work. The record, film or TV company associated with the celebrity pays for development and promotion of the game.

Sponsorship makes good business sense, said Chris Di Cesare, group product manager for The Zone. And if proper attention is paid to the development end, such games can offer compelling experiences for consumers.

"For the casual gamers, what we've really found that works is what we call adver-gaming," Di Cesare said. "It turns out to be a real win-win for the game player and the sponsor. With 'Toyota Adrenaline,' we were able to give gamers an advanced 3D racing game that really pushed the envelope as far as graphics, and Toyota got great exposure."

"What do advertisers want?" Di Cesare asked. "Things that are compelling and engaging for the consumer. That's what games are."

Pidgeon agreed that sponsorships are the best hope for free game sites to break out of the banner-ad ghetto.

"Sponsorship seems to be the most sensible approach for cross-promotion and making a better case to advertisers," he said. "It's much more effective in terms of brand recognition than other types of advertising."

But Neider asserts that sponsorships can undercut the game developer's reputation by putting product placement ahead of the game experience.

"We're really leery of letting advertisers come in and dictate the game content," he said. "That's one of the reasons we want to take the opportunity to the advertiser, not the other way around. We want to maintain that game design integrity and then see which advertisers might be appropriate."

Plug and play?
The wild cards in the online gaming market are video game consoles, which will become an increasingly important conduit for online experiences over the next few years. Microsoft plans to launch an online service for its Xbox system this summer, and Sony is working on similar plans for its PlayStation 2 console.

Pidgeon said that although game consoles will account for only a small fraction of online game revenue into the foreseeable future, console makers have a chance to write their own rules in a way that favors subscription revenue.

"It's going to be easier to make money there because in the PC space there are all these people giving away stuff," he said. "People don't have those expectations on the console side. I think Sony and Microsoft are going to structure the online services so that there's going to be a service charge that includes some basic content and a real push to upgrade to premium services."

DFC's Cole said consoles have the potential to vastly expand the online gaming audience if console makers do it right, making it as easy to play games offline as online.

"I think connectivity is the No. 1 obstacle for online gaming," he said. "People can get frustrated really easily trying to figure out how to configure the PC games for online play. Anything that makes the connection process easier is going to bring more people in."