Study: Online-game revenue to skyrocket

The boom in this niche could be a saving grace for the game industry, which is expected to see fluctuating hardware and software sales in the coming years.

Falling console prices are a big driver in the shift, Yankee said. Priced at $299 when they launched, console prices are expected to fall to as low as $49 within the next five years.

Currently, sales and subscriptions to Web-based games generate $353 million. Online-game advertisements generate between $450 million and $550 million, the research company said.

One segment that's giving the online-game industry a boost is "massively multiplayer online games." According to the Yankee study, in the United States alone, there will be 5.2 million people subscribing to these games by 2008, generating $556 million in revenue. By comparison, the approximate number of people subscribed to these games in 2003 was 2.4 million, with a revenue base of $209 million.

Asia is said to be the next big market for massively multiplayer online games. While most retail game publishers in the United States have so far ignored Asia because of widespread piracy there, that's less of a problem with games that have huge subscriber bases, because the bulk of the revenue from those games is derived from monthly subscriptions. Many online-game developers have been eyeing China because of its sheer market size.

Additionally, broadband penetration is greater in some Asian countries, such as South Korea, which has the largest per capita broadband deployment in the world, with about 60 percent of households subscribing to broadband. Overall, this has made online games a bigger business in Asia than in the United States or Europe. Many broadband service providers, such as Comcast, are providing subscription-based on-demand game services.

Games sold on CDs and Web-based PC games are not expected to contribute as much to the industry as massively multiplayer online games, Yankee predicted.

"PC gamers are migrating to consoles, causing revenues for PC games on CD-ROMs to decline and console revenue to grow. Online gaming represents a shift in revenue, away from boxed CD-ROM games sold at retail to online sales," Michael Goodman, Yankee's senior analyst for Media & Entertainment Strategies, said in a statement.

Competitors in the online console game niche are already experiencing cutthroat competition. Of 41.1 million video game consoles installed in the United States at the end of 2003, 3.3 million were online. The study forecasts that this number will jump to 8 million by 2008 as the big players--Sony, Microsoft and Nintendo--launch next-generation consoles that have better online capabilities.