Maybe I am no longer young, I don’t get the fun of playing online games. I think playing games in general is just a waste of time. I can’t believe how much time I had wasted playing games when I was young. If I can redeploy all those time, I could have earn a Ph.D degree.
Nov 5th 2009, The Economist
The internet swallows another media business, but spits out some hope
IN THE eyes of media executives, the internet is a malevolent vacuum-cleaner, sucking in one business after another. Music, software and videos are all increasingly obtained online—often free of charge. Now it is the turn of video games. A combination of new technology and compelling economics means that many, if not most, of them will be played online soon.
Online gaming is not new. Since the early days of the internet, netizens have indulged in “massively multiplayer role-playing online games”, a genre that, now complete with fancy graphics, is still very popular, particularly in Asia. Some console games can be played online. “Episodic” gaming, in which new add-ons for console games can be downloaded for a fee, is gaining ground. And there are many “casual” online games, often web-based versions of board and card games. Yet in 2009, all these online offerings are expected to account for just $9.4 billion of the $55 billion market for video games, according to PricewaterhouseCoopers, a consultancy.
There are several reasons to think, however, that video games have begun the transition from an industry primarily based on consoles and shrink-wrapped software to one in which online services dominate. Conventional gaming has not proved as resistant to the recession as many had expected. In America, the industry’s biggest market, sales of games were down 12% in the first nine months of the year compared with the same period in 2008, according to NPD Group, a market-research firm. Nintendo recently admitted that sales of its Wii console, long the market leader, had stalled.
Meanwhile alternatives are emerging quickly. Many personal computers are powerful enough to run fast-moving, graphics-heavy games just as well as consoles. As a result, firms are offering online games that can be played either through “client” software, which users download, or via a web browser. Gameforge, one of the biggest and fastest growing online-gaming firms, offers 15 games and has more than 85m registered players. OnLive and Otoy, for their part, plan to let users play console games without consoles, by streaming them over the internet.
Then there is mobile gaming. Handsets have long come with rudimentary games installed, but smart-phones allow users to download new games or play online via a wireless internet connection. Apple’s App Store, for instance, is full of games.
These trends are dwarfed, however, by the explosion of “social” games, which have become all the rage on social networks such as Facebook. These are more about interaction than action: players either join their friends for an online game of poker or Scrabble, or to create and show off virtual pets, farms and mob families. Zynga, the market leader, which had 22m users in January, now has more than 170m.
As gaming moves online, the economics of the industry are changing. Conventional games take years to develop and cost millions to market, and rely on big sales in their first few weeks of release to recoup the investment, making the launch of a new game a gamble akin to a Hollywood studio’s decision to produce a big-budget film. As a result, like Hollywood, big gamemakers focus on successful franchises with fancy effects and plenty of action—and have moved online only hesitantly.
Online games, in particular the social kind, are hard for firms steeped in this model to make, argues Kristian Segerstrale, the boss of Playfish, the number two in social gaming. Developing a new game takes only a few months and costs a few hundred thousand dollars. It can still be improved after its launch. Virtual distribution is far cheaper, and marketing tends to be too, since games often spread “virally” among friends on social networks.
Steve Perlman, OnLive’s boss, points out that online games have benefits for both users and publishers. Users can take advantage of evolutionary improvements in games, rather than having to go out and buy new ones. And publishers no longer have to worry about piracy, as their games live in the cloud rather than on a disc that can be copied.
The most important change will be in the way publishers earn money. Although some are charging subscription fees to players of online games or selling advertising, many of them make most of their money by managing an online economy, complete with virtual goods and a digital currency. Playing is free, but users can get ahead by buying extra bits and bobs.
The beauty of the model is that it allows for “price discrimination”, says Atul Bagga of ThinkEquity, an investment bank. Miserly players can still participate in the game and pay indirectly by being exposed to advertising. Those with more to spend can buy virtual goods. Although only a tenth of social gamers actually do so, he says, such schemes earn game operators $28m a month. By 2012, he forecasts, annual revenues will have grown to $1.2 billion.
Yet the “free-to-play” model has its problems. Online players are a fickle bunch who move to new games quickly. More fundamentally, collecting small sums from millions of users is expensive, says Simon Levene of Accel Partners, a venture-capital firm that has investments in both Gameforge and Playfish. Mobile operators, for instance, take a big cut when payments are made using “premium” text messages.
Facebook, Apple and a raft of start-ups are all trying to develop a low-cost payment system, which could be a lucrative undertaking in itself. If they succeed, they may bring some relief to media firms that have seen much of their business disappear into the vacuum: many in the music and newspaper businesses, for example, are pinning their hopes on the idea that consumers can be persuaded to pay small amounts for digital wares.