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Network Technology
For this section, we look at
the how network technologies (by which we mean internet, mobile, iDTV and other network environments) are being used within the publishing and distribution/retail markets. We have focused on these two segments of
the supply chain as it is there, rather than in development, that the technologies will have the most far reaching business consequences.
Few will question the assertion that network environments will eventually
become not only the principal medium on which most if not all games will be played but also the principal medium through which the games will be sold and distributed. The point of contention is therefore over the
questions of when and in what form this transition will take place. Despite the confidence of the console manufacturers (or at least Sony and Microsoft) in the immediate future of their respective network services,
we do not anticipate network gaming revenues to overtake traditional boxed-product gaming revenues worldwide until 2012 (later for the west) by which time the next-generation of consoles will have been launched that
feature sufficient local or network storage capacity to make full game downloads viable. However, network games sales are already rapidly catching up retail sales. In the West, they represented 15% of total games
software sales during 2006 and we forecast them to reach 41% in 2012. These technologies have begun to make inroads into most aspects of publishing, distribution and retail and have already forced a great deal of
change.
The impact of network technologies on publishing
Network games publishing can be broken down into a number of areas:
1) Multiplayer PC games service provision: Almost all new PC games incorporate network-based multiplayer features. These can range from
simple match-making services, that allow players to find others to compete against or alongside, to full online services that provide players with tournaments, player rankings and other community services.
Publishers foot the cost of running these services and at present no publisher charges players to access these basic multiplayer features.
2) Massively multiplayer games publishing:
Massively multiplayer online games (MMOGs) are network-only games that support thousands of simultaneous users. MMOG worlds are typically persistent, being operated on a 24/7 basis and are charged for via subscription fees, usually levied monthly, or via in-game currency purchases which are used to be virtual assets and services. EA was the first to prove the MMOG publishing model to be effective. Ultima Online, first released
in 1997, still has over 50,000 regular users a decade on, each paying $10/month. At present around 170 MMOGs are currently offered in the west. The most important is Blizzard's MMOG phenomenon World of Warcraft. WoW has smashed received industry wisdom about the total addressable market of MMOG players, the ability of a western MMOG to succeed in the west and the potential returns achievable from a MMOG. At present, it has some 4m subscribers in the west and an additional 4m in Asia. However these user numbers are dwarfed by a number of the most successful Korean MMOGs such as Ragnarok, Audition, Kart Rider and MapleStory who have recorded high tens of millions of users (albeit mostly non or low-revenue yielding users). MMOG publishing is a risky business: typical
MMOG development costs are significantly higher than standard PC games development costs (£7m-£15m) and the publisher typically only receives around 70%-80% of a $10-$15 monthly subscription charge after billing and
network distribution costs are factored in. Additional community management, plot progression, MMOG world development and server support costs add to the overall risk of MMOG publishing but, as Ultima Online has proven, publishers can also expect greater sales longevity for MMOGs and there is substantial price elasticity of demand for the better titles.
3) Online Console Gaming: One category that will be expanded upon at a later stage is network console gaming. All three console manufacturers are now committing considerable resources to the development
of online services for their respective machines. Microsoft's Xbox Live service was launched during 2002 for its original Xbox and is subscription-based (Sony's is free), and features a centralised and unified
registration, login and billing system and premium content and game downloads. With 5 years' operational experience and development behind it Xbox Live is comfortably the most comprehensive online console service
although Nintendo and Sony are slowly catching up. Nintendo's Wii and DS both support network features, the former via a dedicated Wii online service that includes paid-for back catalogue downloads (the Virtual
Console). Sony's service shares more similarities with Microsoft's offering multiplayer features, games content downloads and community features. Sony also announced its Home virtual world in which players can
socialise using 3D avatars. Online console services currently generate an immaterial proportion of total network games revenues and although this is growing, we do not expect these services to start challenging PC
or mobile network revenues until the launch of the next generation of consoles that feature sufficient local or network storage capacity to make full game downloads viable.
3) Streamed gaming: Streamed
application technologies (which simply substitute the network for the PC's CD-ROM player and hard drive) are limited to broadband networks as the bandwidth required for a streamed game tends to be a minimum of
200Kbps. Games streaming (or Games-on-Demand) has long promised but, to date, failed to deliver meaningful revenues although a few services in North America and Europe have shown promising growth.
4)
Casual Browser games: Browser-based gaming tends to be focused on casual gamers looking to kill time with simple, addictive word, puzzle and card games. The addressable market for browser games is far greater
and demographically broader than that for boxed product console and PC games and, recognising this, numerous publishers launched advertising-based casual gaming services during the dotcom boom in the late 90s.
Despite the substantial traffic flowing to these sites, many such services have ceased operation or been merged with others due to the low revenue yield that advertising brought. The market has, however, undergone
something of a business renaissance since 2003 with the advent of casual games subscription services, casual games download services and pay-per-play wagered online gaming - where players pay to compete in
one-to-one competitions or multiple-player tournaments where cash rewards are offered to winners. Almost all the major casual games sites now offer one or more of these ancillary casual games services.
5)
IDTV gaming: A fledgling concept that few believed in but which sprang into life during 2000 on Sky's interactive digital TV service, pay-per-play gaming on interactive digital television has proven surprisingly
popular and attracts an almost identical audience to that for casual browser games. The iDTV games market, like games streaming, experienced promising early growth but has since plateaued partly because of
deployment inertia by cable and DTH TV networks.
5) Mobile gaming: Of all the network gaming categories, mobile gaming arguably offers the greatest potential. With well over 1bn handsets in use worldwide
and average handset turnover running at 10-15 months, the installed base of hardware is well beyond anything that a console manufacturer would achieve. The Far East has set the pace in mobile entertainment and
mobile gaming in Japan, Korea, Singapore and many other Asian countries is already a hugely lucrative business. Pre-existing billing relationships between consumers and carriers has allowed an instant and vast
addressable market and a remarkable price-elasticity of demand with typical games download prices around £3-£8. A plethora of dedicated mobile games publishers and distributors now service this market with many of
the major video game publishers now looking to establish mobile games publishing divisions. The market is not without its problems, though. Content oversupply, perceived content quality issues, the increasing
fragmentation of handset hardware and OSs, and low consumer awareness of mobile gaming products and services are all hampering growth, especially in the west.
The impact of network technologies on distribution and retail
Boxed product games can be viewed as commodities as the final products are homogenous (i.e. they are the same wherever you buy it). As such, price should theoretically always be the most important
factor in determining where a product is bought. For this reason, despite the impersonal nature of most e-commerce operations, the internet has already established itself as a serious competitor to (and opportunity
for) traditional retail. An automated ordering process allows both cost-savings (through lower overheads) and efficiency enhancements (by stripping out manual processing) which in turn can lead to more competitive
pricing and a better quality of service. In the UK for example, online and mail-order specialists such as Play.com and Amazon can undercut retail prices by between 10%-30%.
However, a number of trends make the
medium term and beyond considerably more uncertain for retailers (both online and offline) and distributors.
1) Games have already begun to transition from being products to being services. MMOGs and other forms
of multiplayer gaming have proven appeal and business models which cut out the retailer and distributor from ongoing revenue generation (even if, for now, the core product data is distributed as a boxed, retail
product) are proliferating. Vivendi's Blizzard subsidiary is estimated to generate over $750m per annum from subscriptions to World of Warcraft. Whilst this has to date been limited to the PC market, online
console services and subscription-based console games are expected to form an increasingly material part of the market during the next cycle.
2) This will over time be accompanied by digital distribution of
games. In theory, by bypassing the retailer and the distributor, publishers can both lower the selling price of games titles and increase their own margins although in practice they will likely need to use
technology and network distribution intermediaries. As more users gain access to higher bandwidth connections and as multiplayer games move to a server-lead model (i.e. where part of the game code is held on the
server side), we will witness more instances of online distribution. Interestingly, the potential for disintermediation not only exists for publishers cutting out retailers and distributors but also for developers
to cut out everyone else from the equation! Clearly there are few that have the financial resources to self-fund their development and promote, sell and distribute their titles online but those that do tend to be
the highest profile developers such as Valve Software, creators of the phenomenally successful Half Life. In late 2004, Valve released their Half Life 2 PC game as both a traditional publisher-retailer boxed product (in conjunction with Vivendi) and online via their Steam electronic distribution service. Valve sell Half-Life 2 at its full retail price of $49.99 but takes the full margin (making over three times what they do compared to a retailer-based distribution model). Valve has since opened the service up to third parties and now offer over 100 premium-priced titles. Other powerhouse developers are known to be keeping a close-eye on how Valve fares and this could represent the start of a genuine value chain revolution.
Whilst console-based digital distribution is increasing rapidly, we do not expect it to represent a threat to retail until the launch of the next-generation of consoles which we expect to feature sufficient
local or network storage capacity to make full game downloads viable.
The future for retailers and traditional distributors in the long-run would therefore appear to be distinctly bleak. As long as
retailers (electronic or not) remain excluded from content ownership or creation, their importance within the games supply chain will diminish as online gaming grows as there is little obvious role for them to
perform in a fully network environment. However it must also be remembered that retailers will remain necessary for the sale of both the console and PC hardware on which these digitally distributed games will run.
One should also not underestimate the importance of retail-based marketing and sales initiatives which help educate the market about new releases and which have historically been critical for introducing non-gamers
to the market.
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