October 21, 1997

BUILDING VIRTUAL COMMUNITIES, PART 2

This is the second installment of excerpts from New York City's MIT Enterprise Forum on how businesses can build "virtual communities" on the Web. In Part 2, Prodigy's Dan Daniel explains how intense competition affects the creation of communities, particularly in the area of online-gaming operations. For more comments on this topic, see "Building Virtual Communities, Part 1."

Dan Daniel, Vice President, Interactive Solutions, Prodigy, an online service. Daniel is responsible for implementing strategies for communities, including chat and bulletin boards

What I'll talk about today is an area that's near and dear to my heart which is gaming and having fun on the Internet, which is a little easier said than done. In preparing this presentation, I received a list of topical questions we are supposed to cover. Needing an excuse to organize my presentation, I decided I was going to go right down the list.

Firstly, what is a description of the target audience when you're talking about game communities? Well, what you've got now is a bunch of hard-core, totally addicted techno-dweebs. These are people that live to play games online. I once had a guy call me up and say, gee, can we give him a break on his game bill because he had to pay his rent that month. I think that tells you something about that kind of an audience. But, the audience is changing and it's going to change. You're going to see it happening in almost every other area of the Web. The demographics for game communities will become much more like everyday communities. I played a game of checkers the other day, for example, with a couple of ladies from a retirement home in Florida. This 70-year-old woman kicked my butt... So, the audience is going to fundamentally shift here and the challenge in terms of economics is finding a way to make that shift happen faster.

What methods are used to reach the target audience? Well, I looked at all the different game communities and tracked my competition closely and it seems that there's a standard, well worked-out system for marketing to gamers out there. Step one is taking a bunch of really humongous hard-core game files on a semi-stable Web site... Step two is you wait for them to come. My experience has been, and I think the experience of many companies much to their dismay, is that they don't come! So, then you fall back on step three, which is spend a ton of money on advertising in game magazines. For the most part, this hasn't worked very well for many of the game companies either, so there's always the one fall back position which is, of course, step four: blame it on the programmers!

Benefits to the organizer or sponsor? There are all sorts of benefits. First if you do it right, I call it M&M's. You get members and money. If you do it wrong, you get to really find out about Chapter 11. The reason being that this is a high stakes, fairly expensive kind of area of the Web world. It's not easy stuff to do and, therefore, requires significant up front investment, which means you have the potential to win big. But, as the majority of companies will tell you, you also have the potential to lose big.

That being said, what is the status of profitability? Well, that was actually the easiest question to answer. Pretty much zip! The big donut hole. Nada. Less than nada. The companies that are out there on the market today are really taking a beating. They're in that bottom part of the curve that was talked about earlier. I think there are some pretty straight forward reasons for that. One of which is not being common sensical about cost control, about paying attention to what your audience really is versus what you want your audience to be. There are a few companies hanging in there all right. I thought it fairly interesting to take a look at the companies that are making it and why. One of the game market companies doing pretty well is called Kesmai. One thing that they've done is they've developed from the ground up for the Web. They started out as one of the very first gaming companies in the Web world, and they focused on a few games. In particular, they really controlled their costs. You do not end up with luxurious lobbies when you go to their offices in Virginia. Because of that, they managed to weather the growth curve that is part of this industry. Another company that's doing considerably well, considering the few games they have, is called Simutronics...You do not have to have state-of-the-art graphics or killer animation to succeed. You have to pay very close attention to what your gamers want, and they've done that very well.

Another company doing well, and I think they may turn a profit, is a company called ID. The real money for them is in the CD ROM sales and they use the online shareware gaming as a way to get the word out, and for people to experience their products which I thought was a very clever thing. I think you'll see a lot more of this.

I also think there are a few new business models emerging and this is some of the more important points I wanted to make. One fairly interesting model I ran into in the UK is a company called E-online which basically took a different tack on it. They have single player standard CD ROM games that they allow you to download from the Web and they basically provide a series of games that you can download and you pay a subscription for the right to do that. What's particularly interesting, though, is the way they cover their subscription to make sure they didn't lose numbers, which is: if you fail to pay your subscription fee, each time you go to play a game offline, in the background, multi-tasking, the game runs up to the Web, checks to see if you're still paying your bill and if you're not, it blows up the game. This is a pretty clever approach.

Another model is a model we're working on at Prodigy. Here, I'm talking specifically about a new division of Prodigy, which is called Prodigy Solutions. We're taking sort of a different approach here, one that holds some merit otherwise I wouldn't be doing it. Here are the ideas. Instead of sending numbers out to game communities, we think there's a business to be had from bringing games into existing communities. Someone once said to me that there's a better name for deep linking to other Web sites. They called it sending away customers. I think there's a real truth in that. If you can imagine walking into a department store when you asked for something that wasn't right in front on the counter, they send you three blocks down to the third store on the left. Well, you wouldn't hang on to many customers that way.

There's a real need in communities to keep your people there. The approach we're taking is actually building game engines that you can place in your community which adapt easily to whatever the content of your community is. For example, you've built a trivia game that you can operate with a very simple database file to completely control the kind of trivia you've got. So, if you're an oil company, you've got oil company trivia questions. If you're a movie company, you've got movie trivia. I'm fascinated what surgeons would do with surgeon trivia. It can be done. I think there's a fundamental opportunity there to make play a part of all communities.

There's about 22 million PCs equipped with modems that can basically do anything worthwhile in terms of gaming. There's approximately occasional game players of about two to three million. A third of that is on AOL and the rest is spread across a variety of gaming locations on the Web and other online game services. The core of where the money's coming from now, is, again, this hard-core group of very frequent players of which there are about 500,000. I think you're going to find the key in the relationship that's going to occur here is that size will become significant when you can reach the average human being in a way that they can succeed. I'll cover more in just a second.

Revenue wise, I've heard a ton of projections and I tend to believe longer range a little more. Frankly, the short-term projections have been abysmal in this industry, which is one reason why a lot of the companies that have entered the market right away are really getting hurt. This will probably be a $1 billion market they say by 2005, and I think that's probably true.

Next thing; critical mass...Mass is critical if you're losing money on every gain. It sort of like you don't make it up in volume. This has been a real problem in the industry. AOL just got clobbered last year on this problem which is that they have a variety of games offered by various game publishers who they pay royalty to each time they play a game, let's say, for an hour. Because of all the turmoil over their change to unlimited pricing and connectivity problems, they held off charging for games that they were paying money for themselves. Volume went up massively and they were getting clobbered. A big surprise, i.e., three of the big game conferences last June, and suddenly they decided they had better charge for games. I think there's a lesson to be learned there.

Another issue in terms of mass that struck me is how much mass you need in terms of members to really pay for gaming through advertising. I worked up this number; I think it's close. I asked my five-year old how much that number was and she said it was a gillion-gazillion. I asked her how much that was and she said a lot. I think she's got the right idea. It is very hard right now to pay off the cost, the investment involved in multi-player gaming through advertising. I'm not saying people aren't trying it. In fact, many sites are. About the only one right now that I would give a shot to and may actually be successful is the Microsoft Gaming Zone, or, the Zone. A number of others are trying it and frankly losing their shirts, so I'd be careful about that.

What is the revenue model? Well, that's pretty much all of the map. AOL, Prodigy, Game Storm, a number of companies charge by the hour. It varies anywhere from about $1.50 per hour to about $2.00 per hour. Some companies like Simutronics, which has fewer titles and a very addicted audience who play huge hours, they do it based upon $10 per game, unlimited use. This is a fairly sensible model for a very highly addictive game.

Microsoft has introduced a very interesting model, which I'm curious to see how it'll do, called "Pay-Per-Day." And Mpath, again as an example, is a major game site that's mostly going based on advertising, which I think, is going to be a challenge. What may be emerging in this industry is a two-tier model, where games that have relatively low production costs such as checkers, poker, etc., are offered free with heavy advertising. Then, really hot titles, Quake II, Alien III, etc., are done on a pay-per-view basis. I think it will emerge into some kind of pattern like that.

What's the competition? Lots. Some of the big games Kesmai, AOL, Simutronics, Prodigy, Microsoft, Engage, Infogrames and Mplayer, Heat, NetPlay, those are some of the big ones. A number of these I don't think will see the year out.

I think the other real competition in the gaming industry, when you're talking about isolated game sites, is simply if you're going to play a game you play it off-line. The CD ROM market is very odd and you've got to acknowledge that if you don't do it right online, the game will go and play off-line.

How do community members interact with each other? They scream, fight, curse, pillage, plunder and blow you out of the sky with a thermal missile; a lot of very poignant forms of communication in the current gaming environment. They use all the communication vehicles. They're heavy users of chat, e-mail and bulletin boards and newsgroups. Also, the game themselves are the context for communication.

How do community members interact with the organizers? Pretty much the same way. They scream at you. They fight. They curse. Raise your prices and see what happens; you'll find out really fast. They are a highly communicative group. I think reflective of this trend of very direct relationship between the web customer and the web service provider.

What design elements foster communication? A really good question. There's a bunch of things. The key issue right now in this whole market in terms of success and the lack thereof, is how easy it is to get started. I took six of my staff members one day to lunch and said, I'm going to give you an hour and I want you to pick your Web site and successfully play one game within a one-hour period. Four of those six were programmers. Not one succeeded. Right now on one Web site you have to do four or five downloads, you have to re-set your TCPIP connection, you have to do things like ping. Most people in my service at Prodigy think ping is a word that goes with pong. You just are not going to get people to understand this. Consequently, big surprise. Who are the only people out there that form most of these communities right now? Real hard core tech-types. You haven't gotten to the mainstream yet mainly because you have made it too hard.

Another real key concept is integrating applications. Here the idea is that games are a communication environment. You need to always keep the member communicating and integrate the communicating that's going on into the game with other forms of communication. The single biggest community on Prodigy -- and we've got like 200 -- is games. What do they do? They go on and trade tips and hints. So, it's a big area.

The other thing is fantasy. You've got to let people be what they aren't. Everybody's somebody else when they're playing games online and that's part of the fun. You have to provide for multiple levels of ability. You've got to make sure that, you know, when you walk into the virtual bar in Jump Stone III, you don't get pounced on by three warlords which happens. So, you have to account for that. Having been one of the victims, of those warlords, I can attest to that.

One of the final things is what the uses are of data provided by members. Right now, very little. The reason why is most of the tools for collecting data about people are all oriented towards Web pages and Web counts. Hits, you need members? How many of you would know on your Web sites the amount of people that jumped more than four times between chat rooms in a single hour? Nobody provides that kind of information but that may be more important than about what's going on in your community than anything else I can think of.

Keep in mind that play is a fundamental part of all communities. Games can be a very fast way to grow any community. It doesn't have to be a game community to have play at. Let's have some fun. Again, it is clearly that games are a mixture of content and communication. But, I find you can only get further in understanding the industry if you think about it in terms of communication.

The last point: bring games to your community instead of sending people out somewhere else. Don't send away customers.