Innovation & Design

Online Games Boom: Who Benefits?


New figures suggest the market will grow to $6.8 billion by 2011. DFC Intelligence's David Cole speculates on market winners and losers

After years waiting in the shadows, online games are now generating significant revenue. According to the just released DFC Intelligence Online Game Market Forecasts, subscription revenue from online games was $2 billion in 2005 and is expected to grow to $6.8 billion by 2011.

Furthermore, subscription revenue is only one part of the online game business equation. Advertising and digital distribution revenue are also expected to grow significantly.

One of the most interesting things to note about the online game business is the potential fragmentation it could create. Subscription online games have tended to be very hits driven. However, these hits have come from non-traditional sources. (see "Total Worldwide Online Game Subscription Revenue" chart above).

Most notably, over 50% of online game subscription revenue in 2005 came from Asian countries outside Japan, most notably South Korea, China and Taiwan. These are countries where there has historically been a negligible video game business.

The Asian market has created some significant new players led by South Korean company NCsoft which had over $300 million in online game revenue in 2005. Other big Asian names like Netease, Nexon, Shanda, Webzen and others are largely unknown in Western markets.

Even in the North American market, the online game business has sprung up some new players like Sony Online Entertainment, Mythic, PopCap and others. With the notable exceptions of Vivendi Universal Games/Blizzard and Square Enix, it is hard to point to a traditional publisher that has had a success in subscription online games since EA's Ultima Online.

Of course, it has been much discussed how online games present the opportunity for new types of game genres. To date, the top online game genres have been very different from the best-selling video game products. Two very different genres, massively multiplayer online games (MMOGs) and casual games, account for over three quarters of revenue.

This comes with a caveat: popular genres like first-person shooters (FPS) and sports/racing are increasingly played online. However, their revenue is not included in the online game figures because they are generally sold at retail and offer free online play.

Meanwhile, MMOG and casual games generate the bulk of their revenue online. However they do so with very different audiences and business models. MMOGs rely almost entirely on subscription revenue, while casual games get revenue from advertising, digital distribution, and, increasingly, subscriptions.

Going forward, the online game industry is expected to grow on all fronts. Asia is expected to continue to be a strong market, as online play is the only platform in the absence of a significant retail business. Nevertheless, North America is expected to pass Asia in subscription revenue, accounting for 35% of online game subscription revenue in 2011 (see chart).

This will be largely driven by increasing console online game revenue. In 2011, it is forecasted that 29% of worldwide subscription revenue will be from console systems. However, Asia (outside Japan) is still expected to be almost all PC driven.

What can go wrong with the market growth projections? We will be the first to say plenty. The online game market has supposedly been on the cusp of booming for 20 years or so. There has been a great deal of trial and error in getting the market to where it is today.

Many of the success stories have seemingly come out of nowhere.Future growth will require companies to take some significant risky investments. Most companies that have invested with a conscious goal of growing their online game business have not been successful. Right now there is even a question of whether traditional publishers need online games for growth over the next several years.

Electronic Arts provides a prime example of the struggles traditional publishers have faced when it comes to online games. Back around the turn of the century, the market visionaries at EA boldly declared that online games would be a prime driver of future growth and would account for as much as 20% of revenue in a mere three years (by 2003).

EA even set-up a separate stock for its online game holdings. Since that time, Electronic Art's growth has been nothing short of spectacular. However, that growth has not been because of online games. This is despite the fact that EA is a leader in an emerging online game category, subscription-based casual games.

EA's subscription offering Club Pogo charges $5 a month ($30 for a year). In November 2005, EA proudly announced that Club Pogo had passed the one million subscriber level. In the casual game business getting that many paid subscribers is huge.

However, for market giant EA, that is a drop in the bucket. EA likes to point out that in fiscal 2005 the company had over 31 titles that sold over one million units. Every single one of those titles generated more revenue than Club Pogo. In fiscal 2005, EA had revenue of $3.1 billion. Of that $3.1 billion, $55 million, or 1.7%, was from online game subscription revenue (which also includes the MMOG Ultima Online).

When put into perspective, the online game market clearly is just getting started. Many questions remain unanswered. Chief among those questions is who will be the prime beneficiaries of market growth?

Is it worth it for traditional publishers to risk their much larger retail business for risky forays into emerging markets? Can upstart online game companies like NCsoft continue to grow to challenge the more traditional publishers? Will traditional publishers see their markets shrink as consumers start to pay less attention to expensive retail offerings or will online games allow for new business opportunities that grow overall revenues and profits to record heights?

DFC Intelligence's research services provide detailed strategic analysis of the interactive entertainment industry.


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