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The launch of Sony's PlayStation Network Platform this fall in conjunction with PlayStation 3 will usher in a new era of digitally distributed entertainment among the three leading game companies. It will mark the fist time that Sony, Microsoft and Nintendo will all use always-on, broadband connectivity to allow gamers the ability to download older games to their next generation console. Sony and Microsoft, in particular, will look at their new boxes as entertainment hubs, which will be able to transport digital music, TV, movies and gaming content straight to the hard disc drive.With E3 nearly upon us, Next Gen spoke to game developers, publishers and analysts about the new role that online connectivity will play in next generation gaming. Here's what they had to say.Randy Pitchford, President, Gearbox SoftwareCan you give your thoughts on the PS3 online initiative?Sony reaches a huge number of video gamers all around the world. The idea that Sony would invest heavily in bringing their customers online is exciting. There was a different kind of initiative for the PS2 (and a partnership with AOL), but it never really got any traction. I think Microsoft has really shown everyone how it should be done with Xbox Live. I still hold onto my prediction from a couple years back that, eventually, Sony will be licensing the video game operating system software from Microsoft. Perhaps Sony's experiences with their new online initiative will actually make that difficult-to-imagine step a little easier... If Microsoft can ever figure out how to gain traction and trust as a gaming platform in Japan, I believe that the two companies will rapidly desire to become partners instead of competitors. It sounds counter to expectations at first because we are so caught up in the competition, but I assure you that I could explain why the concept of an eventual partnership between Sony and Microsoft has merit.How do you see next generation online gaming impacting game development?Gearbox is very excited about what real next-generation online gaming really means for us. We have more options for communicating with customers. We have more capability to deliver content to players. We have an improving trend towards congruence on the different platforms. All of this provides a lot of really interesting decisions for game makers like us. Gearbox has had an online component "every time” and it is very exciting that a way of playing games that we believe so strongly in is building momentum amongst a larger group of customers. We are able to increase our investment into the online portions of our games and this will result in better experiences for our customers.To what degree do you expect development costs to rise from PS2 to PS3 development, and what impact will these increased costs have on the games industry as a whole? Costs are increasing substantially, but we seem to be able to get more out of it because we're focusing on tools and technology that improve the game making process and the results. We are also making careful and better decisions about the nature of our teams as we go from pre-production to production to post. For us, we're increasing the quality and the volume of the material we are creating by more than an order of magnitude while our actual costs are increasing only by a linear multiplier. We're investing everything we've made into making sure that our next generation games are the best games we can possibly make. There are others who are spending a lot too. None of us want to lose money.So, one of the most obvious things to come out of the new generation is an increase in price point for video games. We're up to $60 at retail in the US now... It's been over a decade since there have been any meaningful price increases. Meanwhile, the rest of the world has seen steady inflation in all other types of goods, entertainment or otherwise.I can see a few different trends happening elsewhere in the industry with respect to philosophies of how we should spend on development. First, there are the guys who have been just dumping money into next gen prior to figuring out how a next gen game should best be made. Unfortunately, they are wasting a lot of money and the experiences they are creating could've been better for the money they spent. Many of these kinds of guys are going to be in reaction mode and there will be the usual churn at the bigger publishers in reaction to these mistakes. Next, there are guys who aren't pushing hard enough. They're using incremental improvements on old-gen techniques to drive their titles. They are going to be left behind in the second or third wave if they don't rapidly adapt or offer promises that make up for their next-gen shortcomings that will be obvious in a year or two. Last, there are teams like Gearbox that can afford to be patient enough to look at how next-gen games should be made and change their technology and their processes to adapt. No one in this group are creating the launch titles we're all focused on building the best titles.How may online gaming, advertising opportunities and other options help offset rising costs?The more ways that we can generate sensible revenue, than the more liberty we have to spend on making our games offer the most. The new age of online consoles brings new kinds of revenue options with respect to offering content to customers rapidly and conveniently through their Internet connections. The options for advertising are also really remarkable. The world is discovering that our form of entertainment is now mass media and it is here to stay. The industry is now armed with data that supports the reality that we speak to the best consumer demographic on the planet. We have dream customers for advertisers. Our customers are young, they have disposable income and they prove to be willing to spend it on entertainment, gadgets, vehicles, you-name-it they also buy lots of brand/identity connected staples like food and clothing. They spend more time playing video games than any other form of entertainment. They are increasingly disillusioned by the entertainment options coming from television or Hollywood and they rarely read anything that isn't displayed on a computer monitor or video screen. They are influenced by pop culture and mass media and they are connected to everything via the Internet and their social networks.Our customers are smarter than everyone else, they have more money than everyone else and they crave quality, interactive entertainment experiences.We should be very excited about this and we should be happy to find ways to leverage our audience to provide the revenue we need to create better and better experiences for them, for us we are part of this audience too.Brad Foxhoven, President and Co-Founder, Titan ProductionsCan you give your thoughts on the role online will play with PS3 games?The impression we are getting from Sony is that it will play a very big role every bit as important as how Microsoft is pushing their online strategy.I think the games that will get the most support from Sony will be the ones that have an online component. Online was a key element of Microsoft's success and traction. I think Sony will make sure their games have just as much of an online push as they would on Xbox.How do you see digital distribution impacting next gen console gaming?The impact will be enormous. Digital distribution will allow for new ways to generate excitement for these games from being able to purchase new game packs that extend the life of gameplay and purchasing cool new items that make your character and experience unique, to the emphasis the consoles will showcase linear programming much like an iPod or OnDemand service does. With something like Steam, the entire console channel is avoided, and suddenly the game developer is selling directly to a consumer. How do you see next generation online gaming impacting game development?It's common knowledge that most game sales occur within the first 30-60 days from release.With the online component added in, it gives the developer and publisher a chance to extend the life of their game beyond this two-month time frame.A film has multiple windows to make money, which unfortunately is not true for a game so it is nice to see that the one window games do have could be extended out for a longer period of time. How may online gaming, advertising opportunities and other options help offset rising costs of next gen game development?The interesting thing will be whether these new revenue opportunities have any impact at all beyond just being additional revenue to the publisher's bottom line. They will end up as great ways to make more money, but a top game will still require the time and investment independent of any external forces. I would like to think that these new options will lower the retail price, and some companies may opt to make that effort, but for the most part I still see the top games from the top publishers staying where they are with price, regardless of these new revenue streams existing or maturing.Chris Charla, Executive Producer, Foundation 9 EntertainmentHow do you see next generation online gaming impacting game development?Online is here, forever. There will still be a market for single-player games, but generally speaking, if a game doesn't have the online component well thought out, and well implemented, it's going to be a problem. We hear there is a very healthy tie ratio to Xbox 360 sales and Xbox Live usage, and we think consumers are either at the point, or very nearly at the point, where an online component isn't just a bullet-point for them, it becomes a deciding factor in whether or not they buy a game. That will certainly be true with PS3 as well. To what degree do you expect development costs to rise from PS2 to PS3 development, and what impact will these increased costs have on the games industry as a whole? We think you'll see two things. First, publishers will be more willing to make more, smaller bets, even on riskier concepts, so they can prove ideas before they make big bets on new next-gen console franchises. I think the online game download strategies that the first parties are supporting plays directly into this, as does the handheld market, and even PC downloadable to a limited extent. As an example, for the price of one PS3+360 game, you could make five or six PSP games, or maybe 10 DS games. If you get a hit there, then you can expand it to console in the next round.Second, publishers are going to be looking to reduce their risks on their bigger bets, and people who can bring something to reduce that risk, whether it's co-financing and other innovative business models, or a way to show some success for a license already with a target market, etc. will probably get a warm reception.Overall, I think both trends are really healthy. It enables innovation to happen at a sustainable pace and level for the publisher, it enables us developers to try out lots of ideas without having to make huge, multi-year bets ourselves, and it increases the chances that when publishers do make a large investment into a new next-gen console franchise, it will be successful.What impact would the price of PS3 have on sales with hardcore gamers? Do you believe there's a price point limit?I think there is a price point limit, but where it is, is very unclear. Clearly, even at $400 Microsoft was hardware constrained, and price never seemed to be a factor: the game stores couldn't keep their systems in stock, even when they were holding people to $800 bundles. I think price obviously becomes more important the further you get from launch, and it may become important when consumers have two good choices in the market. But as for the hardcore, early-adopters, they are simply not price-sensitive.Loren Hillberg, General Manager of Emerging Business, MacrovisionCan you talk about what you would like to see in a PlayStation 3 online strategy?We'd like to see an open marketplace that helps Sony grow the PlayStation franchise with digital distribution of mainstream and casual games in addition to their traditional core gamer audience.What impact would any delay in a U.S. PlayStation 3 release have on the market this year?The PC Market is thriving, with downloadable and casual games driving increases. I don't think the timing of PS3's launch is going to altar that.What impact would the price of PS3 have on sales with hardcore gamers? Do you believe there's a price point limit?It's too early to tell.What role do you see the Blu-ray disc format having on PS3 sales over the long haul?As an early, subsidized platform for high definition content the PS3 could increasingly move from the den to the living room. Combined with online availability of mainstream and casual games this will help open up the platform to a wider audience.What type of increase in game development costs do you see the leap from PS2 to PS3 games taking? And what impact will these increased costs have on the games industry as a whole?The cost increase for creating content on the next generation consoles outstrips the cost increase for game engines. Combined with the increasingly hit driven nature of blockbuster games this will lead to leveraging franchises and creative assets on all platforms good news for PC gamers. We also see an increased emphasis on new business models including in-game micropayments, advertising, episodic content and digital distribution.Bill Gardner, President, Eidos InteractiveCan you talk about what you would like to see in a PlayStation 3 online strategy?I would like to see more and closer third party participation in developing an effective and lucrative strategy for all. I believe that the third parties will be crucial to the success of any online strategy, but we need to make money as does Sony.What impact would the price of PS3 have on sales with hardcore gamers? Do you believe there's a price point limit?Of course there is a price point limit. Have we forgotten the $799.00 video game system?What role do you see the Blu-ray Disc format having on PS3 sales over the long haul?I really do not know. I only know that if a different format becomes the standard, it could cause the company support problems in the long run.To what degree do you expect development costs to rise from PS2 to PS3 development, and what impact will these increased costs have on the games industry as a whole?Clearly the "next generation of games" are more expensive to develop, for now, and we will need to wait and see what tools, mechanisms or devices will be enabled to reduce those costs in the future. At one point in time, if I remember correctly, developers needed high-end graphics stations to develop for PS1 or PS2, and that was prohibitively expensive at that time, but in time the tools became available and the prices dropped. I suspect that this will happen again.Michael Pachter, Senior Analyst, Wedbush Morgan Securities Can you talk about what you would like to see in a PlayStation 3 online strategy?I don't think the PS3 online strategy needs to be all-encompassing.If they're smart, they will provide an incentive to link up to the Internet periodically so that they can measure consumer behavior and deliver dynamic ads.This could take place if they offer microtransactions or piracy protection--something analogous to TiVo (DVR won't record unless a current program guide is downloaded, requiring a connection every two weeks).I don't think that Sony needs to offer World of Warcraft or Xbox Live type service to be successful.What impact would the price of PS3 have on sales with hardcore gamers? Do you believe there's a price point limit?I think that the PS3 will be $500, and that the hardcore would pay $600.Above that, there will be huge elasticity, and I think Sony is sophisticated enough to know that.They won't charge more than $600, and I predict that the box debuts at $499.What role do you see the Blu-Ray Disc format having on PS3 sales over the long haul?Blu-ray is key to Sony's strategy.This isn't a battle between Sony and Microsoft; it's a battle between Sony and Toshiba.The PS3 and high definition DVD are coming out at roughly the same time, as compared to a 3 1/2 year lag between DVD and PS2.This time, hardcore MOVIE buffs are allowed to choose between standalone high def DVD players and the PS3.There are a lot of them, and I think that people with video game blinders on have completely overlooked the significance of Blu-ray.The high def features of Blu-ray will sell PS3s, and Microsoft can't compete with that. Add to that the fact that it doesn't make sense to buy a next gen box without an HD monitor, and all HD monitor owners want more content (meaning movies), and you can see why this strategy is so brilliant.So the "delay" in launch of PS3 is more related to the high def DVD strategy than to anything else.To what degree do you expect development costs to rise from PS2 to PS3 development, and what impact will these increased costs have on the games industry as a whole?Game costs probably come close to tripling for the first SKU.The real question is whether the architecture of the PS3 and 360 are close enough to allow for less expensive ports between the two.I think it's likely, so overall costs per SKU may only double.The consequence is that developers and publishers will take fewer risks, which translates to less innovation and fewer games, at least early in the cycle.Consumers should be ready for a $60 price point, because it's going to be around for a while.