Innovation & Design

BusinessWeek


Video games will dominate entertainment as they migrate to the Web and companies develop new business models to service more casual gamers

On Sept. 1, 1966, when Ralph Baer (www.ralphbaer.com) jotted some notes on how to play games on a home TV set, he probably had no idea that he'd invented the video game industry. The same could probably be said of Tim Berners-Lee when he posted his phone list on his computer network—and invented the World Wide Web.

The rise of video games provides an interesting parallel to the development of the Web—both became the new paradigms that overtook the technologies that inspired them. And the video game industry isn't stopping there.

The video game industry is quickly becoming a part of everyday life for all Americans. In this debut column, I will look at the real growth driver of the industry, which isn't faster game engines and more realistic graphics. To become a mass-market industry, gaming is going beyond product innovation and embracing business-model innovation, distribution-channel innovation, and service innovation.

GOT GAME? YUP.

I believe this approach will allow the video game market to grow (in our lifetime) beyond all other forms of entertainment. Sound like a bold statement? Sure, but look at the evidence. Do you (or your family members) use any of the products on this list? You might not think of them as gaming devices, but they are.

Product

Its Game Application

Computers

PC gaming

The Web

Virtual worlds, casual games, etc.

MP3 Players

The iPod ships with games

Mobile Phones

Casual gaming

PDAs

Casual gaming

Hotel Rooms

Many include game consoles

Airplanes

In-flight gaming

Watches

Arcade games on your wrist

Operating Systems

Pre-loaded Windows games

Cable / Set-top Boxes

Soon to have games built-in

Digital Video Recorders

TiVo

DVD Players

DVD games

Arcades

Arcade games

Restaurants/Bars

Witness Chuck E. Cheese and uWink

Even movie theaters are doubling as gaming venues. They are ubiquitous. And even if you've never bought a game in your life, a game company is making money from you.

That's because the industry's original business model continues to evolve, and games are finding their way into an astonishing number of platforms. Now banner advertisements on many Web sites include "advergames," or ads that look and feel like popular entertainment video games but serve as a marketing tool. Then there is the now popular MMORPG (massively multiplayer online role-playing game) subscription-based model, and the popular-in-Asia virtual item sales model (purchasing clothing or weapons to outfit or accessorize on-screen avatars).

MAINSTREAM AMBITIONS.

Despite the growing presence of video games and the ever-growing number of game genres, the vital component the industry needs to thrive isn't new modes of platforms and styles, it's people—as in, the mass market.

Sure, game developers roll their eyes at the thought. To hardcore gamers, the phrase "mainstream video game player" just translates to "bad gamer." However, we're finding that the so-called "mass market" gamers who flocked to online poker games play at extremely high levels. These people just missed the hardcore gaming generation (those of us who grew up in the 1980s and 1990s). But once they put a toe in the water, they're hooked. Online poker games already have live speech capabilities and vastly better 3-D graphics than other casual games. (Check out www.pkr.com.)

In contrast to the traditional game market, price is a key motivator in this mass-market realm. One of the fastest-growing segments of the market is casual games, and casual gamers don't hang out in video game stores. They don't want to pay $50 to see if they like a game. Many choose to play free online games instead. So how can we get quality games into the hands of these people, and generate revenues from doing so?

Myriad business models have evolved to do just that:

Video Game Revenue Streams

Full-Price Games

$59.99

Medium-Price Games

$34.99

Low-Price Games

$19.99

Budget-Price Games

$5.99

Full-Price Subscriptions

$15.99 a month

Medium-Price Subscriptions

$9.99 a month

Low-Price Subscriptions

$4.99 a month

In-Game Advertising

Earns around 4 cents per 1,000

FREE Games

Can boost brands (and are FREE!)

Virtual Item Sales

Micro-transactions / personalization

Booster Packs

More levels / content—$19.99

Episodes

The next episode—$19.99

The common trend is that games are moving online, where millions of potential gamers can easily download titles or play Web-based games. When the entire video game industry moves online (over the coming years), we'll see a shift to direct consumer downloads or consumer portals managed by the hardware companies such as Sony (SNE), Microsoft (MSFT), or Nintendo. As evidence that the online model works, consider Vivendi's World of Warcraft, a PC online game that has just hit 7 million subscribers. These gamers have collectively paid an estimated $280 million to install the game on their computers and are paying about $100 million a month to play. (Never mind the expansion packs and hint books that World of Warcraft fans purchase; such ancillary products offer another revenue stream.) Vivendi has two other properties, Diablo and Starcraft, which have incredible online revenue potential if they can follow the success of World of Warcraft.

ADJUSTING TO ONLINE.

The problem with games going online is that it cuts out video game retailers. They will have to embrace the disruptive innovation of digital downloading and find models that still provide them with a way to offer services to gamers. Video game rental (see www.gamefly.com or www.gamelender.com) is also becoming a major business area for games. Interestingly, some big, existing movie-rental companies—namely Blockbuster (BBI)—offer unlimited game rentals for $14.99 a month. It's a smart idea that benefits both sides, as the games they send customers commonly cost $59.99 apiece.

The final hurdle is collecting money from gamers. Convenience is key here, so the leading game companies are greatly expanding the ways they can accept funds online. Already today, game publishers accept money through Paypal (EBAY), Google (GOOG) Checkout, the major credit cards, MoneyGram (MGI), Western Union (WU), NetTeller, PayByCa$h, e-Gold, BE-Cash, INTGold, cell phones, home phones, prepaid gaming cards, and cash.

Game designers and developers—who are, by nature, creative—are taking a creative approach to their industry. Thinking outside the console, they are finding new ways to monetize their projects, rethinking their distribution channels and cutting out middlemen, and lowering consumer prices. All in an effort to make gaming appealing not only to hardcore gamers, but to the masses.


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