This report is courtesy of Dundee Securities, and represents the views of the company’s Head of Technology Research, David Hodgson, and Technology Analyst, Jeff Rabin. We thought it was interesting because we like to play online, and the financial analyst perspective given here kind of made us wonder, maybe, just maybe, is online gaming going to be a bigger technology driver than 3D?
Online Gaming – Searching For Bobby Fischers
The average age of a gamer is now 28. The video gaming industry (both PC and console-related – hardware and software), at well over US$15 billion, is larger than the movie box office business. Super Mario, the Wall Street Journal reports, has sold more software on the basis of his mustachioed mug than Mel Gibson or Schwarzenneger have sold tickets at the box office. This being said, revenues related to online gaming have been, to date, negligible, but this may be small change if online gaming really takes off.
We have always had online gaming, but it has been limited to strategy games that can be played on dial-up connections, such as chess. This is changing. The world’s largest online gaming company, South Korea’s NCSoft, generated a net profit margin of 41% in the first half of calendar 2002. Its top game, Lineage, has over 4,000,000 subscribers, and one man recently passed away after playing the game continuously for 86 hours without food or water. The television show “48 Hours” recently profiled a number of online addicts to Sony’s online adventure game, EverQuest, which boasts 450,000 subscribers who pay US$13 per month for the privilege of playing the game. EverQuest players control characters that acquire possessions and skills that can be bartered in the game or ‘sold for real money’ on sites such as eBay. Amazingly, EverQuest, the game, has established a real economy outside the virtual world.
South Korea’s NC Soft – Look at Those Margins!
Source: Company Reports.
Microsoft’s (MSFT-Q) soon-to-be-released Xbox Live has a Voice Communicator that is plugged into the controller and allows players to talk (trash talk, etc.) with other players. Just look at the popularity of those mundane message boards on the Web. What if that social interaction could also incorporate gaming activities?
Voice Communicator and Headset – Xbox
Source: Microsoft
Sony, in partnership with LucasArts, is releasing the online game “Star Wars Galaxies” in December; 139,000 players have already signed up just for beta testing. Within the first three months, 500,000 people are expected the buy the shrink-wrapped Galaxies game and then will sign up for a monthly subscription fee. In 2003, Sony and LucasArts are planning to release software that will let players fly X-Wing fighters into combat with hundreds of other competitors. Cool? You bet. It is expected that Star Wars Galaxies could potentially exceed the domestic box office revenue generated by the latest Star Wars episode in the first 18 months of the release.
Imagine the future, where games move out of the realm of fantasy adventure (i.e., catering to former Dungeons & Dragons addicts) and into more mass-market segments. Are we that far away from the point where a player could collaborate with hundreds of others online to fight a key battle in the U.S. Civil War or land on Omaha Beach on D-Day, and most importantly, be able to change the outcome? Outcomes would not be pre-determined.
For those interested in the more sedate, Electronic Arts’ popular Sims game is going online, the first mass market title to move to an online world. The Sims Online is a virtual world built from the imaginations of thousands of players, an alternate reality where the player is both spectator and participant. This brings about social interaction between the players, where you can host other players at your house or visit creations by other players. As the network grows, the idea of virtual reality becomes less unrealistic. While multi-player online gaming takes place primarily on the PC today, that is changing.
Source: Gamasutra.com
As has been painfully discovered by entrepreneurs and investors alike, generating a profit online is a challenge. While the Internet remains hugely popular, consumers have shown a limited appetite for paid content and services. We believe that online gaming may be one of the few exceptions.
Console Gaming
The PC will not be the only platform for online gaming. Rather, the console makers, beginning with Sony and Microsoft, will offer online gaming in the near-term. Considering that close to 40 million next generation gaming consoles may be sold in calendar 2003, the addressable market is massive. At an average price of US$200 per console (including accessories) and with an expected 150 million software titles (which cost between US$30 and US$50 each), the market for console hardware and games should amount to almost US$12 billion.
Electronic gaming is not just kids’ stuff: the average age of the console gamer has being going up (he now is close to 30) and he (it is still usually a he) has more disposable income than any kid aside from Richie Rich. We raise the topic of console gaming in this week’s Tech Insight because console gaming is about to experience a sea change in use as it moves from a discrete, lounge-based format to an online, multi-player one.
Online gaming is not new, and it is already very profitable, as Electronic Arts’ Ultima Online, Sony’s EverQuest, and the wildly successful NCSoft’s Lineage can attest. NCSoft, we would note, is now in bed with Sony. Sony shall provide NCSoft with content for its latest titles. What is new is that the gaming consoles are about to go online and it is Microsoft who we believe, initially, is in the best position to profit from it. Software companies likely to make inroads include the usual suspects, Activision, THQ, Midway Games, Square and 3DO and perhaps even Disney, though Disney’s record in electronic gaming has so far been poor.
Already, over 50% of Xbox users have broadband in their homes, and the Xbox is not yet even activated to use broadband. In addition, over 40% of PS2 users have broadband at home, while Nintendo GameCube users, who are generally the youngest of the lot, have a one in three chance of having broadband at the ready. With this degree of broadband penetration in homes already, take-up of connected consoles will substantially accelerate. South Korea, the home of NCSoft, has 67 percent of households with broadband, compared to only four percent in the U.K. and about 12 percent in the U.S. The average Korean “netizen” clocks an astounding 1,340 minutes a month of Internet time!
The results of this momentous change in how console games are played will be:
- increased deployment and use of broadband in our homes;
- more console and accessory sales;
- more software sales;
- a change in the way game software is distributed and revenues collected;
- the rise of a new business model of the sort that NCSoft has pioneered (the employment of this new business model will either be pure-play in the way that NCsoft is, or as an adjunct to an existing business, for which Microsoft is aiming);
- an expansion of the target market as gamers become older and males, hopefully, make up a smaller proportion of the market;
- higher potato chip sales.
We have not heard the term for a while, but online gaming and gambling, and adult entertainment (the single most successful Internet business so far, though numbers, predictably, are hard to come by) could be the ‘killer app’ that drags broadband out of its slump and consumer electronics out of the 5.1 home theatre blues.
Online Gaming has Been Around for Years
Online gaming has been around for years, and one of the most popular games has been, strangely enough, chess. Yes, chess. So, what Microsoft, Sony, Electronic Arts, NCSoft and others are looking for (and will find) are Bobby Fischers.
Fischer, Reykjavik, 1972
The reason we bring up chess and Bobby Fischer is that those who like to play chess often find themselves with no one to play with. The Bobby Fischers of the world find it difficult to find other players nearby who will challenge them. And no one who is not good (but lives nearby) wants to play against them. It is, after all, no fun being thumped by someone much better than you. This is why in the past, great chess players resorted to playing with other great players through the mail.
Think about your next move. Make the move. Post it across the world to your opponent. Wait for his countermove, all the while fretting about your last move. Think about his move. Make a move… Games, literally, took years.
This is probably why when Nigel Short, the self-effacing English Grandmaster from West Hampstead, told The Daily Telegraph that he had been playing Bobby Fischer online, no one in the world of high level chess batted an eyelash. Where else but on the Internet could a lone, paranoid, weight-lifting genius like Fischer find an opponent worth playing? In one match against the U.S. Female Champion Lisa Lane, Fischer withdrew, saying, “Women are weakies – I can give KT odds to any woman in the world.” (‘KT odds’ are where you hobble yourself by playing without knights.)
After trouncing Spasky in a globally televised match in 1972 that ended 30 years of Soviet hegemony in the chess world, Fischer all but disappeared from public view. Since Reykjavik, Fischer has only surfaced for the occasional radio rant or one-off match to top off his bank account. So great is the mystery of Fischer, and so bizarre the man who became a grandmaster at the age of 14, that the movie of his life is where we take the title of this Insight.
The movie was not, however, about the game or Fischer, but about a cute kid overcoming autism. And therein lays the appeal of online gaming.
What if Bobby Fischer could play against a computer? Would he? Well, you can play against a computer. Bobby Fischer has probably played against a computer. But few do, as it is so boring. This is undoubtedly why there has never been a computer-to-computer chess match that has seized any public imagination. There have only been matches between computers and people, as was the case of the famous match between IBM’s Deep Blue and Gary Kasparov.
Source: Chessbase.
Kasparov won one, Deep Blue won two, and they drew the remaining three matches. As we write, the Brains in Bahrain match between Kramnick and Deep Fritz was just completed, but still, we are not interested.
What was interesting about the match between Kasparov and Blue was whether humans could devise a machine that could outwit a man and not chess or the device itself. No one really cares about how many millions of moves a second a Deep Blue can compute (200 million, it turns out).
On a much grander scale, this is what massive multi-player online worlds are all about.
Humans are Interested in Human Interaction
Computers playing games against other computers are, intrinsically, not interesting. There is no human drama, the life and blood of entertainment. Even the great animated movies such as Monsters Inc. or Shrek owe their greatness to the great actors employed for their voices, and the great artists who dictate the computer animation.
Source: USA Today.
The Linux server farms and Silicon Graphics workstations are incidental to the actors, artists and direction. When you watch these movies, you are watching great comic actors acting and great artists painting. Without John Goodman, Billy Crystal or Mike Meyers, these movies would be as dull as, well, Final Fantasy, last year’s animation flop based on Square’s game of the same name.
In part, this is why such great things are expected of online gaming, particularly when it comes to online gaming on user-friendly consoles, many of which are already installed in our living rooms sporting unused Ethernet ports.
Online gaming, the industry, believes it could be very big indeed. Because it, along with a more immersive computing environment through better graphics and sound brought to us through the semiconductor wizardry of companies such as ATI, NVIDIA and Intel, whether it is a first person shooter or something more sedate like EverQuest or Ultima, brings humans to the game play.
Instead of playing against the machine, we can now play through the machine against like-minded opponents wherever they may be, regardless of what time it is. The pace is much faster than chess by post. You can even trash talk. And that has to be far more exciting than Microsoft Window’s Solitaire.
Indeed, we think online console gaming will eventually be bigger and more lucrative from a business standpoint, because of the very nature of the differences between console and PC games and game play. A PC, found at the office or tucked away in a spare bedroom where people play games through their keyboards only a foot or so away from the screen, do not lend themselves to multiple players in the same room. Consoles, by contrast, are found right smack-dab in the den, hooked up to the family TV; people sit on the couch to play, and it is presumed that people will play against each other. Moreover, because of the closed nature of the console (the open source Idrema was an exception, but it is gone), game hosts have absolute control of their audience. In the PC world, you can play CounterStrike online without paying any host fees whatsoever. However, in order to play CounterStrike, you still require a copy of HalfLife, which Valve, owners of the title, are more than happy to sell you.
If you think that all this online gaming is just “on the horizon” and akin to the hype that preceded WAP, the numbers behind Sony’s EverQuest, another successful business model that charges a monthly subscription fee of US$13, suggest otherwise. A recent morning showed over 45,000 people online and nearly 500,000 customers who pay up each month, with 12,000 joining their ranks each month. The EverQuest virtual world has even started to leak into the real world, with virtual goods and IDs auctioned off for real money on eBay to other players who wish to take a short cut to virtual fame. If the figures are to be believed, and we believe them, the average player plays over 20 hours a month and Sony’s EverQuest brings Sony US$5 million dollars a month, a great deal of that falling directly to the bottom line.
Humans are Interested in Human Interaction, Continued
EverQuest, for Sony, was basically a science project that turned to gold and is now the centerpiece of an ambitious online strategy for Sony that will have the PS2 at its heart. Sony has already announced its intention to add digital video recorder (DVR) capabilities to its PS2 gaming console, which would allow users to record and play back television programs on the unit. Sony is no stranger to the DVR market. The company is a TiVo licensee and already offers several TiVo-compatible DVR models.
The move is, of course, part of Sony’s efforts to broaden the market for the PS2 beyond gamers. The strategy views the PS2 as not merely a gaming console, but as a multi-function device that can be the hub for various forms of home entertainment. Sony’s interim plan is to develop a new version of the PS2, incorporating a TV tuner and the other features needed to enable the console to function as a digital video recorder. It would also likely offer upgrade kits to allow users to retrofit existing PS2 consoles, just as it offers a Linux development package in Japan, and already has a networking kit for sale, though take-up has been weak. And the PS3 is not that far away. Sony’s plans for our living rooms are great indeed.
Sony is not the only one. Electronic Arts will be introducing its very popular Sims Online shortly for the PC platform, and there are many more waiting in the wings.
Nintendo’s ATI-powered GameCube is the least powerful and least expensive of the consoles on the market. The GameCube does have a communications port built onto the motherboard, and Nintendo announced plans to roll out online services at an as yet undetermined date. It is clear that Nintendo is taking the more conservative vendor approach with regard to online gaming in these early days.
Microsoft Expects to Spend $2 Billion to Push Online Gaming
Xbox Live, Microsoft’s console-based foray into online gaming, is going live next month. (Microsoft already has a sizable presence in PC-based online gaming.) And with Xbox selling for US$199 with one of those annoying rebate plans including a remote control for watching DVD movies, for some this is as tempting as a spare DVD player. DVD sales, unlike their CD counterparts, have remained incredibly robust.
Linux heads are also snapping up Xboxes to run various flavors of Linux, thinking that they are beating Microsoft at its own game by buying Microsoft-subsidized hardware to run an open source operating system. Truth be told, they are still paying Microsoft for the pleasure of thwarting Microsoft.
As we wrote in our March 12, 2001 report, “The Trojan Horse that is Xbox,” from a sheer hardware and operating system standpoint – with its internal hard drive, built-in Ethernet, 5.1 sound, and the MSN network to support it, the Xbox is best positioned for online gaming. Microsoft has disclosed that it is backing the program with US$2 billion. Initial games will include Sega’s NFL and NBA, Infogame’s (IFGM-Q) Unreal Tournament and NFL Fever. Altogether, Microsoft is aiming for about 50 games and 100,000 users by the end of the year.
We think Microsoft has the right idea insofar as it is promoting voice as a useful adjunct to the gaming experience so players may trash talk other players. The possibilities for adult online entertainment in these increasingly immersive worlds are not to be forgotten either, but we are not going to bring them up now or later. We will also not talk about online gambling, but this too could be wildly lucrative to those companies in a position to dominate it.
What it Will Take to Succeed
We are quite bullish on the market for multi-player networked games, and charging a subscription for access estimates that the market for online console gaming revenue will grow from scratch this year to over US$2.5 billion in 2005. It is believed that 13% of U.S. households will be connected to the Internet via console – not an insignificant comment, considering that America’s current broadband penetration rate is 12%. If you already have broadband, it is simply a matter of winding some additional CAT 5 cable and purchasing a cheap router (both of which you can buy at Costco if you do not already have them).
The economics associated with the subsidizing of hardware in the video game console market, coupled with the nature of Microsoft’s hardware components, means the Redmond giant has made a multi-billion dollar bet on being able to build a new revenue stream in the form of online console gaming revenue. Failure to execute in this regard will ultimately spell financial disappointment for the Xbox and its ambitious strategy, however it is still small change for the beast. It is Sony that Microsoft has in its sights, and as we have argued before, the battlefield will be our living room.
The Market Size – Solution to the Broadband Slump?
Presently, with no console-based online gaming whatsoever, people spend US$1.4 billion in online subscriptions. Even in these days of attenuated forecasting, Jupiter research still expects this to grow to nearly US$6 billion in 2006, and the majority will be in online gaming. Given the market size and the existing appetite of consumers, this is not an unrealistic figure.
As media and computers, games and Hollywood increasingly converge, the PC manufacturers will keep on searching for other Bobby Fischers. In online gaming, they may well have found him.