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Nothing but Net

Sunday, October 10, 1999 by TheDoc || [0 Comments]

I can remember when purchasing a game was as simple as going to the store, slapping some cash on the counter and calling it a done deal. PC entertainment was experienced alone; with the exception of sharing common adventures with a few friends, there was little sense of fellowship and no interaction with developers. No one complained about the solitude inherent in gaming, in part because we had never experienced anything else and also because no one was there to listen. How times have changed! The Internet has opened up limitless possibilities, including the end of seclusion and the advent of new avenues for selling digital fun. With this innovation has risen considerable debate over the preferred methods of compensation, with most people falling into one of two camps spearheaded at two prominent companies: Origin's subscription model and Blizzard Entertainment's one-time retail fee approach. Which is better? That might be tougher to answer that it seems on the surface.

There are those who argue that online gaming should be a value-added benefit from purchasing a title for a one-time price. In other words, I bought the game and should be able to play it online for free! This posture is more or less a holdover from prehistoric times, when games as isolationism ruled our computers. We learned then that once we purchase something contained within a box, it becomes ours to do with as we please. Despite the evolution of gaming into a social act, the classic solo adventure has not gone the way of the Dodo; indeed, it thrives in various forms. Yet gaming more and more resembles other forms of entertainment, such as cable television, in which customers shell out a periodic fee for services.

Blizzard appeals to gamers who fall into the first camp. Their pricing model is the perfect wish list for online adventuring--purchase the box and get unlimited online time for free. Battle.net provides go-between services to bring gamers together, online chat, ladders, tournaments and fan forums. It seems to me that Blizzard's thought process in developing this model first and foremost revolved around what customers would want; the business model to support those goals came second. Battle.net is a value-added offering to customers who purchase their titles; this and banner-supported advertising covers the operating costs the online service.

Who can argue that this is not a winning situation for both Blizzard and their customers? As I mentioned in our last editorial, Battle.net and the business model on which it is based has been a tremendous success for Blizzard. Their efforts to provide an all-inclusive experience for a one-time retail price through such games as Diablo and Starcraft has been instrumental in building intense devotion and trust, and it shows in their sales numbers. The formula is simple enough: Blizzard gives people a solid single- and multiplayer experience, and customers give them their vote of confidence and support through purchasing their titles in massive quantities each time one hits shelves.

Origin's customer snag seems more geared toward shareholder value than gaming utopia, but is no less successful than Blizzard's approach. Their business model--purchase the box, then shell out a once-a-month online fee--was created to enable Origin to earn a reasonable return on investment. This was no small mountain to climb as their investment included three years of development and the substantial infrastructure required to support it. It boggles the mind that there are close to 60 people laboring full-time to support the Ultima Online audience.

How prosperous has this model been? It has been a tremendous success and shows great promise for expanding the online gaming business plan. Witness the competition that has followed Origin's lead in adopting the model and the fervent gamers who have engaged such as titles as Everquest and Asheron's Call en masse. Are all of these people insane when Blizzard offers a free online experience? One thing we have to realize is that these customers are rational people who have made a careful decision regarding what they are willing to shell out for entertainment. With users spending an average of 75 hours a month in Britannia, the entertainment value tops cable television and going to the movies. Is that worth $10? Customers have responded with a resounding yes, and Origin is still attaining new levels of paid subscribers and usage two years after launch. The most important component to their pricing model has been creating an immersive environment in which users invest a huge amount time and emotion.

The rationale behind what I said at the start of this editorial--that it would be tougher than it appears on the surface to peg a winner between these two pricing models--should now be evident. In a perfect world, all games would incorporate a free online component. On the other hand, I am not sure whether the incremental revenue streams for most companies are substantial enough to support certain games for free over the Internet. Ultima Online and Everquest are examples of titles that are expensive to support, but also suggest there is a group of hardcore gamers out there willing to spend one's hard-earned cash on a regular fee. The essence of that last sentence, however, is "hardcore gamers." The big question facing developers and publishers moving forward is, "Will casual gamers agree to a regular fee?" Blizzard meets the desires of both hardcore and casual gamers, so unless their tactics change, the answer presents a challenge for the future of companies wanting to earn revenue through online gaming.

It is therefore clear that there will be more experimentation. For the health of the business overall and to advance online games as a creator of true shareholder value, the subscription model will continue to have an important role. Development and operating costs are escalating; creating evergreen intellectual property with sustainable income streams has the potential to catapult the entertainment software business to a new level of growth and prosperity. If online gaming ends up being nothing more than a service given away to drive retail sales, the industry will have lost its biggest opportunity over the next 10 years.

Furthermore, certain games require a regular fee to support ongoing development teams as well as the high costs associated with assembling servers at an ISP data center and the high bandwidth utilization. Before Ultima Online and Everquest, I would have scoffed at a subscription model, but Origin and 989 Studios have proven that the right content will bring out a reasonable portion of the hardcore audience. Moving forward, however, capturing the huge audience of casual gamers is going to the real challenge for companies wanting to charge a regular fee.

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