Getting social in PlayStation Home.

NOV. 6, 2008 • DFC Intelligence has always argued that there are two major appeals of online games: 1) the ability of online games to directly generate significant revenue and 2) online features as the indirect driver of business through building a community, extending product lifecycle and enhancing consumer loyalty. With the Xbox Live, Microsoft has clearly been focused on making the service a direct revenue generator. In addition to the annual subscription required to play games, Xbox Live’s big focus has been on getting people to spend money in Xbox Live Marketplace.

In contrast, Sony (and Nintendo) have focused on making online connectivity a free value add. The services were not as robust as Xbox Live, but they were free and most consumers could not really tell the difference. Based on the installed base of the PlayStation 2 versus the original Xbox, having the best online game service was clearly not a key driver. With the PlayStation 3, Sony has significantly increased its online offerings, and unlike Microsoft is not charging for online play. That is why it is good to see Microsoft focusing on adding value without looking to directly generate revenue.

The New Xbox Experience is mainly about extending the community and enhancing the user interface. In other words it is about making the online features an indirect driver of business. It is no secret that the Xbox 360 has struggled to expand its user base beyond the hard-core action shooting fan. This is not from lack of trying on Microsoft’s part, going back to 2002 when they bought leading Nintendo developer Rare. Unfortunately, many of these efforts have not panned out to the extent desired.

However, at least in the U.S., there are some indications that the Xbox 360 may slowly be expanding its demographic appeal. With a recent price drop and a new interface, the Xbox 360 has surprisingly become the system with the freshest value proposition for holiday 2008. Most importantly, the Xbox 360 now has a great deal of content to appeal to consumers that DON’T play violent shooting games.

Casual games and social games are quietly becoming a big part of the Xbox 360 experience. Games with more mass appeal, like PopCap’s Bejeweled and Zuma titles, are available on Xbox Live arcade for only about $8. Other products like the SceneIt? party trivia games are designed for the whole family. The Netflix partnership could prove to be particularly lucrative as it allows users to get living room access to stream an unlimited number of movies for a set monthly fee.

All this effort might finally start to pay off for Microsoft. According to Trina Schwimmer, CEO of GamingAngels, a website targeted to female gamers, the Nintendo DS and the Xbox 360 are the most popular platforms among their users. Schwimmer says their female users have been especially attracted to the community features of the Xbox 360 and have started planning viewing nights around Netflix rentals.

With online console games in today’s marketplace, it is important to focus on building consumer loyalty and extending product life cycle as opposed to build a major direct revenue source. Compared with the traditional retail business, the revenue from console online games is minimal.

Microsoft claims Xbox Live has generated over $1 billion in the three years since the Xbox 360 launch. However, when you look closely at those numbers it is clear that the bulk of this revenue has come from the $50 a year membership fee. There have been 12 million hours of video content served on Xbox Live. This sounds like a lot, but revenue generated is at most a couple of bucks an hour. The usage will need to grow exponentially for Microsoft to generate any real revenue.

DFC Intelligence forecasts strong growth for console online games. In our latest Online Game Market Forecast report we estimate that worldwide console online game revenue will grow from just over $600 million in 2007 to $4.7 billion by 2013. Furthermore, the bulk of that growth is expected to occur in digital downloads. Whereas, today the majority of revenue comes from subscriptions (most notably the $50 a year for Xbox Live), by 2013 about 55 percent of revenue is expected to come from digital distribution.

Nevertheless, even by 2013, console online game revenue is expected to pale in comparison to online game revenue from the PC. Worldwide PC online game revenue is expected to be $15.7 billion in 2013. In other words, the opportunity in console online games is not so much about the revenue, but is instead about the more intangible features to enhance the customer experience.

With the New Xbox Experience, Microsoft is trying hard to stay ahead of the online curve. At the same time, Sony has very ambitious plans for its PlayStation Home (PS Home) service and has been making major improvements to all its online offerings. However, PS Home has been delayed in beta and its appeal is unproven. Meanwhile the promised features for the Xbox 360 are mostly here today. The main question is: will consumers care? We think that online games are an important part of the mix, but only one of many deciding factors. In a detailed evaluation of the online services we think the Xbox 360 clearly has the current lead. However, this is only apparent after taking the time to make a close assessment. We wonder how many consumers will make that effort.

The other issue to consider is whether online games can help Microsoft on a global basis. DFC has forecasted that the Xbox 360 will do significantly better in markets like North America and the U.K. than it does in the rest of the world. Right now we are sticking to that assessment, but will of course revisit the issue in early 2009.