Online Gaming on the Video Game Systems

This month we deal with the issue of video game console systems going online.  Of course, this is nothing new.  There have been efforts to bring game systems online going back to the 1980s.  However, it was only with the Sega Dreamcast (released in 1999) that online games started to be promoted as a core feature of video game systems. 

Starting with the release of the network adaptor for the PlayStation 2 (August 27, 2002), the next few months is going to see a great deal of action around online console games. Nintendo will release a similar modem adapter for the GameCube this fall.  Meanwhile, Microsoft is launching beta testing for the Xbox Live service.  Xbox Live is scheduled for a full retail launch on November 15, 2002.

Given all this activity it is not surprising that we are getting all sorts of questions about the future of online console gaming.  Therefore we feel it is important to provide a brief overview of the activities of the major players and what it might mean for the short term of the video game industry.

The Basic Facts:

• The Xbox ships with a built-in hard drive and an Ethernet port.  However, to go online consumers must purchase the Xbox Live starter set for $49.95.  Consumers will also need their own broadband connection.  The initial $49.95 pricing will include one year of the Xbox Live service.  Consumers will need to pay for their own broadband connections and there may be additional costs for individual games.  Microsoft will manage the network and individual publishers will need to work through the Xbox Live service if they want their games to go online.

• The PlayStation 2 Network Adaptor shipped on August 27, 2002 at a SRP of $39.99.  Consumers can use either a broadband or a narrowband connection.  There will be no basic subscription cost, Sony will not operate a general service and game publishers are free to run their own networks and charge whatever they want.

• For the Nintendo GameCube, consumers will buy either a narrowband dial-up modem (SRP $34.95) or, if they have broadband, a high-speed network adapter (SRP $34.95).  The network adapters are scheduled to launch this fall.  Nintendo has not been very specific about their online plans, but it is expected that the GameCube online model will look very much like the PlayStation 2 model.  In other words, Nintendo will not operate their own service and it will be up to individual game publishers to control the online experience for each product. 

It is important to understand the strategies of the three major players.  There is a big difference between the attitudes of Microsoft, Sony and Nintendo.  Microsoft is making a big bet that the future of console online gaming is now.  They have built-in online support and are spending a great deal of money building a proprietary online service.  On the other hand, Sony and Nintendo seem to be of the attitude that, in the short term, online gaming will be something for the hard-core.  Their current systems require separate add-ons to play online games.  Even more telling, neither Sony nor Nintendo will launch their own proprietary online game service in the short term.  Instead they are leaving it to individual publishers and developers to create their own services for individual games.  Of course, this does not mean that down the road Sony or Nintendo will not build their own service. 

Sony and Nintendo talk about how they are making their systems an “open” online service.  This is similar to the PC online game model where each individual publisher runs its own service and maintains complete control over the customer relationship.  Meanwhile, Microsoft has a “closed” service where they control the servers and network infrastructure. 

In our report, The Online Game Market 2002, we go to in great deal of detail about the pros and cons of each approach.  Suffice to say we conclude that, in the long term, Sony and Nintendo will eventually follow the Microsoft “closed” model.  However, this may not occur until they release new game systems.  For the short term, Sony and Nintendo seem to be betting that online games will not be a major reason that consumers buy a specific game system.  

With a huge hardware installed base lead, Sony does not feel an urgent need to rush into the online game business.  Sony’s main goal seems to be to have a solution for the consumers that do want to play online games on the PlayStation 2.  In other words, Sony is maintaining the perception of still being on the cutting-edge.  Of course, the major risk that Sony (and Nintendo) takes is that online games will quickly take off and Microsoft will gain a significant head start.  However, given the large installed base lead the PlayStation 2 holds, this will probably only become a major problem if Sony cannot catch-up to Microsoft by the launch of the PlayStation 3.

So where does DFC Intelligence believe the online console game market is headed?  In short, we think widespread online gaming via the console systems will be some time in coming.  For at least the next five years the PC should be the main platform for online games.  Console systems will have online capabilities, but for the short-term it is likely most users will not take advantage of those capabilities.  Instead, the short-term is likely to witness a great deal of trial and error experimentation.  By 2006 DFC  Intelligence is forecasting 23.4 million online console gamers worldwide.  Thus, for the next several years, it will not be an absolute necessity to develop online products for television-based systems.  However, companies that do start developing online games for console systems may have a significant head start that will allow them to capitalize on the market when it emerges.  This is where Microsoft’s investment in the Xbox Live service could pay off.  

Next month we take a look at what will be the “true” battle this fall:  Sony, Microsoft and Nintendo’s efforts to convince consumers to buy their respective game systems.

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