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Challenges and Opportunities in the Online Game MarketJune 25, 2003 The beginning of summer is always our favorite time of year to look at the topic of online games. DFC Intelligence just released its latest report, The Online Game Market 2003 (see press release; see table of contents). We have had the privilege of publishing reports on online games since 1996, so we have seen a lot of hype and a lot of heartache. Back in 1996 many forecasts were predicting that by 2003 most homes would be wired with fiber and the online game market would be bigger than the traditional video game market. Of course, those forecasts were wrong by an order of magnitude. Obviously the online game market has been a big disappointment to many. However, from our perspective, the market is right on track and positioned for solid growth. For the record, DFC Intelligence’s 1997 online game report said “given the uncertainty over consumer demand and business models, forecasts that online games will be a $1 billion market by the year 2000, or even 2002, seem optimistic.” At the time we were considered naysayers, but in hindsight we were right. However, much has changed since 1997. There is proven consumer demand and there are solid business models. The online game market is still immature, but the seeds have been planted for solid growth. One of our major arguments has always been that there is likely to be a close tie between online game usage and home broadband penetration. A solid online game experience really requires a broadband connection. On the flipside of the coin, the ability to play online games is a major reason to subscribe to a broadband service. The good news is that broadband is finally starting to make major in-roads into consumer households, not only in the U.S. and Canada, but also certain countries in Asia and Europe. DFC Intelligence forecasts that the number of worldwide households with broadband will grow from about 55 million today to 190 million by 2008. The number of broadband households in Europe increased 140% in 2002. In Asia, South Korea and Japan are experiencing rapid growth in broadband households (in sheer number of broadband households they are #2 and #3 respectively, after the U.S.). In South Korea alone, the market has almost reached the saturation point with about 70% of households having a broadband connection. As a result, online games have become a big industry in Korea. In a recent study of South Koreans aged 9 to 44, the Korea Game Development & Promotion Institute found that over 90% of respondents had experience playing games. Korean company NCsoft will go down in history as the first company to make $100 million a year on online games. They did this with just one product, Lineage. The experience in Korea is a solid indicator that the growth of broadband and the growth of online games go hand-in-hand. The new DFC Intelligence report has looked carefully at individual markets around the world and the potential for broadband growth in these markets. Based in large part on this analysis, we forecast strong growth in online game usage, with the number of worldwide online games increasing from 73 million in 2002 to 198 million by 2008. Even more impressive is these gamers will be spending more time online. By 2008 we forecast the usage of online games will be 35 billion hours a year. As the chart shows, what we define as casual gamers will account for only 27% of usage, despite our forecast that 62% of online gamers will fall into that category.
DFC Intelligence feels fairly confident that online game usage will grow significantly. Where we feel less confident is forecasting how companies will generate revenue from that growing usage. The report contains 10 scenarios for market growth, each based on different revenue generating schemes employed by the industry. Under what we deem the “Most Likely” scenario, online game revenue grows to $5 billion by 2008 (see chart). Under this scenario, we think the bulk of revenue will come from consumer subscriptions and other “pay-to-play” services. While we present scenarios for the growth of advertising revenue, we think they are rather unlikely to occur.
Pay revenue is money paid by consumers for subscriptions etc; ad revenue is money from advertising, sponsorships, e-commerce royalties etc. The other major growth area for online games is likely to be in console online games. By 2008, DFC Intelligence forecasts that there will be over 100 million video game console systems that are “online capable” (i.e. by connecting to a service they can go online). However, as the chart above shows, even in 2008, PC online games are expected to be the largest segment of the market (63% of revenue). Nevertheless, the real growth area by that period should be for console online games. On the downside, even as usage and revenues from online games soars, profits are likely to be elusive. In fact, most companies in the online game market are likely to lose money over the next five years. The following points are just some of the many challenges faced by the online game market: · With online games, development and operating costs tend to be high, advertising rates are low, and outside of a handful of products, many consumers are reluctant to pay for content. · The games that consumers pay for tend to be some of the most expensive interactive entertainment products to develop (including high-end video games). On top of that there are ongoing operating costs. · There is a rash of high-end, subscription-based massively multiplayer online games (MMOGs) in development. DFC Intelligence tracked over 150 MMOG products in various stages of development. At most we believe the market over the next few years can support 20 games, probably less. · Outside of the narrow genre of fantasy role-playing, most subscription-based online games have struggled to find an audience. EA.com alone has had four major disappointments in the past two years, Majestic, Motor City Online, Earth and Beyond and The Sims Online. · There is a market for casual online games that have low development costs and can attract significant usage. However, consumers are reluctant to pay for these games, meaning they generally must be advertising supported. Online game sites have done a fairly good job selling ad inventory, but rates have been extremely low. Market leaders like EA.com and Sony Online Entertainment have found that despite attracting millions of users to their casual games, their main area of revenue growth has been with subscriber-based games that attract an audience of under 500,000 users. In conclusion, there are plenty of growth opportunities in the online game market. However, this is definitely not an area where companies can rush in and expect to strike gold. Careful planning, patience and, of course, adequate capital will be the keys to success. The Online Game Market 2003 is a 475-page report that has multiple scenarios forecasting growth for the online game market in North America, Asia and Europe through 2008. The forecasts are also broken down by platform (PC or console), type of revenue (pay or advertising) and consumer type (casual, moderate or hard-core). There are also forecasts for broadband penetration, number of users, number of hours of use, a detailed look at business models, types of subscription services, advertising and online games, operating costs, digital distribution, analysis of individual online game genres and products, online console gaming, company profiles and detailed analysis of many failed services (see here for a table of contents). As part of our ongoing research efforts DFC Intelligence is delivering free monthly briefs on hot topics in the interactive entertainment and video game industry. You (or a colleague of yours) have signed up to receive these briefs. DFC Intelligence’s research services provide detailed strategic analysis of the interactive entertainment industry. Reports on the video game, online game and PC game market include: Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry Released April 2003, this 500+ page report contains complete forecasts for all individual console and portable game platforms by region (Asia, Europe/PAL, U.S.) through 2007. Also included are PC game forecasts and historical sales figures. The report has several scenarios for future market growth including an analysis and forecasts for new systems from Sony, Microsoft and Nintendo, as well as new portable game systems. Market Leaders in the Video Game and Interactive Entertainment Industry This 600+ page report profiles major companies in the interactive entertainment industry. Each individual company report is about 15-40 pages and has an historical background, financial overview, product analysis and a frank assessment of the outlook for that company. The Online Game Market This 475 page report contains a comprehensive analysis of the online gaming market. Includes current sales trends, market forecast, and in-depth company profiles. Other DFC reports include The Business of Video and Computer Games, The State of Game Technology, The Video Game and PC Game Consumer and The Executive Interview Series.
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