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MMOs Dreaming of a China Boom

SPECIAL REPORT: On April 19, the San Francisco Marriott played host to “Mastering the Craft of Online Gaming”, a conference dedicated to the business of building MMOs. Overall, the event was underwhelming and unattended, but that doesn’t mean there weren’t some interesting tidbits to be gleaned from attendees. The biggest take-aways:
American development companies underestimate the power of the Asia markets, and middleware is the path to success.

Ozzie Monge is vice president of business development at research firm DFC Intelligence. Based in San Diego, Monge was passing around a copy of his company’s latest report on the Chinese market. While the report didn’t contain any information that hasn’t already been covered in the mainstream gaming press, its weight and girth did underscore the fact that Asian gaming markets haven’t just exploded, they’re continuing to expand every day. With 180 million Chinese expected to be online by 2010, that could mean as many as 50 million potential subscribers by that time.

Monge stated that his firm’s research has shown the Chinese online game marketplace will be the biggest and most lucrative world-wide. 

Elsewhere at the show, infrastructure salespeople from the likes of OpSource and Emergent hawked their services to a non-existent crowd of developers. Indeed, the conference was attended almost entirely by vendors and speakers. Those poor speakers who happened to be from actual MMO companies, such as Three Rings CEO Daniel James (who gives good numbers), were hounded by sales pitches all day.

This was probably due to the fact that the world of MMO games is not yet one of entrepreneurial spirit: indeed, most companies would rather farm out their properties to experienced MMO developers than try to go it alone. While this may change in the future, it means that, for now, MMOs are typically made by expert teams who don’t think they need to attend educational conferences. 

However, the biggest sales person at the show was easily IBM’s George Dolbier. He’s IBM’s CTO of games and interactive entertainment, and he said that his company is seeing more and more interest from companies who don’t want to build everything from scratch.

“We try to take a neutral approach to the market, although we do have our internal leanings. If you were starting development of an MMO three years ago, there weren’t very many commercial choices for middleware, let alone the ability to outsource end-to-end infrastructure. Today, we see announcements on an almost weekly basis for a new pieces of middleware. There’s a lot of talk in the industry about how things like Emergent can save you like 12 months and dramatically enhance development,” said Dolbier. 

And that’s the key to getting new products up and selling in emerging marketplaces.

Discussions from attendees pointed to Brazil and India as possible new markets for MMOs, with limiting factors being broadband and poverty rather than technical knowhow or desire for gameplay. 

The net result of the Mastering the Craft of Online Gaming Infrastructure conference was to hammer home the concept that MMO’s are just applications. Derek Wise, Netoptex CEO, said “Games are software as a service. I think we can say that out loud now.” And he’s right. When it comes to massively multiplayer games, they’re just big database-driven thick client applications. The only real difference is that the development team includes artists and sound guys.

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Does Virtual World Advertising Work?

The debate over the value of advertising in the metaverse just got a lot more interesting. Earlier this month, I noted a survey which suggested that real world marketing in Second Life wasn’t working. That still seems largely true, but now a new study from Seattle-based Global Marketing Insite strongly implies that it’s not from lack of interest— which is, according to the firm’s report, surprisingly strong.

When asked, “Are you more likely to purchase/use a brand in real life that is represented in Second Life?”, 37% of SL users surveyed by GMI responded “Definitely”, while 41% responded “Maybe”. These numbers are in marked contrast to the report from the Hamburg-based research firm Komjuniti, in which 72% of SL users polled said they were disappointed with marketing efforts in Second Life. And where Komjuniti’s data was based on interviews with 200 SL Residents, GMI garnered this figure from 479 Residents, selected via a double opt-in process, GMI’s Jensen Gadley tells me, after e-mailing me their full raft of data.

Instead of asking the respondents what they thought of existing SL marketing, says Gadley, GMI asked them what they thought of it in principle. “The Komjuniti survey specifically asked people what they thought of advertising campaigns in Second Life,” he explains. “The problem is if you ask anyone point blank if they like advertising, in almost every medium, people are going to say no.” Instead, says Gadley, “We decided that since Second Life is such a new technology, asking people what they think of specific marketing and branding techniques wouldn’t tell us much about the platform’s potential.”

With that angle of attack, GMI came away with decidedly different answers. So the problem with SL marketing doesn’t seem to be rejection of advertising in general, just indifference to the kind of virtual advertising they’ve seen thus far.

These figures, of course, aren’t likely to resolve the larger debate over Second Life’s comparative value as a marketing platform.

After all, GMI’s study is taken from an extensive, multi-country survey of 9,529 respondents who were asked about their perceptions of Second Life, with only 5% reporting that they even had an SL account— hence the 479 who gave their specific responses to SL marketing and other topics. What’s more, 87% of those surveyed haven’t even considered creating one. This points to the relatively small number of total SL users, in relation to other online worlds— at this writing, about 500,000 regularly log in on a weekly basis. (Gaia Online, by contrast, has 2,000,000 monthly users, 10-20% of whom participated in a recent New Line marketing campaign, as compared to the 1% or less who’ll typically engage in an SL-based campaign.)

On the other side of the ledger, proponents of SL marketing are likely to point out the advertiser-friendly demographics compiled by GMI— 65% of Second Life users polled have a reported household income of $54,000 or more; 51% of them log in 6 hours or more a week.

So the debate over the ROI on SL advertising continues. To be sure, the real short term tension is desire versus reality. Because with few exceptions, most corporate-sponsored sites in Second Life are sparsely and intermittently attended.

And for the next year, at least, even the most effective Second Life campaigns will meaningfully reach an audience numbering in just the high five to mid six figures. (In other words, it’s comparable to boutique advertising on a popular blog.) And as SL marketers for the film 300 recently found out, that totally leaves aside the question of whether advertisers are comfortable with putting their products in all the surreal or disreputably grabass situations that Second Life’s content creation tools make possible.

(This is just a sampling, by the way, to what is easily the most extensive survey of consumer perception of Second Life I’ve seen thus far, everything from real world family demographics to moral boundaries for avatars— read GMI’s summary, and note the contact link there to get the whole thing.)

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Virtual World Revenues, $6 Billion by 2012

David Cole of DFC Intelligence, a game industry expert for years, has been a guiding source for me for years, and he just revealed some astonishing numbers about the MMOG market:

“I can let you be the first person we tell that we forecast the worldwide MMOG market going from $2.2 billion in 2006 to $5.9 billion in 2012,” he e-mails me.

These figures are part of an upcoming DFC report, and they are bullish in the extreme. For proportion’s sake, bear in mind that the entire computer/videogame industry is currently a $7.4 billion business.

“In terms of overall growth,” Cole continues, “the market in both North America and Europe is expected to triple.” Furthermore, over $2.3 billion of that revenue is expected to come from advertising and digital distribution of virtual items/characters etc, not subscriptions.” This would be quite a reversal, for most Western MMOs still rely on a monthly subscription model.

The DFC forecast, it’s worth noting, is pinned to online games, with some ambiguity on how to count revenue from the numerous virtual worlds on the market or about to be launched; many are social hangouts or user-created collaborative spaces, and not games in the strict sense of having pre-defined goals, levels of success, and so on.

“Does MySpace count?” Cole asks rhetorically. “Every free site that has an avatar?” (Many online worlds are free to the user, and depend on external advertising deals for revenue.) DFC’s solution for virtual worlds, he goes on, was to only count user-to-company payments.

“If you can get them to pay a subscription fee or get them to buy items in a virtual world… for those consumers that starts to become a game.” With those services, he says, “[W]e would count the subscription and virtual item revenue, but not any ad revenue they generate.”

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Kutaragi to Step Down From Sony

In an announcement that shouldn’t surprise regular GigaOM readers in the slightest (warning signs emerged as far back as last February, and reached crescendo pitch in November and December), Sony Computer Entertainment Inc. just announced that CEO Ken Kutaragi, the “father of the Playstation”, will leave his post in June and become an “honorary chairman of SCEI”.

By most appearances, his new title will be an “emeritus” position in the sense attributed to Rupert Murdoch, when he showed a Newscorp exec the door: “The ‘e’ means you’ve been given the elbow and the ‘meritus’ means that you bloody deserve it!” Unsurprisingly, most analysts attribute the departure to the Playstation 3’s poor performance against the Wii, and worst blow of all, as compared to the Xbox 360.

Not entirely deserved, however, for despite the numerous missteps in its development, pricing, and marketing, the PS3 ultimately failed because Kutaragi succeeded with the PS2 so well.Though seven years old now, the Playstation 2 is still selling better than the Playstation 3; with a 116 million+ installed base, a massive library, and a list price under $100, there’s little incentive for Playstation fans to spend $600 upgrading. (Especially when quality backward compatibility was in doubt.)

So there’s tragic irony in Kutaragi’s departure. Having transformed videogaming into a truly massive entertainment medium, he seems to have assumed that the market he did so much to create would follow him to the next level.

As IDC analyst Billy Pidgeon put it to the AP, “Sony didn’t notice that their audience was dwindling and didn’t increase the base by playing to a wider demographic, and instead it played the old-school game of playing to the 18- to 32-year-old male early adopter.” But in those seven years, the young men who had eagerly snatched up the PS2 were now having kids of their own, making them ripe targets for a console that could appeal to their whole family. So rises the Wii– and so goes Kutaragi-san.

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According to Digital Spy, market research firm NPD says the PS3 is selling marginally better in its first four months than the 360 did for the same period. “Figures show that the PS3 is selling slightly faster in the US than the Xbox 360 did at the same stage in its release,” an NPD spokesman told the UK publication. The news comes amid a lackluster PS3 launch across most of Europe last week.

It should be noted that significant production shortages plagued the 360 in its first few months to market, but the numbers do put early PS3 sales into context. Most consoles struggle during the initial launch period due to a shortage of games and the tail-end success of legacy systems. But the case by some analysts that both next-gen systems are under-performing may have some added validity.

Still, Sony must ultimately prove that their system is worth the $200 premium over Microsoft’s comparable 360. Giga has contacted NPD for comment and will update as soon as we know more.

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Will Halo3 help Microsoft secure the Digital Living Room?

The latest skirmish in the console wars took place this weekend, at the Mission District’s ultra-hip Foreign Cinema. That’s where Microsoft offered the gaming media a hands-on media preview of Halo 3, one of gaming’s most anticipated titles— and the company’s bid to expand their broadband audience.

Make no mistake about it, though the PS3 trails far behind and the Wii isn’t a direct competitor, the 360’s position as the HDTV-powered next gen champ is far from assured. The console has sold 10 million units to date since first launching 18 months ago, and claims six million online members to its Live service. It is hard to say how many of those are paying members, and how many are part of trial or some giveaway.

Still, those numbers are impressive, but just to put them into perspective, 10 million 360 owners represents only 6% of the total number of consoles sold last generation, and six million registered online users is tiny in comparison to the total gaming population. Granted, it’s still very early in the traditional 5 year life cycle of consoles, but the trajectory isn’t promising. Despite Xbox Live boasting the largest online console community to date, it doesn’t appear to be gaining ubiquitous traction, at least not yet.

Enter Halo 3, the jewel in their gaming crown, and the franchise the company hopes can not only boost online membership to higher levels, but bait gamers into purchasing additional downloadable content such as movies, music, TV shows, and episodic game content.

Of all 360 exclusive titles, Halo 3 is the one best positioned to do that.

How well did it succeed? We attended the Microsoft’s event at Foreign Cinema where we were treated to an open, hands-on session. The party atmosphere wasn’t very conducive to intimate gaming, but the game experience is classic, proven Halo. It plays slightly faster than previous editions, which makes frenetic gameplay situations that much more intense. There’s new vehicles and weapons, including a sweet cannon turret and missile launchers that slow down your player, but spew massive damage on your enemies. I especially liked the ginormous laser blaster with equally imposing damage. Microsoft showed off three new multiplayer levels, two of them set in two, outdoor environments, lush but limited in expansiveness. The other map was an annoying sandpit level reminiscent of Return of the Jedi. Overall, the visuals were a bit underwhelming, at least in their current state.

“It’s not going to win any awards,” said one attendee at the event, accurately critiquing the game in terms of innovation. In market terms, this suggests a game that’ll keep its existing audience, but probably not do much to expand it. Or for that matter, gain the 360 any extra edge in Microsoft’s bid to become the main digital distribution channel of the next gen living room.

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Nintendo sold almost a million video game systems in the short month of February according to NPD sales data released yesterday. To put that into perspective, Nintendo systems made up 54% of all hardware sales in February, more than all other manufacturers combined. Their DS handheld was the top selling platform at 485K units, followed by the Wii with 335K units. Sony’s impressive 7-year old PS2 outsold Microsoft’s 1-year old Xbox 360 by 295K to 228K units, and Nintendo’s 6-year old Game Boy Advance outsold Sony’s newly launched PS3 136K to 127K units. Really.

What does it all mean? It means that Nintendo is well on its way to becoming the number one video game manufacturer again for the second time after an 11 year trouncing by Sony. It also means Sony’s PS3 is struggling more than initially perceived, though the company would have you believe revenue is more important than profits or the pursuit of securing a healthy install base for latter profits which is standard in the console business. “The PlayStation brand remained the number-one revenue driver for the month in the industry owning 38.5% of total sales,” Sony said in a statement following the news.

But it’s not just Sony that has to worry says analyst Jeetil Patel in speaking with Game Daily. “Particularly disappointing is Xbox 360 hardware sales of 230K in February, which puts its installed base at 5 million or in-line to the original Xbox which was an unproven console and faced substantial competition from the PS2.” Even still, Patel called an early PS3 price drop “critical,” though highly-unlikely.

Whatever happens in the coming months, the industry is booming. February hardware sales were up a whopping 53% over last year, while software sales were 20% higher.

UPDATE: We erroneously added an extra zero to million. Fixed. Thanks AK.

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