Barry Diller's Web Gaming Play

IAC/InterActiveCorp's gaming foray could revolutionize online games and hurt console makersif it succeeds

Barry Diller's IAC/InterActiveCorp (IACI) is entering yet another arena. The Web conglomerate, owner of businesses such as and the dating site, announced Sept. 18 that it has acquired a majority interest in, a game publisher and provider of programming tools for indie game developers.

The acquisition, which will lay the foundation of a new division focused on Web-based gaming, marks the latest and biggest move in IAC's bid to become a major player in that market. In the past few months, IAC has snared several video gaming executives from rivals, including Nicholas Lehman from Viacom (VIA). "We think this is an untapped $2 billion market today growing to $5 billion in three years," says Shana Fisher, IAC's senior vice-president of strategy and mergers and acquisitions. "This is a once-in-a-lifetime market opportunity, we think. And we are investing appropriately."

Viacom's Big Bet

While the acquisition's terms were not disclosed, BernsteinResearch (AB) estimates it will cost IAC between $80 million and $100 million. InterActive also says it hopes to announce a collaboration with a major gaming studio in the next week.

At first glance, IAC is arriving rather late to Web gaming, which is already the third most popular online activity after e-mail and chat, according to the Stanford Institute for the Quantitative Study of Society. In May, the number of unique visitors to gaming sites reached almost 217 million worldwide, a jump of 17% from a year earlier, according to traffic data tracked by comScore (SCOR). The sector attracted 28% of the total worldwide online population in May and recorded an average of nine visits per visitor.

As such, a wide array of media and Internet titans have already been staking out the positions to claim a piece of a market that, according to DFC Intelligence, is expected to swell from revenue of $3.4 billion in 2005 to more than $13 billion in 2011. Viacom's MTV Networks alone expects to dump $500 million into gaming in the next two years. Meanwhile, portals led by Yahoo! (YHOO) and Microsoft's (MSFT) MSN have built up their offers to lure online players. Microsoft also offers owners of its Xbox gaming console an online portal called Xbox LIVE Arcade where they can play games, including GarageGames' own Marble Blast Ultima, where players navigate marbles through moving platforms. Similarly, the Cartoon Network (VIA) has been working to adapt its games for online play with Sony's (SNE) PlayStation 3 and Nintendo's (NTDOY) Wii consoles.

Browser Delivery: A Challenge

Having not dabbled in online gaming much until now, IAC says it hopes to catch up by approaching the market in a different way. Today, some sites either offer simple games, such as puzzles, for free, while more advanced online gaming often entails subscriptions, downloads, and high-end computers or consoles. But without high-end computers and downloads, it's hard to find Web games as robust as those available to play offline on a TV using the big three consoles.

So in early 2008, IAC plans to use GarageGames' technology to launch, a Web site offering first-person shooter, real-time strategy, and action games of the quality currently found on Xbox, PlayStation, and Nintendo's Wii. To play these games, IAC says, users won't need to invest in additional hardware: They'll be able to play through any device with a browser, be it a low-end personal computer, a Web appliance, a gaming console, or even a mobile phone.

These browser-based games won't require users to download software or install it from a disk. While it may charge fees to play, IAC hopes to make money partly through advertising: Chances are, will offer some games free if users view ads.

However, many industry insiders argue that delivering graphics-rich games entirely through a browser, without requiring users to install any software, remains a difficult technological challenge that may leave users with glitches and delays in the action. "I have to see it to believe it," says Billy Pidgeon, an industry analyst at consultancy IDC (IDC). Further, IAC's vision is a widely shared goal, as many rivals recognize that easier, more robust Web offerings would likely bring a flux of new players.

Game Changer in Emerging Markets?

But if InterActive succeeds, it could revolutionize the market by pushing game genres played mainly on high-end PCs and consoles to more people and more devices. That in turn may hurt console makers by slowing their growth in countries such as India and Russia. "In many areas of the world, in emerging markets, users don't have consoles," explains IAC's Fisher. "Kids are going to start playing online if we can bring video games to people wherever they are—in school, at home. We want them to have constant access."

IAC's site could also pose a threat to popular online gaming social networks like Electronic Arts' (ERTS) and Valve's Steam gaming community, where users can chat and interact during games, as well as multiplayer sites like the fantasy role-playing world called Ultima Online.

With recent disappointments in the performance of and the turmoil in the mortgage and housing markets taking a toll on its real-estate-related sites, IAC needs for this online gaming endeavor to be a success. "It'd have to be in the hundreds of million of dollars in a few years for them to be interested at all," says Jeffrey Lindsay, an analyst with BernsteinResearch.

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