Let the Games Begin -- Online

The industry is betting that the future is on the Web. And the success of games such as EverQuest has analysts buying in

It's a secret world of sorcerers, dragons, elves, and giants. They spy on you from behind castle walls, hunt you down in the darkness of dungeons, and live to watch you die. More than 400,000 people pay $9.89 per month, plus software fees, to face the danger in the most popular, massively multiplayer game on the Web: EverQuest.

The game, in which players across the globe interact in the same adventure world, can definitely pull you in: More than 40% of EverQuest users play 20 to 40 hours a week, according to its maker, Sony Online Entertainment (SNE ). Released on Dec. 3, the game's newest installment, called Shadows of Luclin, sold more than 120,000 copies at $29.99 each in its first day in stores. It may be the most spectacular game success on the Web, the latest in a growing list of aspirants to that title. Remember Doom and Quake? Or that old favorite, online poker?

Until recently, online games were considered a niche market for the seriously maladjusted. But in the year ended in October, the number of visitors to online game sites grew by 50%, according to market researcher Jupiter Media Metrix. Improved Internet capabilities and next-generation video-gaming consoles will lure 40 million households into online gaming by 2004, up from 25 million in 2000, according to a February, 2001, report from tech consultancy IDC.


  Of those, approximately 1 million will be U.S. residents playing multiplayer games. That's less than one-seventh of the number playing console-based video games, which reach into nearly half of American homes. But in the years ahead, online games might just turn out to be the brightest star in what is already an $8.2 billion U.S. games industry.

Indeed, November's introduction by Microsoft (MSFT ) and Nintendo of online-enabled gaming consoles Xbox and GameCube, respectively, will help push Net play into the mainstream within several years, say analysts. The market should also get a boost from the continued spread of broadband, which will allow for increasing variety in online games. In fact, more than 80% of some 60 makers of game hardware and software end entertainment expect broadband-connected consoles -- and not PCs -- to ultimately be the dominant home platform for online games, according to a 2000 survey by tech consultancy Forrester Research.

Already, Microsoft's Xbox comes with an Ethernet adapter and an internal hard disk for storing the information required to play games online. Until Microsoft offers true online gaming, the adapter just allows gamers to cable two Xboxes together. Xbox retails for $299, and Microsoft expects to sell as many as 5 million units by the end of 2001, says J Allard, general manager for Xbox at Microsoft. Early next year, the company will also introduce an online gaming service, along with 20 new online games. "We think online gaming will be as important to the industry as 3-D graphics were to the last generation of consoles," Allard says.

Rival Nintendo's GameCube, priced at $199, is also broadband-enabled but doesn't come with a hard drive. Market leader Sony will introduce Internet connectivity features in 2002 for its PlayStation 2, which retails for $299. Later next year, the company will introduce a PlayStation 2 external hard drive.


  As a result, by 2005 more than 18% of U.S. households will have an online-enabled game console, according to market researcher GartnerG2. Users might also start getting accustomed to buying online services along with their consoles, and subscription revenues could grow from $138 million in 2002 to $2.3 billion by 2005, GartnerG2 predicts. That's still small compared with the traditional video-game market, which is projected to jump from $10.3 billion this year to $13.2 billion in 2005, according to SoundView Technology Group. Still, if those projections are right, the industry will grow rapidly, considering that online console game subscriptions will come to a paltry $2.5 million in 2001.

The spread of broadband will be the key to growth. Today's narrowband Web connections make favorite game activities such as slaughtering zombies or playing football and basketball difficult because of time lags in the action due to slow connections. But by the end of 2002, some 90% of U.S. homes will at least have access to broadband from their cable companies, according to Microsoft. "Many people view [online gaming] as a killer app for broadband," says Microsoft's Allard.

While only 12% of U.S. households use high-speed Internet connections today, some 36% of them will have signed up by 2005, GartnerG2 predicts. And one-third of these households with broadband access will use it for online console gaming.


  Marketers are already salivating over that prospect. Career site HotJobs.com, which caters to 21- to 49-year-old professionals, offered an online game during last year's Super Bowl in which players had to guide a marble to a goal. Marc Karasu, the company's vice-president for advertising and marketing, says more than 50,000 players left their e-mail addresses for the HotJobs.com staff to use for future promotions. "For us, it's a nice way to further an advertising reach," Karasu says. But to be used most effectively, he adds, games "need to be a part of a broader campaign."

That will be especially true as the demographics of the online-games business change. Today's online gamers are mostly males aged 18 to 26. But by 2004, younger and older gamers, as well as women, will increasingly play online, predicts GartnerG2, as game software companies introduce new online genres and titles.

Sci-fi games such as the much-awaited Star Wars Galaxies from LucasArts Entertainment and Sony Online Entertainment, due to launch in about a year, and sports games, yet to be designed for online, should be exceedingly popular, believes Scott McDaniel, vice-president for marketing at Sony Online Entertainment. The world's biggest video-game developer, Electronic Arts (ERTS ), plans to bring its successful PC games, such as The Sims, online, says EA.com Chief Operating Officer Bryan Neider. In The Sims, players can create houses and the people who live in them.


  Fans argue that online games will ultimately have more appeal than PC-based counterparts because they can incorporate a sense of community and an unpredictability that's more akin to the real world. "Video games are just that: games," wrote Richard Bartle, the legendary British game designer who came up with the idea of online multiplayer gaming, in an e-mail interview with BusinessWeek Online. Bartle's MUD (multi-user dungeon) fantasy adventure game was the low-tech predecessor to fantasy role-playing pioneer Ultima Online and EverQuest.

"Online games of the kind descended from the original MUD aren't games at all, they are places," Bartle says. "When you visit those places, you can play, sure, but you [also] can talk, you can explore, you can boss people around. They are environments, and they have real people in them." And thanks to the Web, real people outside them as well -- friends and acquaintances from different cities who can interact in a new fantasy world. Playing games online, adds Microsoft's Allard, "is a social revolution, as well as a technological advancement."

One drawback for online-game companies is that their margins can be smaller than those for producers of video games, says EA.com's Neider. For massive multiplayer games, support can be expensive. EverQuest requires 24-hour customer service, staffed by 120 people. Plus, the games have to be updated several times a year so that participants don't get bored. Thanks to such updates, the amount of virtual territory EverQuest players can explore has doubled since the game debuted in 1999, says McDaniel. On the bright side, the costs of creating on online game are less, ranging between $750,000 and $5 million, according to GartnerG2, as compared with about $10 million for a new video game.


  Still, game companies are searching for a predictable revenue model online, says Paul-Jon McNealy, an analyst with GartnerG2. Today, EA.com receives 45% of its revenues from advertising on its site and inside the games, says Neider. The rest comes from subscriptions -- a model similar to cable TV's but not yet thoroughly tested on the Web to conclude that there's a mass market for online games.

In addition, game consoles with online capabilities still have to prove themselves. After all, Sega's wired Dreamcast console failed, and production ceased earlier this year -- a debacle analysts blamed on slow dial-up connections, unnecessary add-on services such as Internet access, and a paucity of good games. Finally, most broadband connections are located next to the family computer instead of in the living room, where games are often played. "At present, I'd dispute any claims that online gaming is going to be huge," says Charles Howe, an analyst with Forrester Research. "But there's clearly potential."

Other observers are more optimistic. "Online gaming is already happening: It's a really big market," says Schelley Olhava, an analyst with tech consultancy IDC. Whether it turns out to be really big -- or just big -- future gaming will be set apart by the medium of the Web. Its interactivity will make possible never-ending adventures in search of gold -- for players and game makers alike.

By Olga Kharif in Portland, Ore.

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