Tolkien's Virtual World Takes Off

The Lord of the Rings Online has enjoyed explosive growth since its April unveiling. And it'll probably keep doing soif it remains true to Tolkien's vision

Jeff Anderson is not a nerd. The 40-year-old chief executive of Westwood (Mass.) video game developer Turbine is six feet tall, with the frame of an NFL linebacker. Nevertheless, he presides over a vast and rapidly growing virtual world of elves, orcs, dragons, and hobbits.

In April, Anderson's company took the wraps off the Lord of the Rings Online, a massively multiplayer online role-playing game (MMORPG) for PC, based on J.R.R. Tolkien's classic books. The explosive growth of the game—players have created some 4 million unique characters in just five months—has vaulted the company into the top tier of online game design companies and made it the largest privately held developer of massively multiplayer games in the U.S.

In the game, players create avatars based on characters from the books—hobbits or orcs, for instance—to pursue quests and battle monsters in an expansive virtual world closely based on the tales' locations and events. They can also chat with other players via an internal instant message system, or join groups to play collaboratively and virtually trade objects such as weapons or potions. A copy of the game costs $29.99, with an additional $14.99 fee per month for continued online access. Turbine also offers an alternative payment option: A $299 lifetime membership with no subsequent fees.

It's a good time to be introducing new products into the burgeoning online games market. In May, the NPD Group reported that a growing majority of all gamers prefer to play online. According to research firm Strategy Analytics, the worldwide online games market, which generates more revenue than other genres of games and either video or music sales, currently rakes in nearly $4 billion a year. Strategy Analytics reckons the online games market could triple in size over the next five years, ballooning to $11.8 billion.

Adept at Dealmaking

With the Rings game, Anderson is attempting to transform Turbine from an obscure game developer working on contract for big publishers such as Microsoft (MSFT) into a well-regarded gaming brand of its own, capable of competing with offerings from much larger companies such as Vivendi's (VIVEF) Blizzard Entertainment, maker of the current top MMORPG title, World of Warcraft, which has 9 million subscribers worldwide.

"We're more nimble than a larger company," Anderson insists of his team, which consists of about 200 employees including developers, designers, support, sales, and administrative staff. Inking agreements with European developer Codemasters and CDC Games for an upcoming Chinese edition of the Lord of the Rings Online, Anderson's team has proven adept at the dealmaking crucial to extending multiplayer games around the globe. Such deals allow the game to be operated according to national regulations and to be translated into the appropriate language.

The company isn't shy to outsource, either, offshoring to India the triage of support-related e-mails and the 3D modeling of some of the game's simpler objects. Nor has it shied away from hammering out technology deals, licensing a software-based physics engine from Irish developer Havok to make its titles look and play more realistically without having to rewrite code from scratch.

It has also, Anderson says, achieved cost-cutting economies of scale by operating multiple older titles alongside the new one. Turbine runs several other online worlds including Dungeons & Dragons Online, another fantasy game featuring quests and mythical creatures. Technical support, networked game servers, and the software engine that renders the games' graphics are shared. This allows the company to fold the advancements from newer games back into older ones, which helps maintain subscriber interest.

Strategic Success

So far the success of the Lord of the Rings Online has validated Anderson's strategy. According to Anita Frazier, an analyst with NPD Group, since April the Lord of the Rings Online has sold some 200,000 copies at retail in the U.S. During that same period, World of Warcraft sold just over 335,000 units.

While the company won't reveal the number of subscribers who pay a monthly fee to access the game, analysts estimate that the title has between 800,000 and 1 million paying players in the U.S. and Europe. Those figures are based on publicized character numbers, accounting for the fact that each player can create a maximum of five characters. "That's very impressive," says Michael Pachter, an analyst with Los Angeles-based Wedbush Morgan Securities, who follows the gaming industry and who estimates that the business could generate as much as $70 million annually in subscriptions. "Not only are those headline numbers, but Turbine has reached critical mass," he continues. "They're likely profitable and can now plow the profit back into the product."

Regular cash flow is crucial for Turbine's future prospects, analysts say, allowing the company to reinvest in expansion packs, customer support, performance improvements, and innovative new features to keep players interested and entertained. "A massively multiplayer game is very different from your typical retail [gaming] product," says David Cole, an analyst with San Diego-based DFC Intelligence. "You have to be able to keep pumping money into it to keep it growing." Continued reinvestment allows the company to keep its servers running smoothly even while adding new players or new content.

Anderson says Turbine's designers are already implementing features to keep the game fresh. Later this year, a free upgrade will allow players to buy and decorate their own homes, a feature lacking in titles such as World of Warcraft. The game also integrates the Google (GOOG) Maps interface for use on maps of all of its various lands. And players can compose or upload musical scores, enabling them to stage elaborate concerts for hundreds of other players. Other paid-for updates are expected at roughly one-year intervals.

Making Tolkien Proud

"We see ourselves being in the interactive content business, the community business," Anderson says. In a nod to fervent Tolkien fans, the company built a wiki into the game, called the Lore Book, and in June invited users to participate in contributing and editing content. Since then, players have added about 30,000 entries on various creatures, locations, and legends from The Lord of the Rings mythology.

The road could get bumpy yet. Unlike other titles such as World of Warcraft, which though no doubt influenced by Tolkien's works has essentially created its own set of fables, Turbine is rigidly bound to the books. Deviating from the literature could damage the game's reputation with hardcore players who come to the game specifically for its Tolkienism. "They are treading a very fine line as far as creating new content goes," says Michael Regina, editor in chief of, a popular Tolkien fan site. Vigilant fans will be scouring every update, ready to cry foul—and stop subscribing.

Still, the title's growth has been phenomenal. Cole estimates that the launch of language and culture-specific versions of the game in China and South Korea early next year could as much as triple the number of subscribers. That still leaves a long way to go before it catches up to World of Warcraft, which contributed $500 million to Vivendi's coffers in 2005. (Pachter estimates the title brought in a further $600 million last year.) But it may not even matter. "Who cares?" asks Cole. "If you've got a product like the Lord of the Rings Online making a ton of money, who really cares if you're No. 1 or No. 2?"

Click here to view the BusinessWeek slide show.

Before it's here, it's on the Bloomberg Terminal.