May 13, 2004 6:24 PM PDT

Game companies tweak online plans

LOS ANGELES--Game publishers and hardware makers are confident that consumers want online gaming. Now if they can only figure out a way to make money from it.

Unlike previous editions of the E3 game trade show, this year's event had few launches of high-profile online games for the PC, a market dominated by fantasy games such as "EverQuest" and "Star Wars Galaxies."

On the console side, publishers say they're happy with consumer acceptance of new online gaming services but need to find a business model somewhere between the current extremes of free online play and games that require monthly subscriptions.

The answer for most is minitransactions, small purchases that would allow game players to pay a few cents to download a slick new piece of armor for a role-playing game or a new map for a shooting title.

Andrew House, executive vice president at Sony Computer Entertainment America, said market expectations have already been set by the first wave of online console games, and consumers will have to be eased into the idea of paying extra for online assets.

"Our belief is that consumers expect basic head-to-head multiplayer online play to be included in the game they buy," he said.

Rather than the regular fees many publishers had hoped for from online gaming, financial success will depend on offering little extras. Sony is working on payment and billing systems to allow such transactions, which should begin appearing over the course of the next year, House said.

"The subscription-based model is inherently self-limiting," he said. "The preferable model, we think, is based on downloadable content and minitransactions. You'll see the fruits of that emphasis from us over the next year."

Bruce McMillan, executive vice president at leading game publisher Electronic Arts, endorsed the notion. "I think you need to have a flexible business model," he said. "Some gamers will pay extra to get the Cadillac version of a game, while the people who buy the packaged goods will get some basic ability to go online and play head-to-head."

But McMillan said making money from console online gaming is more likely to happen when PlayStation 3 and the next Xbox hit the market in a few years. "Our goal with this generation of hardware...is really to sell packaged goods now."

Microsoft is already working the online angles, though, with the Xbox Live online gaming service for its Xbox console. The software giant has more than 800,000 subscribers paying $50 a year for the service, which allows access to online portions of more than 100 games. Steady growth in subscribers and strong subscription renewal rate shows gamers will pay for content, said Microsoft Vice President Peter Moore.

"The subscription business is a tough one to be in, because you've got to manage things 24/7," he said. "I think we've done a good job of that and finding new ways to deliver value to the consumer."

Microsoft will take a step toward minitransactions with Xbox Live Arcade, an upcoming service that will allow customers to download arcade-style games for a typical price of $10 or less. Beyond that, smaller chunks of downloadable content will require tweaking the Xbox Live transaction system to allow efficient processing of small transactions, Moore said.

"Micro-transactions are something we have to figure out, and we will," he said. "I think it's our job to build the service, both for consumers and for our partners. It's like we own the shopping mall, and our business is to build out the facility and take care of the infrastructure so the businesses inside can prosper."

Forty acres and a nose ring
On the PC side of online gaming, publishers appear to have given up on the idea of dethroning "EverQuest" and building a user base in the millions. McMillan said the comparatively tepid response to "The Sims Online," the online version of the smash PC game, was a tough lesson for EA.

"The thing I think we learned is that expecting packaged good sales to be an indicator of subscription sales isn't realistic," he said. "They're very different things. For a person to actually put down their credit card and say--'I'm going to pay so many dollars a month to play this'--that's a big decision."

Start-up Linden Labs, however, is confident it has sidestepped the financial pitfalls of online PC gaming.

The company has been running the game "Second Life" for a little more than a year with a business model that combines a number of novel approaches. Aside from an initial fee of $10 to set up a user account, the company makes most of its money by selling real estate in the game's virtual world. Players buy lots at an average of $100 an acre and pay monthly property taxes, neatly covering the costs of installing and maintaining game servers, one of the biggest ongoing expenses in running an online game.

Ongoing development costs are minimal, because every bit of content in the game--from virtual nose rings to futuristic vehicles--is created by players, using online tools or graphics programs such as Photoshop. The game currently has more than a million user-created items, and players are free to resell their creations for the game scrip, "Linden dollars," which can be exchanged for real U.S. dollars on any of several trading sites. Sales average $100,000 a month.

The key, said Linden Lab founder and former Real Networks executive Philip Rosedale, is delivering the game as a streaming service, which means the game world can be constantly updated without requiring the user to install lengthy downloads or CD-based content.

Besides being a real money-saver, relying on users to create content means the game becomes whatever people want. At any time, the game can vary from a virtual makeover experience to a shoot-'em-up frenzy. "You have racing games with user-created vehicles, shooting games--whatever people are interested in." Rosedale said.

Leaving it all up to users also helps "Second Life" sidestep the intellectual property issues that have dogged other online games with extensive black-market economies. "We don't own any of the content--we don't care what you do," Rosedale said.

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Neil Stephenson's dream nearing completion...
We are now one step closer to a usable "Metaverse."
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