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Online Gaming: Getting Down to Business
Introduction to online gaming business
components, architectures, and financials.
By: Bruce Bahlmann - Contributing Author (your
feedback
is important to us!)
Created: March 29, 2002
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CED
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May 2002 |
Note: This article is based on a white paper written about
online gaming for broadband as well as completed
research about online gaming.
Both of these are available for purchase from Birds-Eye.Net.
As the electronic gaming industry has
grown, it has reinvented itself many times. Through these cycles of gaming evolution each
game stimulates more senses, is more realistic, and permits more people to play the game
– all in an attempt to engage/attract more people for a longer period of time. Online
gaming is a relatively recent wave in electronic gaming evolution. Through its creative
use of the Internet, large numbers of people can join a game from all corners of the
globe. Online games also employ a myriad of features that enable them to cater to larger
audiences as well as exploit capabilities of its diverse players and the Internet. As a
result, online gaming is becoming increasingly popular and the associated business that
sustains it has seen significant growth.
Business Components
Interestingly, with all the
sophisticated hardware, numerous game titles, and improving availability of broadband, the
business of online gaming is less organized and consist of the following components:
- Subscriber – The consumer of the
gaming service and the one who ultimately pays for it.
- Advertiser – The organization who
subsidizes the costs of providing the games or the game content for opportunities to
advertise with the game (e.g. co-branding such as "Toyota® Adrenaline”), within
the game play (e.g. a signpost along a speedway track shown during some game), or
ancillary to the game (e.g. banner within the game web site or on the software box).
- Broadband Service Provider (BSP) –
The organization providing some kind of last mile connectivity to the subscriber. This
organization may also perform the duties of the Network Service Provider/Reseller.
- Network Service Provider (NSP)/Reseller
– The organization that supplies various components of a service. In the case of
gaming, this organization might supply caching, security, authorization, copy protection,
etc. host a gaming service or resell a gaming service provided by some other organization.
- Gaming Content Provider (GCP) –
The makers of the games or content related to games that it uses to resell games along
side its content. These organizations may also perform the duties of the NSP/R and/or the
Gaming Platform Provider.
- Gaming Platform Provider (GPP) –
The makers of the hardware platform either distributed to subscribers by the BSP or
purchased by the subscribers independently. This hardware could be a game console or a
set-top box. These organizations may also perform the duties of the BSP, NSP/R, GCP.
The various overlaps among these
components make for a very complex group of companies with each vying for a larger piece
of the subscriber dollar. There are also independent game sites available on the Internet
which the subscriber can frequent without the need to interface with any of these parties.
Independent game sites may require the subscriber to obtain the games through retail
purchase of the game (or by download) and then play it over the Internet via either free
sites (those run by fellow gamers) or fee sites (or arcades run by businesses). The fee
sites often host a number of online games and in most cases operate independently of the
different providers previously defined. As these gaming sites increase in popularity they
promote a completely independent business model which does not work with the BSP while
challenging different providers/resellers with BSPs ties.
Proposed Online Gaming Architectures An online gaming architecture must
incorporate the six business components previously discussed. These include the
subscriber, advertiser, gaming platform provider (GPP), broadband service provider (BSP),
network service provider or reseller (NSP/R), and the gaming content provider (GCP).
Figure 1.0 Free Market Architecture of
an Online Gaming Service
Figure 1.0 shows one possible way
these business components may be assembled to provide an online gaming service. This way
of providing an online gaming service could be considered a free market architecture
because all parties have an opportunity to capitalize on the delivery of the online gaming
service to the subscriber. However, since some of these business components can perform
multiple duties, other architectures exist as well.
Figure 2.0 is an example of a GPP
driven online gaming architecture. Here the GPP manages the gaming service, any and all
content carried over this service, and any and all advertising permitted over this
service. This service highly leverages Internet access and connectivity provided by the
BSP. Beyond that single dependency, however, the GPP pretty much owns and runs a vertical
business of online gaming using their proprietary game console or STB.
Figure 2.0 GPP Driven Online Gaming
Architecture
While the architecture in Figure 2.0
is not ideal for BSPs, it is the only architecture that has been described with any
clarity in terms of defining all the infrastructure components and what they are supposed
to do. Figure 3.0 represents one such GPP driven architecture.
Figure 3.0 GPP Driven Online Gaming
Infrastructure Components
In the GPP driven architecture it all
begins with a proprietary hardware and software presence in the subscriber’s
dwelling. Since a PC is fairly generic and unsecured, it does not have the same impact as
a game console or a STB – these are the preferred customer presence devices for GPPs.
Through these devices the GPPs can attach to perhaps the most prolific and most used home
appliance – the television. Subscribers interact with the GPP through the STB or game
console’s user interface (typically some kind of browser). The browser then
communicates using some standard language (HTML/XML) through the STB or game console, onto
the Internet, to the NSP/R or the GPP (they are one in the same in this case). Three
different clusters of servers then handle things from there.
The authorization and subscription servers provide
permission for HDD downloading of the games or content sought, authentication for renewing
subscription or other account information online, parental lock functions, and time based
access (record keeping) function. The digital rights
management servers keep track of what game software is going to which STB or game
console. Most GPPs have placed unique identification information within each piece of game
software (content) as well as each STB or game console. The digital rights management
servers keep track of this identification information as a means to track usage,
subscription, and billing where necessary. The information in the digital rights
management server becomes especially important as gaming software or other content becomes
increasingly large to the point where all of the purchased content will not fit on the
subscriber’s STB or game console hard disk drive (HDD). Thus it is important to all
allow them to download software they have already purchased if for some reason the most
current version of the content no longer resides on the HDD within their STB or game
console – e.g. was over written by another recent download. Having gaming software
available via download permits the GPP and the GCP to continually provide only the latest
(most up to date) software for download while decreasing the need to imprint compact discs
(CDs) with the software – it also lessens the need to distribute software updates.
The CD is perhaps the least secure method of software distribution – not to mention
more expensive. Once more, the digital rights management software could also provide a
virtual library of audio and video titles owned by the subscriber – say good bye to
shelves of VCR tapes, DVDs, and CDs. In this way, all the shelf space is sparred while the
GPP maintains their subscribers video or music library. The application or content servers provide a carousel
for certain types of content to sit in preparation for global, regional, community
distribution, as well as handling individual gaming content downloads, and hosting
numerous gaming servers.
Certainly there are other ways that
online gaming could be offered, but without widespread support from both GCPs and GPPs
(the two key players) they may be unachievable. GPPs are in the driver’s seat of the
online gaming business and are promoting their proprietary online gaming services and
architecture. Some GPPs like Microsoft and Sony have
gone to the extent of patenting their online gaming support and delivery technologies
– Microsoft for example, recently received a patent for their digital rights
management software (the first such in existence). These patented technologies could
prevent free market online gaming services from evolving – at least nothing built
upon any technology that immediately works or scales. GPPs can make the case that since
they have spent significant time and money designing, building, and patenting these
technologies that they deserve much of the profits – even though these services
increasingly demand improved BSP network access and bandwidth. BSPs seeking to profit from
online gaming need to look towards either hosting/reselling their own gaming service or
charge their customers for access to GPP services. Unless these measures are exercised,
BSPs could find themselves in a “profit free wilderness” where many things seem
possible but perhaps as they approach something that works they end up paying royalties to
the GPP who owns the patent rights to that technology.
Defining
the Online Gaming Market, Possible Revenues, and Costs
The market for online gaming is quite
large and continues to grow. Jupiter
Media Metrix states that there were 46.7 million wired computer users at home
in the United States who played a PC-based game application in October 2001, up 10 percent
from 42.4 million users in January 2001. Jupiter projects that subscription revenues from
online PC games will total $1.5 billion by 2006, while subscription revenues from
connected console gaming will only reach $250 million in the same period. Based on these
numbers, BSPs can project that about 12.9% of its broadband data subscribers represent
potential online gaming candidates.
For a second tier cable BSP system
with 350,000 homes passed (all of which are data service ready) and 5% of them are
broadband data subscribers that there is the potential for up to 12.9% take rate for
online gaming among these broadband data subscribers (or about 2,257 possible online
gaming subscribers). If each of these online gaming subscribers paid $9.95 per month for
the gaming service that would represent a gross revenue of about $269,485 or about $0.76
per year per home passed.
The costs for a BSP to build its own
online gaming service may be substantial however. While equipment, etc. can be added
according to need, a BSP should initially build their online gaming service to handle at
least one fourth of their projected take rate or 5000 subscribers – whichever figure
is higher. From there, BSPs should budget their setup costs for hardware, software,
content, marketing, and networking to be around $150 per subscriber. The ongoing support
costs for the call center, game content, service calls, etc. will run BSPs about 55% (30%
of which is for content) of their gross revenue per subscriber per year along with
additional costs (which could vary by BSP) for technicians to oversee the equipment and
content people to over see the games. At the end of the day and in ideal conditions, there
is the potential for BSPs to break even at about 2,239 subscribers (or a 3-5 year
acquisition period). This means the smallest possible BSP system that could build their
own online gaming service would need to have at least 350,000 homes passed – smaller
systems would struggle to make ends meet and should consider reselling service or charging
for access rather than building their own.
Conclusions:
Certainly online gaming represents an
enormous market. By 2005, Forrester Research Inc. predicts that nearly 50
million households will take part "pervasive gaming" --defined as broadband
gaming with multiple real-time players and added TV, movie, and music hooks. About 43.5
million will do so through advanced gaming consoles and 6.3 million via a digital TV
set-top boxes. Hardware revenues will top $9.4 billion by 2005 with software and content
revenue hitting $16.9 billion. BSPs are in a unique position to capitalize on the growing
demand and success of online gaming by managing access to gaming content, providing their
own gaming service, or reselling another party’s gaming service.
Check out these other Birds-Eye.Net papers/products regarding
Online Gaming:
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