As a banker, I get asked the same questions all the time. Online game companies want to know: What is the best strategy for my online game business? Or: What are VCs looking for in an online game company? For VCs, the question is this: What type of online game business should I look to invest in? And of course the large media companies ask me this: Which online game companies should we look at acquiring?
The words are different, of course, but when you think about it, basically everybody wants to know the same thing: What is the Holy Grail in the future of online games? I think the best way to begin answering that question is to talk about what is not the Holy Grail.
MMORPGs
Currently, many people believe the Holy Grail is World of Warcraft (WOW) from Vivendi. That single game is generating $1 billion per year in revenues. But WOW and other MMORPGs are not the Holy Grail of online games inasmuch as they only attract hard core gamers and not the mass market. While WOW’s eight or nine million subscribers are indeed a lot of people, that total actually pales in comparison to the over 50 million users worldwide who play Maplestory from Nexon in Korea or the over 66 million registered users of Habbo Hotel from Sulake in Finland. Furthermore, MMORPGs do not have much of a life cycle beyond five years.
Subscription-based Games
It is also not clear that subscription-based business models are best for online game businesses—especially given the huge success of item-selling-based business models in Asia and the growing success of companies like Three Rings (Puzzle Pirates) and K2 Network (publisher of Korean-developed online games). One company to watch in the Western World is Bigpoint, a German company which now offers seven casual browser-based games. In lieu of no subscription fees, Bigpoint generates revenues by selling items in-game. On average, they are generating more revenues per user than WOW is.
Aggregators
Some people believe that becoming an aggregator with a games portal that sells every single game available is the answer. I say this only because of how many game portals are currently on the web. But most people don’t realize that very few of these portals are generating any serious revenues. And even fewer people realize that some of the companies generating serious revenues may not be around in 18 to 24 months.
Aggregation as a standalone strategy does not work unless you are the number one or two player in the market—or have the bank account of Microsoft. This has been proven in other sectors such as mobile music, where aggregators grew huge overnight but have fallen even faster. (Consider, for example, Monstermob in the UK, which just reported an annual loss of $209 million for fiscal year 2007 versus a profit of $17 million in fiscal year 2006.) The primary reason that aggregators are suffering in mobile music is that the content owners (record labels) suddenly woke up to how much money they were leaving on the table in their original deals with the aggregators. Subsequently they have decided to retain most of the revenues for themselves, leaving almost nothing for aggregators. Now ask yourself, what is going to happen when casual game publishers have the power to do the same? This will not happen overnight but it will happen once there has been more consolidation in the sector and the publishers are larger or owned by larger companies. Content owners will always win in the end—and this business is clearly more about great games and than about great distribution.
Publishers
Now some other people believe that publishing a huge number of downloadable games and selling them everywhere is the answer. It’s true that publishing games will generate some revenues, but is it really a long-term sustainable business? Given the large (and rapidly growing) number of downloadable game publishers and developers, I’m not so sure. For instance, I’m amazed by how many puzzle games there are in the market currently. How many puzzle games can the market support? And how does a consumer differentiate among them? It is doubtful that anyone will succeed long-term with undifferentiated content in a saturated market.
The Holy Grail
For the last several months my answer to the original questions has been essentially the same: The Holy Grail of Online Games is a website that mixes great games with a fun community and social networking. Given what I have learned in the past year, my “killer app” in games would look something like this now: a website that features a casual, mass market-focused MMO with great game-play, interactivity, customization, VOIP capability, and user generated content (games, videos of game-play and avatars). The site would also have to provide a simple way to make friends, find friends, invite friends, and play with friends. It would also, of necessity, include a mix of different types of advertising, including both onsite banners and in-game promos or product placement. Imagine, in other words, a mash-up of MySpace, YouTube, Skype, Maplestory and Habbo Hotel—all together, you would be looking at over 500 million users.
The first game website that offers all the key features of this mash-up will indeed be the Holy Grail of Online Games. Forget about 10 million or even 50 million users. Look for 100 million registered users for one game website. Now the only question is: Who will build it—and when?
Paul Heydon runs Unity Capital in London, UK, where he advises Digital Media companies. Paul has helped companies globally on transactions with a total value of over $1 billion . Mr. Heydon earned an MBA in 1999 and a HBA in 1990, both from the Ivey School of Business at UWO, which is located in London, Canada. Paul has worked with: Infogrames, Ubi Soft, Giant Interactive Entertainment, IO Interactive, Canon Europe, Netgem, Criterion Software, Digital Bros, Endemol, Overloaded, ITE and Lionhead. Paul can be reached at paul.heydon@unity-capital.com.
