The Bove and Rhodes Report
Insight on computers and media | by Tony Bove and Cheryl Rhodes | June 4, 1997

Online Games and VCs: Shoot Out the Nets

In case you haven't noticed, investors are clamoring to get onboard the latest bandwagon in the Internet industry, online multiple-player games. You can thank Forrester Research for putting out a report that was picked up by everyone from Technologic Partners' ComputerLetter to this month's Red Herring magazine. One wonders how many VCs investing in this new area actually spend the time to play twitch games.

I already joined the online game bandwagon a while ago. I worked as a contractor at Newfire, a company that designed tools for rapid development of games for the Internet but unfortunately went out of business (game developers are not that interested in "standard" tools but prefer to create their own). I've immersed myself in 3D worlds, VRML 2.0 (Virtual Reality Modeling Language), Java scripting for game environments, and multiple-player network debugging.

I have looked at some online games, although I am not a hard-core gamer. It seems that nearly all interactive 3D experiences, if they are engaging, are like games. The issues involved in multiple-player game design, such as communication among players, latency factors related to Internet-based interactivity, high-quality immersive environments, customizable avatars, and engaging experiences, also affect other types of Internet experiences, including communities, chat areas, guided tours, and 3D interfaces to deep information.

In other words, you could learn a few things from online games. You could discover, for example, that latency problems with multiple users on the net can cause disjointed and choppy conversations in shared cyber-communities, and that the techniques used by game networks might be just what we need for these communities. Slow modems, over-subscribed backbones and dropped packets contribute to latency problems that degrade the performance of any real-time gathering on the net.

Twitch games are the hardest to implement on the net, as they require intense interaction among players -- when you shoot at your opponent, your opponent should actually be hit, and both you and your opponent should see this happen. RTIME is a company that is trying to get around the latency problem by using an approach that is based on client/server architecture, in which the server acts as a giant intelligent network switch that connects a client to one of several multiple servers. As clients come and go, their data is automatically sent to or deleted from other appropriate clients. RTIME also uses an affinity-based data distribution scheme that uses filtered templates to provide each client with the capability to specify multiple affinities (based on geographical location, priority, type of game, etc.). Dynamic motion modeling techniques provide a global time base so that clients can run asynchronously, with variable frame rates to accommodate extremely slow clients, and a timestamp that the servers can use to model correctly the motion of objects on other clients. Finally, RTIME aggregrates data streams to each client to reduce IP overhead; when used with affinity filtering, servers can support complex multiple-player games even with net spectators. The result is that gamers don't notice (as much) the latency problem. But the problem does not go completely away.

Another way to solve it is with a proprietary network, but the network must attract gamers who then have to set up their accounts. Only hard-core gamers are attracted to these proprietary networks, so this business model doesn't expand the market quite so fast as games available on the public net. Mpath Interactive claims to have more than 75,000 registered users for its free network, which is actually lower than expectations, while its rival Total Entertainment Network (TEN) claims about 30,000 users for its subscription-based network. The intensity of network gaming has increased (witness the growth of Quake clans), but the revenues have not caught up. In fact, the net is loaded with games that you can play for free, like The Bingo Zone and Final Bell.

The Forrester Research study of game networks was most revealing, which is why it was widely reported. It predicts that this market will face difficulties getting off the ground due to technology, consumer, and business model roadblocks. According to the report, the market will only be catalyzed once network game centers take off, sometime around 1999, when the revenues from such games will reach close to $540 million. At that point, game centers will offer chat, interesting content, and net commerce, which will act together to propel the market forward so that revenues should jump to more than $1.6 billion by 2001.

The lukewarm news hasn't stopped game developers from jumping on the net, or VCs from funding them. But the present game market itself is not that huge, with only about 1 million hard-core gamers in the U.S. To grow this market, vendors have to attract new types of users, who would rather play against other people than play by themselves.

And yet, although 25 percent of net users in the U.S. play games on the net, Forrester estimates that only 9 percent of these gamers actually pay for the privilege, and these 600,000 or so revenue-producing net players will generate a meager $51 million this year.

So goes the idea that the game market is lucrative. The game development market remains lucrative because there are so many wannabe game developers, and because any tool that reduces the cost of development and the time to market will be attractive to these game developers. The Internet presents itself as unlimited shelf space, and there are many dreamers out there who think that if they build it, people will surf to it.

Interestingly, all of this technology could be put to use in applications not associated with "twitch games" -- including virtual communities, avatar-populated chat areas, contests, and so forth. These applications might just be what we are all looking for, because they can bring together people from all over the world. There is not much sense in just putting out games for the habitual gamers; developers must find ways to broaden the appeal of games.

But will online games make VCs twitch? Burned several times by a content business that claims "content is king" but can't seem to make a profit, the VCs are looking at this new market with slightly jaundiced eyes. They already know that advertising on the Internet is a shell game, with most ad dollars spent by the top 10 Web sites on ads that display on the top 10 Web sites -- the same dollar is passed around. Banner ads, even if implemented as billboards, will not work in 3D game scenes -- most players will simply shoot to kill, not click to buy.

So where will revenues come from? Some folks think it will come with product placement. You wanna crush that dwarf? Don't mess around with those pliers -- pay a little extra for the missile launcher. Join the ranks of the superior players on the higher levels -- for a fee.

But don't expect any overnight success with this model. So many large companies are trolling these waters that the real gamers are spooked. So many free games are already on the Internet that revenues are not likely from subscriptions. Which means that branding will become important, which costs big money.

Expect, instead, a lot of losers, and maybe a few big winners. Those who believe that content is king have overlooked the major funding model in movies and entertainment: it's a hits business, with less than 10 percent of retail titles receiving more than 90 percent of the revenues. And we all know what happens in a hits business like movies: content developers (studios) spend extravagant amounts trying to make each title a hit, and if just one of the titles is a hit, the merchandising rights, sequels, and other ancillary sources of revenue push it over the top and fund the other development efforts. Which is why most of the games on sale today are sequels and proven titles.

That means less innovation, more formulas. Just like the movie business, which is routinely laughed at by the critics who gather at Cannes but supported by fistfulls of dollars at the box office. Perhaps content should be king, but right now, the king is broke.

Be seeing you...

-- Tony Bove, June 4, 1997. Comments?

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Copyright © 1997 Tony Bove and Cheryl Rhodes