MMO Giants Prepare for War

"Everyone is talking about more or less the same opportunities." says Jeffery Anderson, CEO of Turbine. "The goal for all the different studios, regardless of your product, is how you're going to maximize revenue.

He adds, "Today, a lot of revenue is being created by a small audience. In fact, the people who are paying most of the profits in the games we're running are the casual user, the people who are using the game lightly, a couple hours a week. They're the ones with the lowest variable cost.

"Ironically, they subsidize heavy users who are who are -- from a subscription basses -- a poorer value proposition. Right now, everyone is trying to figure out ways to do two things simultaneously."

He adds, "One is diversify revenue streams so you get away from doing hardcover books into doing paperback books and comics. We're trying to get away from the heavy priced subscription side. And conversely, we're tying to go after the intellect because the intellect should be treated differently. So when you see somebody who's willing to pay a hundred to two hundred dollars a year for item transactions, we also want to capture that revenue."

He adds, "One is diversify revenue streams so you get away from doing hardcover books into doing paperback books and comics. We're trying to get away from the heavy priced subscription side. And conversely, we're tying to go after the intellect because the intellect should be treated differently. So when you see somebody who's willing to pay a hundred to two hundred dollars a year for item transactions, we also want to capture that revenue."

Primary Revenue Sources
John Needham, SVP and CFO of Sony Online Entertainment says, "You've probably seen a lot of ancillary services that have been rolled out. We started out with character transfers, and character renaming services that once spawned, were really successful. With the launch of Everquest 2 we launched Station Players. We've also got Station Exchange. I like to call it SOE-Bay."

Robert Garriott, CEO of NCSoft, North America adds, "I don't think there's any ?after' subscription. Subscription is a viable model, and will continue. The key is that there is going to be a lot of variety. Pretty much any way you can think of for paying for games, you will pay for games."

He adds, "Look at gaming in Korea. The methods of paying a much broader, in terms of how you pay for games, than we have in the United States. And that's partly because they have such a wide variety of billing methods. So people can pay for games with cell phones, and telephone bills, and everything else. Our job is to provide entertainment to customers in the way they want to pay for it.

"I don't think subscriptions are dead," Garriott concludes, "As a matter of fact, I think that the gamer in general is willing to pay even more for games, I think you might see subscription prices actually increase. But there will be more variety and people will be paying lots of different ways."

Needham would be the first to disagree. He believes the base subscription fee will stay in the ballpark that it's in now, "with the goal of growing the market. And I think you'll see value added services layered on top of that. Trying to capture people that are willing to pay above and beyond the base subscription fee.

"At the same time I do think we'll see a lot of innovation from Asian markets, potentially out of Europe, and other games coming out of the US from people who don't have as much vested interest in the subscription based model." says Needham.

The Retail Question
Where does retail distribution come in? Garriott says, "The answer to that is different depending on what market you're looking at. If you're looking at the US market, retail is critical. However, if you look at Asia, it's very unimportant. As a mater of fact, there's no retail for MMP games in Korea, because retail space never developed in those markets.

"If you look at the US market, it's very important, but for different reasons. The retail space is a great place to do marketing. It lends credibility to your product. Our model in Korea is to give away the client, and then charge a subscription fee, and that subscription fee is much higher than it is in the US. A product like Lineage has a $26 a month subscription fee in Korea. But you get the client for free. In the US we tried to actually give away the client, but there's an interesting dynamic, or difference in culture between the US and Korea."

Garriott continues, "In Korea, if you go to a customer and say ?I want to sell you a product, and then charge a monthly fee,' they say, ?You're crazy. Why would I buy a product?' In the US it's actually the opposite. If you go to a customer and say ?Here is a free product, I'd like you to try it and then pay me a monthly fee.' Most Americans say, ?The value of this product is exactly what I pay for it.' So when you give it to them free, they think it's worthless."

"From our market research and studies, if we sell them the product at retail, they like the product more, they have more value to it, they think it's worth what they paid for it, and they try to get that value back on the computer, learning about the game, and then they have a higher chance of paying a subscription fee afterwards.

"In the US retail is critical," Garriott concludes, "And it's going to continue to be critical, just by the nature of our culture. I think we'll have more online downloads and direct online selling. Of course it's going to become bigger, and more prevalent, but retail is always going to be a critical part."

Anderson says, "The American MMO is suffering under what I call an Ultima Online hangover. When we first launched the game at EA, and EA was trying to figure out how to price it, there weren't a lot of good examples of how to do it. So they said, ?hey, people understand retail.' And they went with this model, which is all you can eat. Fifty dollars, up front, free for thirty days. So if I asked anybody in this audience today ?how much is the first month subscription of any of our products?' and people will say ?It's free,' Right? Wrong! What is the first months subscription? It's fifty dollars!"

"If you think about this even more obtusely, today you could just put a box on the shelf that was empty it would probably be more effective. We're already patching on day one. It already takes an hour to install these games. Everquest 2 had ten CDs. These are not small games. So by the time it's finished installing I could have downloaded it. So what are you really paying for? The manual could be PDF. What you're really getting is a code. So what we're really telling the consumer is, ?hey, pay fifty dollars for the first month, and after that it's fifteen dollars a month.' The problem is, it's not the best way to reach customers."

"It's even funnier." Anderson continues, "We're saying ?hey, it's fifty dollars for the first month, but we're only going to take fifteen as publishers in retail.' And all retail is doing is putting out a piece of paper or a sticker about that big. So it's even more bizarre when you think about it that way. What we're seeing over time is that the market is going to continually drift away from retail because it just doesn't make any sense."

"Consumers are getting more comfortable downloading everything from music, iTunes, they're going to be more comfortable with websites like IGN, getting downloads of betas. There's less and less reliance. It'll get increasingly difficult for retail reliant companies to get away from that model."

"I think retail will continue to be a crucial part of most core gamer products." Needham. You've got to look at the demographic you're trying to reach as well. There are a lot of successful MMOs out there that are not at retail. Runescape, Toontown -- they've been very successful, and it's because they're appealing to a younger demographic. Less mobile and able to get to stores. For us, we have a very fervent belief in retail and will continue to support retail. We'll use digital downloads mostly as a retention device."

Jeff Anderson agrees. "In the short term, it is the principle acquisition vehicle because it's still the way people look at it. But in the long term..."

Digital Divide
Is there a tipping point where digital distribution becomes more important than retail? Robert Garriott doesn't think so. "I don't view this as a fight between the two. As a matter of fact, I view retail in the US as self-paid marketing. Why would I not want to have self-paid marketing? It's where I can get my product on the shelves, people can look at it, where there's educated sales people who can tell them about the product, they pay me for this opportunity, and that's what drives a lot of article that are written in magazines."

"So it's actually a great system. I like them both. There's no reason why I'd want one over the other. As a matter of fact, to take the opposite direction, you go to Korea, and the only reason we don't have retail in Korea is because is because there is no retail channel. That's probably going to change. One of the things that drive retail in the United States is console sales."

"Until last year, consoles were illegal in Korea." Garriott says, "And so the retail channel did not evolve around that. Well, now consoles are going into Korea, there will be a retail channel, because there has to be a retail channel for console sales. And as the channel develops, my guess is we'll start using that retail channel in Korea. Why? Because it's a great, self-paid channel to get marketing and advertising and articles written and everything else."

"The funny part," says Jeff Anderson, "is that people now refer to retail as marketing. It used to be that retail was revenue. Now a lot of people see it as primarily a marketing function. And the tipping point is when that marketing function, those dollars that you're spending on marketing, whether those dollars are better spent giving it to your marketing team and saying, ?Hey, you know what? Instead of me going out and selling five-hundred-thousand units at five dollars a unit, how much money can we spend on marketing?' Get those people to come to the website, and put this product everywhere. And that's the tipping point. When you start realizing that the economics may not be as good."

"Maybe this is the inverse of Robert's point," muses Jon Grande, VP of Sigil Games in San Diego, "The reason retail hasn't happened in Korea is because there's no good physical distribution mechanic in that country. Maybe that's the inverse of the problem here in the US. There's great retail, but that's actually sucked the energy out of a great digital distribution model."