The PCGA Presents: The PC Gaming Industry in 2008

Table of Contents
1. Executive Summary A. State of the PC Highlights B. Note from the President of the PC Gaming Alliance C. DFC Intelligence Overview D. Horizons Report Summary E. PC Gaming Trends Summary 2. News and Trends A. 2008: The News in Review B. 2008: The Trends C. Major Trend 1: Online Digital Distribution D. Major Trend 2: Free Games With Virtual Item Model E. Major Trend 3: Game Cards at Retail 3. Markets and Companies A. Overview B. North America and Europe C. China and Korea D. Emerging Markets 1. Russia/Eastern Europe 2. India 3. Brazil 4. Southeast Asia 4. Hardware A. Overview B. Low-cost PCs C. Laptops D. High-end PCs E. Graphics Cards F. Mac G. Windows Vista Operating System 5. Software A. B. C. D. E. Overview High-End Games MMOGs Casual Games Free to Play and Virtual Items 02 03 04 02 05 05 07 07 09 10 12 13 14 14 15 17 18 18 18 18 18 19 19 21 22 23 24 25 26 28 28 29 30 32 33

1. Executive Summary
c. DFC Intelligence Overview
This report was written by DFC Intelligence. DFC Intelligence is a research and consulting firm that has been focused on tracking PC games, video games, online games and interactive entertainment since 1994. DFC Intelligence specializes in market sizing and forecasting, trend and business model analysis, company profiling and analysis of consumer sales and usage trends. DFC published its first report on online PC games in 1997. In 2001, DFC expanded its coverage to become one of the first companies to report on the booming Korean PC game market. This was soon followed by coverage of the emerging markets in China and Europe. Prepared by DFC Intelligence George T. Chronis David Cole Joost van Dreunen N. Evan Van Zelfden Gerardo Zarate
www.pcgamingalliance.org

2

a. State of the PC Highlights
• The PC is the largest single platform for games with annual worldwide revenue of about $11 billion. This is more than any of the console and portable systems from Sony, Microsoft and Nintendo. • In emerging markets such as Asia and Eastern Europe the PC has become the de facto platform of choice for games as console systems have not had major penetration in most countries. • Even in North America and Western Europe the PC is the leading single platform for games with over $6 billion in combined revenue from those markets. • Broadband penetration has been a key driver of growth and revenue growth for PC games, and is directly tied to growth in broadband penetration. • The three biggest trends in 2008 were 1) the growth of online digital distribution via services like Valve’s Steam; 2) the growth of free games with a virtual item purchase model and 3) the growing presence of game cards at major retailers like 7-Eleven. • Top PC games regularly generate over $50 million at retail revenue but can generate substantially more in subscription and/or add-on revenue. • Massively Multiplayer Online Games (MMOGs) are the leading products for both revenue and profits. Several Asian MMOGs are generating over $100 million in annual revenue after 5+ years on the market. World of Warcraft is generating over $1 billion in annual revenue. The Lich King expansion to World of Warcraft outsold its predecessor. In 2008, two major new subscription MMOGs (Warhammer Online and Age of Conan) sold over 1 million units at retail. • Digital distribution, free-to-play models and retail game cards are well-established in Asia, but just starting to emerge in North America and Europe. • Leading emerging markets for PC games include Russia/Eastern Europe, India, Brazil and Southeast Asia. These markets generally have very low (often less than 5%) broadband penetration, but are expected to grow substantially as the infrastructure improves. • Low-cost PCs often have trouble playing high-end games, but they are helping drive growth in the mass market and emerging markets that can not yet afford high-end systems. These PCs are helping drive the casual game market. • The trend in Western markets is toward portability and connectivity, with laptops outselling desktops, In addition, the major growth segment in laptops is under-$500 netbooks that are better suited for online casual games. • Casual games have developed into an entire sub-segment led by large industry portals such as Electronic Arts’ Pogo, Yahoo, MSN, Big Fish, Real Networks and others. These top portals can now generate well over $100 million in annual revenue from casual PC games.

www.pcgamingalliance.org

3

b. Note from the President of the PC Gaming Alliance
Gaming software (retail, digital distribution, online subscription, advertising and other business models) generated $10.7 Billion which according to most industry studies would make PC game software responsible for nearly one third of every dollar generated in the gaming software industry. This makes the personal computer by far the No. 1 platform for gaming world wide. The hardware revenues for PC gaming include the PCs purchased by gamers and any peripheral component upgrades done in the year 2007. At $43 Billion this dwarfs the hardware revenues of competing gaming platforms by two-to-one. Thank you for taking the time to read our overview of the PC Gaming Industry in 2008. The Personal Computer Gaming Alliance (PCGA) is a dynamic and varied organization that is working hard to communicate the value of gaming on the personal computer, as well as to discuss and resolve the challenges that the personal computer gaming industry is facing. PCGA Overview The PC Gaming Alliance was formed on Nov. 8, 2007 with the objective of acting as the single industry voice for personal computer gaming worldwide. The PC Gaming Alliance’s primary focus is on accurate research and reporting of the size and scope of PC gaming worldwide. The PC Gaming Alliance released the first Horizons research in August of 2008. This report highlights the personal computer gaming industry’s hardware and software revenues by geographic region.” The summary of these findings are that PC Gaming is a substantial $54 Billion per year industry. The Personal Computer turned 30 in 2008. According to IDC there are over 1 billion personal computers in use worldwide. The PC Gaming Alliance research shows that 250 million of these computers are being used for gaming. The PC Gaming Alliance intends to continue delivering quality research publicly and privately to members on an annual basis. At our launch in February 2008 the PCGA decided it should focus on minimum systems requirements as an area of concern to the entire PC gaming industry. Early analysis showed us that few games supported the same PC hardware requirements. Furthermore, inconsistent approaches to supporting the same or similar hardware led to consumer dissatisfaction with gaming experiences on older personal computers. The PC Gaming Alliance has highlighted this as an area of particular concern and is planning to announce the establishment of a common minimum system requirement as well as performance expectations by genre of PC games. The PCGA hopes to establish marketing partners / relationships through their role in the PCGA. The PC Gaming Alliance recently updated the membership tiers to make the entry-level membership significantly easier for almost any company in the PC game industry to join. Entry-level membership benefits were also established to help put together marketing programs that one single company, or two, might not otherwise be able to undertake. It is the vision of the PC Gaming Alliance marketing committee to provide a regular opportunity pipeline for all of its members to participate in. Marketing programs for 2009 are being developed so that member companies can combine resources to bring their unique products, In 2008 the PC gaming industry games or services to consumers. told the PCGA that minimum systems requirements are important, Summary but so is piracy’s effect on the long-term health of the platform. The PC Gaming Alliance expects The PCGA listened and deter- to report solid growth despite troumined that a separate working bling global economic times. The committee @ the PC Gaming PCGA also expects to showcase Alliance should be formed to de- minimum systems requirements termine what alignment could be and anti-piracy industry aligncreated by the PC gaming industry ment that will help ensure that this on this front. The PC Gaming Al- growth does not slow as we head liance has not yet announced the into the next decade. formal charter and objectives for this sub-committee, but it would We urge you to get involved in like to encourage those publish- the PCGA community and help ers, developers, hardware and us shape the future of PC Gamsoftware solutions providers that ing. PCGA’s member program enare concerned about PC Game courages companies of all sizes Piracy to join our efforts in 2009 as to participate, collaborate, and we define an aligned direction for contribute to the success of our shared mission. Join today! the industry to head. alignment of both the hardware and software experience for PC gaming consumers and in doing so increase overall customer satisfaction. The desired outcome of this effort will result in game developers having a much more finite target for the entry level system required to play their game. The PC gaming alliance will additionally demonstrate the long-term total available market viability for each of the forthcoming minimum systems requirements that it intends to advocate. The PC Gaming Alliance calls on Game Developers and Publishers to support this effort as it should lead to reduced customer support calls and reduced product returns. The Benefits of PCGA Sincerely, Membership Randy Stude As an industry consortium mem- President, PC Gaming Alliance. bers of the PC Gaming Alliance enjoy an open forum to meet and discuss the direction of our industry. Many members have become familiar with future product and
4

www.pcgamingalliance.org

d. Horizons Report Summary
The first PCGA Horizons report on the Worldwide PC Gaming Software Market was presented in August 2008. The focus of this report was on global PC game software sales for 2007. Unlike many other reports the Horizons report considers revenue from multiple sources including: 1. Major Retailers (Boxed games sold in stores) 2. Etailers and Alternative Retail - (Boxed games sold thru etailers, alternative chains such as 7-Eleven) 3. PC Online - (Micro transactions, subscriptions) 4. PC Digital - (Games sold digitally, i.e. STEAM, Direct2Drive, etc) 5. PC Ad (Advertising rev, either in game, game website or server log-on page, etc)

Worldwide PC Gaming Software Market Revenue 2007 (in millions)
2007 Retail PC Online revenue PC Digital Distribution Rev. PC Ad revenue Total NALA $1,231 EMEA $1,898 Japan $58 ANZ/Asia $80 WW $3,267

$776 2007 $860 NALA$134 Retail $1,231 PC Online $776 $450 revenue $569 $120 $450 PC Digital $222 Distribution $170 $42 Rev. $222 $354 PC Ad $2,679 $3,497 revenue

EMEA ANZ/Asia $2,999 Japan $4,769 $1,898 $58 $80 $860 $134 $2,999

$783 $358

$1,922 $792

$569

$120

$783

$170 $4,220 $42

$358 $10,750

Source: The PCGA Horizons Report – Worldwide PC Gaming Software

PC Games Software Market Revenue 2007
$5,000

$4,000

$3,000

$2,000

$1,000 ANZ/Asia

$0 NALA

EMEA

Japan

Retail PC Digital Distribution Rev.

PC Online revenue PC Ad revenue

e. PC Gaming Trends Summary
• The PC game industry is growing rapidly on a worldwide basis as PC penetration and broadband connectivity grow. • The growth in the PC game industry is occurring with online connectivity that allows for digital distribution, online play and can help avoid piracy by focusing on games as a service. Our goal in this report is to provide the reader with a critical, yet honest appraisal of the state of the PC game business entering 2009. As you will quickly note, this is not solely a report on the state of the traditional PC game business in the United States. Neither will this report dwell on the old console • The traditional retail business has seen a decline in the number of products being introduced. However, the top high-end PC games now have very strong sales at retail. • The biggest story in PC games is the expansion to revenue streams beyond traditional boxed retail, especially in emerging markets. versus PC debate. That topic is as old as it is moot. PC gaming did not lose, the segment simply went its own way. In the United States, the traditional PC game business, as defined by
5

The growing breadth and quality of Chinese online games recently saw China’s Perfect World ink distribution deals in South Korea and Japa

www.pcgamingalliance.org

Sorcerer’s Stone, Sim City 3000 Unlimited, The Sims, Warcarft III: Reign of Chaos, World of Warcraft and Zoo Tycoon all passed the 1 million mark after 2000. In 2007, a game like Electronic Arts’ Crysis, designed for the cutting-edge high-end PC systems, was able to ship over 1 million units in its first month of release. These sales all occurred at retail at a time when overall retail sales were declining. As aggregate revenue declined, total retail sales of PC game products in the top 20 exploded. The number of SKUs being released at retail declined dramatically and it was this weeding out at retail that caused much of the decline. According to the NPD Group, in the U.S. the average top 10 PC title in 1999 sold 488,000 units. In 2000 the average top 10 title sold 823,000 units. This was the first time that top PC games started to have sales on the level of the top console games. By 2008, PC game products like Blizzard’s World of Warcraft are breaking all records for revenue and profit. Our position, therefore, is that the traditional PC game business has matured, publishers of sub-standard quality have been weeded out, and consumers are more than open to rallying around compelling, AAA PC games. Furthermore, the focus on AAA retail products has allowed retailers like Wal-Mart to more effectively promote the top selling products.

Network, the online platform that remains the most accessible and most robust worldwide is the personal computer. No wonder then that we see tremendous growth in online PC gaming in Asia, where so many markets have been locked out of console introductions, stable broadband and wireless networks abound, and computer penetration is high. Whether it be involved MMOs, or simple casual games, the online PC game business has exploded in Asia, and similar trends are being seen in Europe, the U.S., and Latin America. Along the way, new ways to monetize game via micro-transactions, and other forms of pay-to-play, have taken root to boost profitability, and combat piracy. Taken together, the traditional PC game business, and the new online PC game business, are a formidable revenue producer. Especially when both segments combine, as in the case of products like World of Warcraft. With this broader business model perspective underlying our analysis, this report will illustrate important trends and data in the following topic areas:

Arthas and World of Warcraft has dominated PC game trends since 2004.

software sold in a box at retail, peaked in 1999, and has seen sales revenue drift back to 1997 levels during the following decade. That might seem depressing, but only if you ignore the fact that in 1999 there simply were too many titles in the market. The flood of SKUs at retail – primarily real-time strategy and first-person shooters – could not be merchandised effectively, and it was difficult for many of them to break out past 500,000 units sold. The general rule at the time was five percent of the titles generated 90 percent of the revenue. Not until overall annual revenue started to decline after 1999, and the number of lackluster product start to decline, did the industry start seeing PC games begin to top 1 million units sold. In the U.S., a diverse group of PC games like Harry Potter and the

1. Important Recent News and Trends 2. Hardware Developments 3. Software Developments 4. Analysis of Markets and Companies 5. The Impact of Piracy and How However, the biggest story in PC to Deal With It games is the expansion beyond retail. PC games have success- Despite colloquial prognosticafully pioneered online subscrip- tions to the contrary, our position tion and distribution models that in the following sections of this have resulted in a global boom is that the PC game business is that shows no signs of slowing. alive, well and moving forward. Despite the advances of the likes of Xbox Live and the PlayStation
6

www.pcgamingalliance.org

2. News and Trends
a. 2008: The News in Review
achieves total sales through origi- sion decides against the PC vernal and two expansions. sion of Madden NFL ‘09, because of serious business challenges. March 3, 2008 ● LEGO announces MMO – the April 16, 2008 Danish toymaker reveals their on- ● NCsoft launches NCcoin – the line game: LEGO Universe. Korean MMO publisher offers a micro-transaction solution for their March 3, 2008 players. ● Piracy kills Iron Lore – according to THQ creative director Michael April 25, 2008 Fitch, piracy was a major factor ● KingsIsle announced – the new in the demise of PC-developer MMO company develops two projOnline games are global, hence the Asian theme in this Lego Universe concept art. Iron Lore, but also blamed were ects, one from Tom Hall, one from hardware vendors, audience, and J. Todd Coleman, both well known January 15, 2008 PC developers. ● THQ Buys Big Huge Games – reviews. the third-largest U.S. publisher May 26, 2008 purchases the developer of strat- March 3, 2008 ● Phil Harrison join Infogrames – ● Age of Conan tops 400,000 usegy games. the former president of worldwide ers – during the first few days over studios for Sony Computer Enter- 400,000 players enter the HyboJanuary 29, 2008 ● Valve launches Steamworks – a tainment aids David Gardner’s ef- rian realm. suite of development and publish- forts to reshape Atari. June 6, 2008 ing tools offered free to developers March 13, 2008 ● Age of Conan tops 1 Million to entice use of the Steam plat● Sony Online folded into Sony – sales– developer Funcom anform. after the departure of Yair Landau, nounces more than one million Sony Pictures Digital gives control copies shipped. February 4, 2008 ● NVIDIA buys AGEIA – the graph- of MMO publisher SOE to Sony June 12, 2008 ics processor maker gains rights to Computer Entertainment. ● AMD and Havok enter agreePhysX middleware. April 1, 2008 ment to optimize physics process● Stormfront Studios closes – the ing for gaming. February 11, 2008 ● Microsoft cancels Marvel MMO longtime PC developer, citing dif– the Cryptic-developed game is ficulty getting new projects, ends July 8, 2008 it’s 20 year run. ● Activision/Vivendi merger closes dropped by Xbox executives. – becomes the largest publisher in April 3, 2008 the U.S. with ownership of World February 26, 2008 ● EA cancels Madden NFL for the of Warcraft. ● Guild Wars sells 5 Million units – the NCsoft published MMO PC – Electronic Arts’ sports divi-

www.pcgamingalliance.org

7

July 10, 2008 ● Good Old Games launches – the Polish publisher, CD Projekt, starts a new digital distribution platform for classic PC titles. July 17, 2008 ● EA reveals KOTOR Online – speaking in an interview at E3, John Riccitiello confirms work on a Star Wars MMO. July 22, 2008 ● Games For Windows Live goes free – the Microsoft subscription service for Windows gamers drops August 15, 2008 ● Flagship Studios closes – the it’s monthly charges. developer behind Hellgate: London closed after the game failed to July 28, 2008 ● NCsoft sells retail cards – the become a commercial success. Korean MMO publisher offers game cards in several U.S. retail- August 19, 2008 ● Cyrsis costs revealed – speakers. ing at a conference, Crytek executive Cevat Yerli said the game cost July 29, 2008 ● Madden returns to the PC – EA €15 million to develop, but was still Sports chief Peter Moore reports profitable. that the next version will take advantage of the PC’s online prow- September 9, 20008 ● Microsoft closes Ensemble Stuess. dios – the famous PC RTS developer is closed by parent company August 5, 2008 ● Fury goes offline – the Austra- Microsoft after 15 years of major lian MMO developed by Auran blockbusters.

September 30, 2008 ● EA cancels Tiberium – the squad-based shooter based in the Command and Conquer is canceled because of quality concerns. October 30, 2008 ● S.T.A.L.K.E.R. Clear Sky, is patched and becomes the first game officially supporting DirectX 10.1. November 11, 2008 ● Richard Garriott leaves NCsoft – the creator of Ultima Online leaves Korean MMO publisher NCsoft some months after finally launching the under-performing Tabula Rasa. November 13, 2008 ● Activision Blizzard releases the World of Warcraft: Wrath of Lich King expansion and it sells 2.8 million units in the first two days. November 21, 2008 ● Tabula Rasa to close – NCsoft announces that the now free-toplay MMO will be taken offline in February. December 23, 2008 ● WoW reaches 11.5 million active subscribers - the game likely accounts for half of Activision Blizzard’s earnings.
8

which focused on player-vs-player gameplay, shut down without September 11, 2008 enough subscribers to sustain the ● NCsoft consolidates – the Korean publisher merges European game. and U.S. operations into NCsoft West. September 18, 2008 ● Warhammer Online launches – the Age or Reckoning officially begins for one of EA’s most anticipated MMOs. September 24, 2008 ● Spore tops 1 Million sales – the cross-platform creature game reaches the mark in two and a half weeks.

Even a huge franchise status won’t save every game

www.pcgamingalliance.org

b. 2008: The Trends
big deal because it was the merging of the traditional retail model with the new service model under one roof. And with one half or more of the publisher’s fiscal year earnings may end up being attributed to World of Warcraft, that is a very big roof. We don’t expect another World of Warcraft to arrive anytime soon. But what Blizzard’s success has done is make more than 12 million active players comfortable with the service concept worldwide, and made that concept safe for many millions more who cannot afford to play WoW. For those, the service model as expressed via mainstream online casual experiences purchased via micro-transactions, has plenty of global opportunity to exploit. As a category well-tailored to low-income emerging markets where consumers can afford less and are more prone to accept piracy, casual online content is also tailor-made for first-world consumers suddenly faced with less discretionary income to spend. Similarly, traditional retail box PC gaming was already moving toward less risk taking in title development, reducing the number of titles released annually, and an emphasis creating quality AAA franchises that can return $1 million and above in revenue – once again exemplified by Activision Blizzard’s publishing strategy. With consumers curtailing expenditures, their purchasing behavior will neatly match the business trends of PC games: very attractive. Their expansive worlds take many hours to explore, and MMOs receive regular free content updates, all of which makes one subscription to a good MMO seem like a good perceived value for the money. • Dedicated gamers will buy more sure bets. They won’t give up the in-depth computer game experience, but they will cut back on how many new titles they will purchase at retail. When gamers pay top dollar they can be expected to gravitate to the very same known AAA franchises that publishers are directing their creative teams to deliver. The PC is one platform, yet it is a platform with a great deal of flexibility in power, portability and connectivity. With the rise of ultramobile wireless netbooks boasting battery charges lasting up to seven hours, consumers can now take a wide variety of PC games with them anywhere. No other game platform has the ability to scale with so many different lifestyle segments. That scalability provides the PC games industry a huge opportunity to help consumers play games in more ways than, and with more ways that any other platform, and with more flexibility to profit in hard economic times, than any other platform. While there are many trends at work in the rapidly growing PC game market we thought that three emerging trends really stood out in 2008: 1. The Importance of Online Digital Distribution 2. The Emergence of Free Games with a Virtual Item Model 3. The Growth of Retail Outlets that Offer Game Play Cards
9

Mabinogi is a free-to-play game in South Korea.

• The growing base of online broadband connections continues to drive market growth and online distribution is rapidly becoming the preferred method of delivery. • Subscription-based Massively Multiplayer Online Games (MMOGs) continue to be major revenue generators. In 2008, two major subscription MMOGs (Warhammer Online and Age of Conan) sold over 1 million units at retail. The Lich King expansion to World of Warcraft outsold its predecessor. • The pay-per-use and virtual item model is driving growth in Asia. The service-oriented nature of these products are proving very profitable. A worldwide economic recession and liquidity crisis is the angry gorilla in the room during any discussion of business trends. The PC games industry is no exception. Despite conventional wisdom games are not recession-proof. The key factor to consider, however, is no matter what, people like to play games. The opportunity for the industry during tough times is offering consumers as many ways to play as the thickness of their wallets will allow. That is why the international economic crisis is accentuating existing trends in PC games.

• Leading western retail publishers like Electronic Arts and Activision are pushing harder into the PC game market as the traditional retail model is proving less profitable. • High-end games like Crysis that require expensive highend PC game systems are having better than expected sales. • The economy has not yet seemed to have a major effect on the PC game industry, but does appear to be slowing the growth of PC hardware. • Retail expansion is occurring with the introduction of retail cards that take up very little shelf space and allow consumers to download games. of the service model worldwide as the growth engine of the business. Whether it be full-blown MMOGs such as World of Warcraft, or online browser games like Diner Dash, computer gamers progressively defining the entertainment they receive by the amount of money they want to spend. For some that means $14.95 monthly subscriptions, for others, it means downloading a free action shooter where they must purchase the ammunition for their weapons separately as a 99-cent micropayment.

• Free-to-play online experiences become more enticing for people on a tight budget. If the game is good, then additional features can be purchased for a nominal cost. The merger of Activision Inc. and In 2008 we saw clear emergence Blizzard Ent. in 2008 was such a • MMO subscriptions become
www.pcgamingalliance.org

c. Major Trend 1: Online Digital Distribution
tive platform for digital distribution. Like all consumer companies, game publishers increasingly rely on the Internet to reach their customers. However, with PC software, the emergence of online connectivity has already resulted in a major shakeout in the traditional business model. Like with the music industry, the PC game market has seen a significant shift away from the classic retail model. An increasing share of the games industry is moving online. As a platform, the PC has led the movement to online distribution and consumption of games. Experience has clearly shown that when a country experiences growing household broadband penetration, its PC game market significantly increases. Digital distribution is the replacement of traditional disc-based media, in favor of digitally downloading the same data to the harddrive of the gaming device. As publishers look for ways to boost their profit, cutting out expensive boxed retail SKUs, and retailers, has become very attractive. Retail isn’t going away anytime soon, but the expectation is that game publishers will continue promoting digital distribution of their games in the years ahead, and that will become more prevalent consumer choice. While game consoles have made use of this technology to a certain extent – Xbox Live Arcade, the classic games that can be downloaded via Nintendo’s WiiWare, and Sony’s Playstation Network where like WarHawk are sold as a digital download – the PC’s long record of stable broadband access has proven to be the most recepSeveral third-party publishers like Electronic Arts offer their own download services, and independent services like GameTap, Direct2Drive, and Stardock, all offer games from multiple publishers. But the most successful has been Steam, from Valve Corporation.

Valve claims to have 15 million users, and supports over 250 game titles – including back-catalogs from almost every major publisher. A sophisticated system, Steam ofThe major PC game growth mar- fers players and publishers access kets such as casual games and to achievements, competition leaMMOGs are largely online based derboards, profiles, and avatars. and are a clear indication how much the industry is moving away Developers can also take advanfrom brick-and-mortar retail. Pub- tage of built-in multiplayer matchlishers continue to herald the roll making, community features, antiout of digital downloads. cheat and voice chat software. Publishers are offered real-time Leading retail publisher Electronic sales tracking, anti-piracy tools, Arts announced that for the first and region controls. nine months of fiscal 2009 (ended 12/31/2008) revenue from digital- Digital distribution technology has direct-to-consumer service was matured sufficiently to present a over $300 million. Riccitiello, the viable foundation for many of the chief executive for Electronic Arts recent micro-transaction models has stated to investors that his that involve sizable game clients. company will focus on direct-to- Steam has proven to be such a customer transactions, increasing good model of what digital distriburevenues and lowering cost-of- tion can achieve that Mitch Lasky, goods through digital sales. a partner at Benchmark Capital and a former Activision executive,

www.pcgamingalliance.org

10

recently said he considers Steam to be the most valuable asset in the video game business. Obviously, this trend rides on the coattails of other forms of entertainment garnering online success, such as music (iTunes), television (Joost, Hulu) and film (NetFlix). The failure of big-label retailers like Circuit City, and added pressure on better managed dealers such as Best Buy, only motivates game publishers further to employ digital distribution to cut cost, reduce overstocking, and remain competitive. As publishers move more of their content online, they’ll have to adapt to the model of casual games and other ad-funded forms of game play that depend on large audiences, and will move from local clients to browser-based game play. The move online is a tremendous opportunity. There is a substantial growth factor for the overall industry in the expansion of its global audience by making games more easily available. One way this will come about is by lowering the technical barrier to gameplay. Furthermore, instead of playing an easy-entry game on its own, casu-

al gaming integrates into a larger selection of online entertainment. Online aggregators will shift their focus toward gameplay that takes place on their sites to increase their “stickiness.”

in recent years. While a huge part of that success is based on the strength of used sales, moving forward, these retailers will continue to be places where gamers will go to hang out, test new titles and shop for bargains. Nonetheless, a Of course, it is also worth noting lot of what retailers offer is and will that, across the board, gameplay be replaced by an online version. now involves an online component. Whether MMOG, FPS, ca- One major driver in this transition sual or otherwise, gamers are is broadband penetration. While keen on playing with others. The overall adoption rates are slowsuccess of Call of Duty, the recent ing, the overall consumer market release of AAA titles such as War- is now outfitted with a pipeline that hammer Online (EA) and Age of can handle large downloads. For Conan (Funcom), and the growing traditional game companies this industry of casual games all incor- means that they can sell titles diporate a lively element of online rectly to the consumer and take a game play. larger cut. It also means that updates and patches can be distribOf course, the traditional retail- uted online. Finally, a bigger pipe based model will continue to ex- facilitates the downloading of large ist. For one, the off-line, real-world files: Age of Conan’s download community experience remains an size is 13.7GB and Warhammer important part of video games that Online 11GB. simply cannot exist online. Retail chains like GameStop and Play N Despite how attractive digital disTrade have done exceedingly well tribution may be, publishers still have a long way to go to build in adequate customer service mechanisms to ensure consumers have a painless experience. It still is too easy for a glitch during downloading to leave consumers without the game they want to play, regardless of a charged credit card. When publisher phone reps are left with no other option but charging the customer’s card again to initiate a new download, as has happened with World of Warcraft, additional thought needs to go making the process more consumer friendly. These growing pains aside, the growth in online gameplay, and economic imperatives for publishers, means the future of game retail will progressively be online.

www.pcgamingalliance.org

11

d. Major Trend 2: Free Games With Virtual Item Model
involved outside of art design, and substantially less overhead in terms of personnel costs. By not being at the mercy of brick-andmortar retailers, publishers deal essentially direct with the consumer, allowing them to monitor behavior better and creating more attuned products. An important aspect in facilitating the sales of virtual items is a solid, credible payment method. In earlier attempts, online retailers tried offering small, cheap virtual items. But with credit cards charging a fee per transaction, micro-transactions never reached profitability. The sale of individual songs via iTunes circumvents these costs by billing its customers on a monthly basis, rather than every time they download music. Successful game companies employ a similar method by selling in-game currency. Although the company operates on advertisingbasis in Asia, Nexon, for example, sells Nexon Cash, which can be used throughout all its games in the U.S. Consumers either purchase a redeemable code online, or can mosey over to a retail outlet like 7-Eleven, Target, Duane Reade or CVS Pharmacy and buy game cards. Similarly, PlaySpan offers the “Ultimate Game Card.” The idea behind these cards is to persuade consumers to spend their money on upgrading their avatar, within the setting of an otherwise free game. For the long-term, however, and despite the low overhead, margins on virtual item sales will be very low. Although it currently seems almost absurd that people are willing to pay, for example, $4.40 for a “Slimy Stick” in MapleStory, real money will ultimately come from in-game currency exchangers, which provides effective fraud protection and liquidity. Facilitating such in-game exchanges will eventually become the backbone of virtual items sales. Already the few original providers of such services are being joined by new entrants – some of them merging to capture a larger market share. In July 2008, Silicon Valley-based PlaySpan, Inc. acquired PayByCash to become one of the largest players in the space.

At the Diner Dash shop players can upgrade their diners.

Asian markets are proving to be pioneers in many of the new game business models, notably virtual item sales. Nexon’s Kart Rider is the poster child for games that incorporate virtual item sales. Succinctly, players pay for upgrades to their racer avatar. Prices are generally low, varying from a few cents to several dollars. Kart Rider been very successful; according to Nexon, with 25% of South Korea’s population having played the game. Building on emergent online models, virtual items sales carry several benefits. For one, it is a very effective way of protecting intellectual property against piracy. As this is originally one of the main reasons why Asia operates less on a console or retail-based system, and many Asians play exclusively online. Since the game “lives” on the company’s servers, it is very easy to prevent or correct illegal practices. Next, the cost of producing virtual items is approximately zero. The ‘item’ does not actually exist in a material sense, because it is entirely digital, there is no labor cost

www.pcgamingalliance.org

12

e. Major Trend 3: Game Cards at Retail
Managing distribution remains a critical issue for successful game companies, and with audiences moving online, new distribution models must emerge. That’s why Internet technologies are facilitating micro-transactions and the concept of in-game currencies. Market leaders like Nexon are booking remarkable successes by mixing the traditional point-ofpurchase in brick-and-mortar retail stores with an online presence. Currently, Nexon holds an arrangement with the 7-Eleven retail chain to sell cards that hold in-game currencies at the register. Game sales in part move away from the traditional place in stores, such as the consumer electronics or book sections, and become more of an impulse purchase. Gift cards for iTunes have done well using the same model in recent years. One critical element for the emergence of retail game cards is that younger players do not have access to most other forms of payment that are suitable for online game play. Credit card companies, to name the obvious example, require customers to be 21 years old. Consequently, game cards expand the potential customer base to well below this traditional threshold. In addition, micro-payments facilitated via cell phone also aim for the younger demographic with more time on their hands. According to one executive: “Thirteento 20-year-olds might not have credit cards, but they do have cell phones,” she said. “We’re a payment network that allows consumers to charge digital goods ... to their cell phone bill.” It was in November 2007 when 7-Eleven first launched the Nexon gift card. The initiative proved so successful that the retail chain expanded to about 20 cards, and will has generated a steady revenue stream of 3 billion KRW ($3 million) every month from items sales in its popular Kart Rider. NeoWiz, also Korean, has seen revenues in excess of 30 billion KRW (~USD$33 million) coming from its first-person shooter Special Force since January 2006. Beyond toy companies and Asian publishers, the incumbent American game companies are also beginning to take notice. At a recent investor conference, EA’s CEO John Riccitiello stated that micro-payments will be crucial to the company’s overall success, particularly in tandem with its effort to distribution online. EA’s Spore, said Riccitiello, is ideally suited to incorporate micro-payments to sell “body parts and planet parts and vehicle parts.” Furthermore, Battlefield Heroes, currently in closed Beta, will generate revenue exclusively from micro-transactions.

Almost a year later, GMG Entertainment launched a line of prepaid currency cards at Toys “R” Us. GMG is partnered with AdventureAeria Quest, Cartoon Doll Emporium, City of Heroes Gala-Net, Stardoll, WeeWorld, Combat Arms WildTangent and Zwinky. GMG Exteel also published a line of cards from Gaia Outspark in Target stores and Best In July 2008, Silicon Valley-based Guild Wars Buy. PlaySpan, Inc. acquired PayBygPotato Cash to become one of the largest Habbo Despite some notable failures of players in the space. Its Ultimate ijji some micro-payment games on Game Card is offered in retail IMVU the Internet, game companies stores throughout the U.S. and Mabinogi are generally proving successful. Canada. Maplestory IMVU generates approximately $1 Neopets million every month through pre- The cost of charging micro-payRunescape paid micro-transactions. Similarly, ments through traditional credit Sims2 Nexon claims its game cards were card companies has deterred Sugar Rush the second-best selling prepaid many from entering the space. card after Apple’s iTunes cards in Consumers paying for in-game In addition, 7-Eleven also carries Target stores. credit via game cards, which they game cards for the Sony Playcan spend all at once or over the Station Network and Microsoft According to Nexon’s vice-presi- course of many months, signifiXbox Live. With over 7,600 store dent of Mmarketing, the underly- cantly reduces the risk for publishthroughout North America, the ing mechanics are similar to the ers and invigorates their profitabil7-Eleven retail chain has the wide traditional razor-blade model in ity. Moving forward, as the current reach and capital to make this new which razors are sold cheaply and generation on online teenagers development a success. Other profit comes from the sale of the reaches adulthood, micro-transwell-known retailers that carry the blades. Nexon, which originates actions are likely to become part Nexon game cards are Blockbust- in South Korea, has been able and parcel of everyday consumer er Video, CVS Pharmacy, Duane to do exceedingly well with this spending. Reade, Longs Drugs, Target and model. Since 2005, the company
www.pcgamingalliance.org
13

put a greater emphasis on game cards in 2009 as part of its business. Currently, 7-Eleven offers prepaid cards for the following games:

Rite Aid Pharmacy.

3. Markets and Companies
a. Overview
Around the globe, piracy has severely limited the growth potential for PC games. In some markets such as Brazil and China, almost all CD-based media is pirated. The problem is so bad that very few publishers bother releasing a legitimate CD product in those markets. Even in established markets like the U.S. and Europe, peer-topeer file sharing services like BitTorrent make it easy for users to violate copyright restrictions. long-lasting service is a broadband online connection. This is why we believe that growing broadband penetration is the key driver for the growth of PC games. Markets like South Korea were leaders in building out online broadband connections and this also led to an explosion in the PC game business. With less than 50 million people, South Korea has become one of the world’s leading PC game markets.

The good news is that there are The good news is that in many maindications that piracy may even- jor markets, broadband penetratually be less of a problem for tion has plenty of growth potential. games than it is for other digital There will likely be a direct correlamedia such as movies and music. tion between growth of broadband This is because 1) more effective and the growth of PC games. The DRM solutions are being built and other positive sign is that an online 2) the market is going to more of a broadband connection is what alservice-oriented business. It is ac- lows companies to turn their boxed tually the second point that is most products into more of a service. important. Leading PC games are The service oriented products becoming akin to a service which are not only harder to pirate, but is updated and supported on an they have significantly larger profit ongoing basis. Service-oriented margins. Under the traditional reproducts are extremely hard to tail model a product had at best a pirate because of the ongoing sup- few weeks on the shelf to estabmajor global markets, but they • Broadband penetration is the port required. The rapidly growing lish itself. With a service-oriented are proving to be significantly single leading driver of market legitimate market in China is al- product a game can last for years. more profitable than traditional growth. As a country’s housemost entirely run on a pay-per-use In China and Korea several top games. hold broadband penetration Italy UK France S. Korea Germany Japan U.S. games are generating China $100 over service-oriented model. BB x HHs 0.46 0.46 0.82 0.37 0.55 0.14 0.47 goes up so does revenue for • Digital distribution and pay-per- DFC 0.37 Intelligence million in annual revenue after use are well-established modPC games. Of course, the key to changing more than five years on the marels in Asia, but are just now • Piracy has been rampant for games from a mere product into a ket. starting to gain traction in North all forms of games around the America and Europe. world and has especially limBroadband Household Penetration by Country 2007 • China has been the most rapid ited growth for PC games. 90% 0.82 emerging market of the past • The movement to ongoing 80% five years. The other notable products that are service-ori70% emerging markets include ented is proving a way around 0.55 60% Russia/Eastern Europe, India, the piracy issue and has al0.47 0.46 0.46 50% Brazil and Southeast Asia. All lowed countries like China to 0.37 40% 0.37 these markets are under $100 build a substantial, legitimate 30% 0.14 20% million, but with very low broadPC game business. 10% band penetration, they have • Successful PC MMO games 0% U.S. China Japan potential for significant growth. are not only doing well in all S. Korea Germany France
Italy UK

BB x HHs DFC Intelligence estimates

www.pcgamingalliance.org

14

b. North America and Europe
North America and Europe have robust game markets across multiple platforms. Of course, the largest segment of the market are the dedicated console systems that attach to the television set. However, where there was once a lively debate about which system would win out, consoles or PCs, the answer now seems to be both. Consumers are accessing and playing games from multiple devices and it is all about having access anytime, anyplace, anywhere. This means console systems, portable systems and Dedicated video game console up a large portion of the console the PC are all thriving. systems are the largest segand portable market. In terms ment of the market of third-party software the PC is One thing that is becoming clear, is that while the console market Most products still follow the the number one platform traditional retail model • High-end games like Crysis will generate more overall revThe market has become dividand MMOGs with $10+/month enue, it is becoming harder to ed among multiple platforms: subscription fees can sell over make a profit. The most important four major console systems, 2 1 million units across North factor is that, there is no longer a single dominant console system. major dedicated portable game America and Europe systems, PC retail and online • Casual games, virtual items Sony has the PlayStation 2 and games, and games played on and digital distribution are still PlayStation 3, Nintendo has the mobile phones a relatively minor portion of Wii, and Microsoft has the Xbox Revenue generated by Nintenthe market but have significant 360. Each of these systems has a large installed base, but they do, Sony and Microsoft make growth potential. are really like four different platforms. As a software platform, 2007 North America and Europe Combined Retail 2007 North America and Europe Combined Retail the PC is larger than any of these and Online Game Software Revenue and Online Game Software Revenue individual systems. This is even North America Console Portable PC Software North America Console Portable PC Software more apparent when one takes and Europe Software Software and Europe Software Software into account that all of the hard2007 Software $12.58 $5.34 $6.18 2007 Software $12.58 $5.34 $6.18 ware revenue and a large portion Revenue Revenue of the console software revenue In billions In billions goes to Nintendo, Microsoft and Sony. These three companies alone generated well over $30 North America and Europe Software North America and Europe Software Revenue by Platform 2007 billion in game related revenue Revenue by Platform 2007 during 2008. Platform 2007 Revenue Platform 2007 Revenue PC $6.18 For many years, the large indePC $6.18 Xbox 360 $4.15 pendent software publishers had Xbox 360 $4.15 been primarily focused on the Wii $3.58 Wii $3.58 dedicated game platforms from Nintendo DS $3.31 Nintendo DS $3.31 Sony and Nintendo. The 2007 PlayStation 2 $2.55 results clearly indicated that it PlayStation 2 $2.55 was time to diversify to other platPlayStation 3 $1.92 PlayStation 3 $1.92 PSP $1.54 PSP $1.54
www.pcgamingalliance.org
15

• • •

PlayStation 2 PlayStation 3 PSP

$2.55 $1.92 $1.54

Electronic Arts New SKUs by Platform Fourth Quarter 2007 and 2008
Period PC Wii DS X360 PS2 PS3 PSP 10/1/07-12/31/07 4 5 5 7 7 5 4 10/1/08-12/31/08 13 12 9 8 7 7 3

Furthermore, World of Warcraft is The majority of Activision Blizzard a service- oriented product that revenue for the first nine months was launched way back in 2004. of 2008 was not from traditional product sales, but from subscripLooking at the initial numbers from tion, licensing and other revenue, forms. In 2008, the two largest the new Activision Blizzard entity, a large portion of which came independent software publish- it is clear how important the suc- from World of Warcraft. FurtherNintendo PlayStation PlayStation PSP cessful from product-ori- more, the profit margins on World ers, Electronic Arts and Activi-Platform PC shift Xbox 360 a Wii DS 2 3 2007 $6.18 a service-oriented $3.31 $4.15 $3.58 $2.55 $1.92 ented busi- of Warcraft. Are $1.54 higher than much sion made major moves to diver-Revenue (in to billions) ness can be to the bottom line. traditional retail products. sify their business across multiple platforms. A big push was to exNorth America and Europe Software pand activity into PC and online Revenue by Platform 2007 distribution business models. $7
$6.18

A comparison of the number of titles released by Electronic Arts in the fourth quarter of 2007 versus 2008 proves illuminating. The number of titles released for the Sony and Microsoft platforms remained about the same. Meanwhile, the number of titles released for the PC and Nintendo systems increased significantly. Electronic arts published 13 new PC titles in the fourth quarter of 2008 versus only 4 in the same period in 2007. The story for Activision is even more dramatic. The biggest news of late 2007/2008 was the merger between Activision and Vivendi Games to form Activision Blizzard. Vivendi Games Blizzard Entertainment division was the developer of World of Warcraft and is the most successful PC game publisher in the world.

$6

$5 $4.15 $4 $3.58 $3.31 $2.55 $1.92 $2 $1.54

$3

$1 PlayStation 2 PlayStation 3 PSP

$0 PC Xbox 360

Wii

Nintendo DS

2007 Revenue (in billions)

Activision Blizzard Revenue and Expenses First Nine Months of 2008 9 months ending 9/30/08 Product Sales Subscription, Licensing and Other Revenue Cost of Sales: Product Costs Cost of Sales: MMOG
In millions, does not include all expenses
16

$553 $824 -$350 -$123

www.pcgamingalliance.org

c. China and Korea
• China and South Korea have the market. been the two leading markets • The PC online business origifor online PC games. nally started in Internet cafes • Leading products in both China but growing broadband penetraand Korea are primarily a sertion has meant more household vice-oriented business where usage. games are supported and main- • China and South Korea are piotained on an ongoing basis. neering the virtual item digital • Several products are still generdistribution market that is just ating over $100 million in annual starting to be introduced to revenue after over five years on North America and Europe. With a population of under 50 million, South Korea has been the largest market for PC online games since the turn of the century. Usage in South Korea was mainly done on pay-per-use basis in publicly located Internet Cafes. However, over the past few years South Korea’s broadband penetration has exploded and this has resulted in increased home usage for online PC games. In 2007, China passed South Korea as the largest PC online game market. Like Korea, China games have been played on a pay-peruse basis in Internet Cafes. China is far behind South Korea and the Western world in terms of broadband penetration, but, with a population of 1.3 billion, the sheer number of potential consumers make China the fastest growing market in the world. to operate products as an ongoing service done on a pay-per-use basis. Not only did this build the industry, but it has allowed companies to operate games for years. Products like Lineage/Lineage II from NCsoft, Fantasy Westward Journey from Netease and Shanda’s Legend of Mir/World of Legend games have been around for over 5 years and are still generating revenue of over $100 million a year at very high profit margins.

Company

Activision Blizzard % Change -42% 1/08 to 1/09

Ubisoft -57%

Take-Two -59%

Infogrames -65%

Electronic Arts -73%

THQ -85%

Midway -93%

Western Publishers 2008 Stock Performance
0%

Activision Blizzard

Ubisoft

Take-Two

Infogrames

THQ

-20% -30% -40% -50% -60% -70% -80% -90% -100%

-42%

-57%

-59% -65% -73% -85% -93%

Company Netease % Change 17% 1/08 to 1/09

NCsoft 8%

Shanda

% Change 1/08 to 1/09 -3%

Asian Online Game Company 2008 Stock Performance
20%

16%

12%

8%

17% 8%

4% -3% 0% Shanda NCsoft -4% Netease

The other big boom area in China and South Korea is games that are free-to-play but generate revenue by upselling virtual items. This is a new model that is only enabled by online broadband connections. Products like Nexon’s Maplestory and Kart Rider are free but generating hundreds of millions of dollars in virtual item sales. Once again this is a trend that is coming to both emerging markets and The China and South Korean mar- established markets like North ket are dominated by domestic America and Europe. players. However, these markets are very important because 1) they Investors are clearly reacting to show the potential for other emerg- the new business models being ing markets and 2) they show how pioneered in China and South profitable a company can become Korea. In general 2008 was a when a game becomes a service- terrible year for all stocks. Game oriented product. companies were no exception. However, both NCsoft (Korea) and Traditional publishers did not Netease (China) were among the release products into China be- few stocks to show an increase in cause piracy of digital media is so 2008. Meanwhile Shanda Enterrampant. Therefore, the only way tainment (China) showed only a to build a legitimate business was slight decline.

CJ Internet CJ Internet Revenue CJ Internet Revenue Net Income CJ Internet 2007 2008 Revenue of USD at 1 USD = 1,000 KRW for year ending % Change $160 $194 21% Net Income $26 $25 -3% in millions 12/31 Revenue of USD at 1 USD = 1,000 KRW for year ending 12/31 $160 $194 21% Net Income $26 $25 -3% in millions Net Income of USD at 1 USD = 1,000 KRW for year ending 12/31 $26 $25 -3% in millions in millions of USD atNine Month Revenueyear ending 12/31 1 USD = 1,000 KRW for and Income NCsoft NCsoft Nine Month Revenue and Income Change Ncsoft 9/30/2007 9/30/2008 % Ncsoft 9/30/2007 9/30/2008 % 3% Revenue NCsoft Nine Month Revenue and Income Change $241 $248 Ncsoft 9/30/2007 9/30/2008 % -45% Revenue NCsoft Nine Month Revenue and Income Change $241 $248 3% Net Income $35 $19 Ncsoft 9/30/2007 Revenue of USD at 1 USD = 1,000 KRW9/30/2008months % Change $241 $248 3% Net Income $35 $19 -45% 9/30 in millions for nine ending Revenue of USD at 1 USD = 1,000 KRW for$19 months ending 9/30 $241 $248 3% Net Income $35 -45% in millions nine Net Income of USD at 1 USD = 1,000 KRW for$19 months ending 9/30 $35 -45% in millions nine inShandaof USD at 1 USD = Nine KRW forRevenue and Income millions Entertainment 1,000 Month nine months ending 9/30 Shanda Entertainment Nine Month Revenue and Change Shanda 9/30/2007 9/30/2008 % Income Shanda Revenue and Change Shanda 9/30/2007 9/30/2008 % Income Revenue Entertainment Nine Month $365 $250 46% Shanda Revenue and Income Shanda 9/30/2007 9/30/2008 % Change Revenue Entertainment Nine Month $365 $250 46% Net Income $158 $129 -18% Shanda 9/30/2007 9/30/2008 % -18% Revenue of USD at 1 USD = 7 CNY for nine months endingChange $250 $365 46% Net Income $158 $129 in millions 9/30 Revenue of USD at 1 USD = 7 CNY for nine months ending-18% $250 $365 46% Net Income $158 $129 in millions 9/30 Net Income of USD at 1 USD = 7 CNY for nine months ending-18% $158 $129 in millions 9/30 in millions of USD atOnline=Game Services Nineending 9/30 1 USD 7 CNY for nine months Month Netease

% Change 1/08 to 1/09 CJ Internet Revenue and Income CJ Internet Revenue and Income % Change 2007 2008 CJ Internet Revenue and Income % Change 2007 2008 $160 $194 21% CJ Internet Revenue and Income % Change 2007 2008 $160 $194 21% $26 $25 -3%

Netease 9/30/2007 9/30/2008 % 28% Revenue of USD at 1 USD = 7 CNY for nine months endingChange $204 $261 Net Income $86 $146 69% in millions 9/30 Revenue of USD at 1 USD = 7 CNY for nine months ending 28% $204 $261 Net Income $86 $146 69% in millions 9/30 Net Income of USD at 1 USD = 7 CNY for nine months ending 69% $86 $146 in millions 9/30 17 www.pcgamingalliance.org USD at 1 USD = 7 CNY for nine months ending 9/30 in millions of

Netease Online Game Services Nine Month Revenue and Income Netease Online Game Services Nine Month Revenue and Income Netease Netease Online Game Services Nine Month 9/30/2007 9/30/2008 % Change Revenue and Income Netease 9/30/2007 9/30/2008 % Change Revenue $204 $261 28% Revenue and Income Netease 9/30/2007 9/30/2008 % Change Revenue $204 $261 28% Net Income $86 $146 69%

Midway

-10%

Electronic Art

d. Emerging Markets
• Console systems are too exsome products like Counterpensive for mass consumption strike and Everquest in Russia and Eastern Europe • Strong affinity with Western cul• Currency inflation is a major ture. problem. 4. Southeast Asia 2. India • Combined the countries of the • With over 1.1 billion the market Philippines, Vietnam, Thailand, in India could eventually start to Indonesia and Malaysia should look like China, but currently it’s account for over $500 million in game market is well behind. revenue in 2008. • Internet cafes are big and ac- • These countries favor Chinese cording to the IAMAI account and Korean games and prodfor 36% of Internet traffic. ucts generally must be both loThere are over 200,000 cafes calized and adjusted for culture with a combined total of over 3 factors. million PCs. • Broadband penetration is very • Broadband penetration is growlow and the main model is paying but currently under 2% per-use at Internet cafes. • Philippines: 90 million popu3. Brazil lation, 14,000 Internet cafes, heavy English speaking popu• Over 190 million people but lation less than 5% broadband pen- • Vietnam: 90 million population, etration 20,000 Internet cafes. • Piracy of digital media is a huge • Thailand: 64 million population, problem that the government is 12,000 Internet cafes trying to crackdown on • Malaysia: 25 million population, • There is a 30% tax on retail 3,000 Internet cafes software • Indonesia: 235 million popula• The government has banned tion, 7,500 Internet cafes.

An Internet cafe in Hanoi-AP Photo.

• The emerging markets are those that are currently under $100 million in annual revenue but have the potential for significant growth as the infrastructure improves and broadband penetration increases. • The leading emerging markets for PC games include Russia/ Eastern Europe, India, Brazil and Southeast Asia. • Many emerging markets are following the model of China where games are played on a pay-per-use basis in Internet Cafes. • Dedicated console systems are often too expensive in emerging markets thus, leaving the PC as the de facto platform of choice. 1. Russia/Eastern Europe • Eastern Europe has about 300 million people with Russia the largest country at 140 million. The population is on the decline. • Major western games can launch and do well in Russia and Eastern Europe. • Strategy, simulation and roleplaying games that do well on PCs are popular in these markets.

Wanako Games in Chile developed 3D Ultra Mini Golf.

www.pcgamingalliance.org

18

4. Hardware
a. Overview
• Economic pressures are limiting sales of high-end PCs on a global basis. • Lack of solid information on the high-end PC game installed base makes it hard for game companies to feel comfortable investing major development money in developing to the maximum system potential. • In addition to the infinite variety of hardware systems there is a wide range of operating systems and system configurations that can make it hard to properly run software across a wide base of systems. • The popular Windows Vista operating system and Mac OS have proved problematic for game development. The good news is many of these problems are now being corrected. Personal computers are becoming an essential tool for both communication and work productivity. In the U.S., high schools routinely assume that students will have access to a home PC. In established markets, and increasingly in emerging markets, it has become nearly impossible to function in the modern world without access to a PC. Despite the prevalence of computer’s in today’s society, the PC often leaves much to be desired as an entertainment platform. This is especially true when it comes to games. High-end games can cost tens of millions of dollars to develop and market. The problem is that many of those high-end games require the latest and greatest in PC hardware. It is extremely difficult for business managers to accurately assess the current installed base of PC hardware that will actually play their specific product. Obviously without this data it is difficult to justify investing in products specifically designed for high-end system. This Catch-22 has limited the number of high-end PC game releases, even at a time when the price of high-powered PC hardware has come down dramatically. The problem with PC hardware is that it comes in all shapes and

A PC factory in Asia.

The Good News • PCs are ubiquitous in established markets and with decreasing costs are rapidly penetrating emerging markets. • The cost of a high-end gaming PC system has declined dramatically. • PCs are the platform of choice in emerging markets that can not afford dedicated console systems. • Many of the most popular games can do well on low-end PC systems and are profitable in both established and emerging markets. • Operating systems are improving their functionality when it comes to games. The Bad News • PC hardware is all over the map, ranging from low-end systems, to laptops, to high-powered game machines. It is hard to build a product that can reach the full range of systems. • The technology curve is constantly changing making it very hard to chase the high-end systems.

A PC Bang online game cafe in South Korea.

www.pcgamingalliance.org

19

system they own. The good news is that many low-cost games with minimum system requirements have major appeal in both established and emerging markets. These games are proving extremely profitable on a global basis. Furthermore, there are a growing number of consumers that view high-end PCs as a status symbol. In 2008, the cost of a high-performance game desktop that can play the most cutting-edge PC games, like Electronic Arts’ Crysis, approached $1,000. While it is hard to get exact information on the installed base of these game systems, it is clear that they are out there in increasing numbers. EA shipped over 1 million units Children at a village school near Beijing. of Crysis in its first month of rePCs are a utilitarian device that lease. are necessary to function in society. Dedicated game platforms The diverse nature of PC hardare more of a luxury. In emerg- ware can make it frustrating for ing markets, the PC becomes the developers and publishers. However, based purely on significant platform of choice by default. revenue that comes from the right Of course, many consumers will products at both the low-end of be content with a low-cost PC, the market and the high-end of especially in emerging markets. the market, there is clearly more This means game developers potential than ever to reach the need to be very aware of their wide variety of PC users around target audience and what type of the world.

sizes. There are high-end gamer PCs at one-end and low-end notebooks at the other end. In between is the mass market for desktops and the growing number of laptops, that have plenty of horsepower, except when it comes to graphically intensive games. On top of that, there are competing operating systems that each impose their own limits. Meanwhile the technology curve moves so fast that what is cutting-edge today will have been surpassed in six months. These problems are only enhanced by the serious void in solid information about what platforms consumers actually own. A developer looking to create a high-end PC game has no way to get solid information about whom, or even how many consumers will actually be able to play the game upon release. On the other hand, PCs have become ubiquitous in society and, even without standardization, PC game sales have exploded.

A cyber cafe in Senegal.

www.pcgamingalliance.org

20

b. Low-cost PCs
In the years ahead it can be expected that there will be major growth in PC sales in the low-cost segment. The trend will only be reinforced by effects of the ongoing financial crisis. List prices under $500 are attractive in themselves, but as revenue growth is expected to be centered in emerging markets, low-cost hardware becomes an imperative. The Consumer Electronics Association (CEA) predicts sales increases of 4.3% to $724 billion worldwide in all three of its major product categories – mobile phones, TVs and computers – in 2009. But the CEA says this growth will come from emerging markets in Asia, Latin America and the Middle East, not traditional consumer electronics consumers in North America, Western Europe and Japan. If emerging markets are where the growth is, no wonder then that the biggest product trend of 2008 in the computer hardware business – the rise of inexpensive Netbook computers under $500 – came out of Asia. These mini-laptops feature screens under 12-inches, low-power Intel Atom processors, built-in WiFi, and come with Windows XP Home installed. Asian manufacturers such as Asus (Taiwan), MSI (Taiwan) and Samsung (South Korea) pioneered the segment. Now the likes of HP and Dell are entering the low-marginend business. Of the 9.9 million Netbooks shipped during 2008, IDC estimated that 6.7 million units were split between Europe, the Middle East and Africa. Another 1.4 million went to Asia, and 950,000 to the U.S. In one year low-cost Netbooks grabbed 7% of the global PC business, and the segment is expected to double its market

The Dell Inspiron Mini 10

share worldwide in 2009. Combine the obvious allure of low-cost computing, significant global penetration, and hardware sales growth centered on emerging markets with lower per-capita wage earners, and the impact on gaming is clear. Resourcefriendly online games that are monetized via micro-transactions will be a major growth engine for PC gaming, especially in emerging markets. Where consumers in emerging markets cannot afford the popular Netbooks, local garage shops will continue to fill in the demand with ultra-cheap desktops that can be thrown together with a motherboard, a hard drive and a few memory chips. Further discouraging higherpriced premium computer hardware purchases is the distress in worldwide financial markets, the global decline in consumer demand, as well as the growth in laid off workers at manufacturers and service providers globally. If Western game publishers were

expecting a growing percentage of consumers in China and India to migrate to high-end premium PCs, the reality is the computer hardware business in Asia was the hardest region hit.

a 14% drop, while laptops sales dipped by 5%. The falloff was acute in China and India thanks to economic and channel issues that curtailed demand. Compared to the 0.4 percent drop in global PC sales for the period, Asia as a The fourth-quarter of 2008 is the region was hit much harder. first full period the impacts of recessionary pressures on consum- So the economic reality in emergers severely impacted computer ing markets throughout Asia, hardware sales and shipments. Middle East and Latin America Shipments of PCs worldwide will continue to favor low-cost during the fourth-quarter of 2008 PCs. With hardware demand for were the lowest since 2002 ac- traditional PC SKUs expected cording to both IDC and Gartner. to remain static or drop further The latter found the United States in North America and Western experienced steeper than ex- Europe, mainstream consumers pected shipment declines due to faced with a necessary computer the recession. Europe, the Middle replacement will likely entertain East, and Africa region was also lower-cost alternatives. Given affected by the economic slow that laptops are already favored down across key countries. Latin by consumers worldwide, NetAmerica met expectations though books will prove extremely attracits growth was much lower than in tive choices. the past. But the Asia/Pacific region recorded the worst shipment Therefore, we expect accessible growth ever. casual online games to continue to make inroads in traditional Yet it was in computer sales where game markets, and will continue Asia saw its big hit. IDC charac- to prove dominant in emerging terized the fourth-quarter drop markets. throughout Asia as a “jaw dropper.” Sales of desktops witnessed
21

www.pcgamingalliance.org

c. Laptops
bug. These people may no longer wish to dedicate as much space at home to desktop set-ups to play their favorite games. In these situations, game-capable laptops reduce clutter and promote a more mature sense of decorum around the house. Some of the current game-friendly laptop systems available in North America include: • Alienware m15x • $1,299 • 6.12 pounds • Gateway P-7811FX • $1,399 • 8.8 pounds • HP Pavilion HDX Dragon • $2,177 • 15.5 pounds • MSI GT627 • $1,299 • 5.8 pounds Also consider AMD’s recent announcement of the “ultrathin” category of notebooks. Previously codenamed “Yukon,” the platform is based on a new AMD processor dubbed Athlon Neo and supports either ATI Radeon X1250 integrated graphics or the more powerful ATI Mobility Radeon HD 3410 discrete GPU. Unfortunately, recessionary reality will keep growth in $1,400 gaming laptops to a minimum. Especially when the big action in laptop sales growth is in the under $500, under three-pound, Netbook (detailed elsewhere in this section). As we move further into 2009 netbooks will be getting a big performance boost from Nvidia’s ION platform that combines the Intel Atom processor used in netbooks with the same powerful GeForce 9400M GPU going into Apple notebooks. Until better graphics solutions become commonplace in netbooks, the reality is that the netbooks that most consumers will embrace in 2009 and beyond will continue to be less capable of playing highend games. The computer game segment that will be best able to ride the global growth in laptop penetration is casual online titles monetized through micro-transactions. This is a tremendous opportunity for publishers in Asia and Eastern Europe already heavily vested in serving their emerging markets. In our view, major inroads with consumers for these casual games will also be made in Western Europe and North America, and there is plenty of time for today’s Western game publishers to ride the growth in laptop sales.

The Alienware Area-51 m15x high-end gaming notebook.

All across the world consumers are in agreement that they value mobility, accessibility, connectivity and simplicity in their home computing. The tangible result is a growing preference for laptops.

nents that use less power and generate less heat. Often video cards in a laptop offer minimal graphics processing potential to save on weight, space, energy and heat. All of this usually means laptops that won’t handle traditional PC If you checked Amazon.com’s list games well. of top selling PCs the weekend before Christmas not one desktop Designing laptops to handle cutting system made the list, although edge PC games requires including seven laptops were listed. In 2009 components and sub-systems that the Consumer Electronics Asso- add weight and heat generation. ciation estimates 63% of all PCs In addition, cooling fans and/or sold globally will be laptops. heat dissipation pipes add further weight, complexity and cost. Then Yet the mobility virtues that make there’s always the chance that delaptops popular aren’t necessarily sign assumptions on controlling complementary to traditional PC heat don’t pan out. Take the coolgaming. The enthusiast gamer ing system for the original Xbox values cutting edge processing 360 as an example of what can and graphics power to run the lat- happen when cutting-edge gamest games at the highest resolu- ing components are forced into tions at 60 frames per second. Yet a compact case: overheated and the latest multi-core CPUs, high- dead units. end graphics cards, high rotation speed hard drives, and mother- With laptops leading desktops boards featuring fast bus speeds in overall sales, the trend should for CPUs and DDR system memo- create modest growth in demand ry all generate substantial heat. for gaming laptops. True, hardcore PC gamers who build or mod Laptops by design, however, are (modify) their own rigs at home for efficient. Downsizing components top performance probably won’t to cram them into a extremely be inclined to switch to a laptop. small form factor sacrifices air flow But there probably are plenty of that could cool the unit. So laptop PC consumers who game actively makers generally choose compo- yet are also bitten by the mobile

An ION reference board.

www.pcgamingalliance.org

22

d. High-end PCs
laptops lack the easy upgrades of desktops, and often aren’t as powerful as their non-portable counterparts, yet they are light years ahead in performance compared to their business counterparts. Both types of systems tend to be more expensive than average home or business units, with price tags of $2,000 and above being common. And though their users show an enthusiasm for the technology, these gaming system makers command a limited slice of the marketplace. A recent survey by DFC Intelligence and GameShadow of World of Warcraft players, showed only 1.4 percent had more than 4GB of RAM, 41 percent had between 2GB and 4GB of RAM, while 40 percent had between 1GB and 2GB of RAM. What that translates to is 1.4 percent of WoW players are running 64-bit Windows for added performance, because 32-bit Windows and Vista cannot use more than 4GB of RAM. The next 41 percent of users can be qualified as power users aware of the speed benefits more than 2GB delivers to both XP and Vista installations. The last 40 percent are more casual players. One of the banes of PC game development is taking into account the wealth of system variations to make their titles work on as many PCs as possible without glitches. The same DFC/GameShadow survey referenced above identified 752 different CPUs, 539 different graphics cards, and 142 variations on operating systems – which comes out to 50 million different possible hardware combinations – not even considering other components like hard-drives and memory. Like snowflakes, each PC is likely to be unique.

Alienware has been building custom high-end gaming PC’s for more than a decade.

Specialized gaming desktop PCs can be purchased from large and small manufacturers like Dell, which offers the XPS line; the entire Alienware brand; HewlettPackard, which offers the Blackbird line, the Voodoo PC brand; and smaller boutique makers including Falcon Northwest and Commodore Gaming. Their more portable cousins, the gaming laptop, are also offered from the likes of Alienware and Voodoo. Some customization is possible, and the highest-performance components are traditionally offered. The fastest processor with the most RAM and the hottest graphics card and a premium sound card, all with a sufficient power supply and plenty of fans can be placed inside a gleaming case to create the ultimate desktop gaming machine. Gaming
PCs from China are growing in sophistication.

www.pcgamingalliance.org

23

e. Graphics Cards
With Windows Vista, graphics cards have become a bigger consideration for consumers. Unlike previous Windows, Vista came with Aero interface, which required 3D graphics to render. Vista also runs best with 2GB or more of system memory. All of a sudden, beefier components that PC gamers consider daily now were on the radar for mainstream consumers. Computer makers in the past were more than happy to trim costs in shipping systems withjust enough graphics power to run the operating system, video and movies, with limited 3D. Sometimes this meant the CPU had to take on video chores, other times an under-powered video processor was added to the mainboard. More expensive retail PCs would get a standalone video card of varying capability that could be upgraded for an extra fee. Most gamers tend to buy their own video cards to get exactly the combination of graphics power, on-board memory and cooling. In recent years most gamers have favored video cards manufactured using graphics processing units (GPU) designed by ATI and NVIDIA that a computer uses to display complex animations and visuals. Like most computer components, these cards can be replaced and upgraded. Developers often design their PC games to stretch the limits of state-of-the art 3D graphics, , and consequently, gamers will often upgrade cards when a particularly anticipated title will make use of the new technology. Consider the two competitive product lines from ATI and NVIDIA. The current high-end GPU lines of HD 4800 and GTX both offer full DirectX 10 support, with ATI adding DirectX 10.1. Still, within each cycle there are mainstream, performance and high-end versions of each GPU that card makers build their offerings around. The technology cycle for new GPUs is very short however, so there are plenty of Radeon HD 2000 and NVIDIA 8000 series cards still being sold, and running most games at high resolutions and high frame rates. It’s a testament to how powerful these GPUs are that a 2 or 3 year old graphics card would be overkill to most consumers. In general, faster on-board RAM and ever-increasing processing speeds are technical improvements that are the hallmarks of new video cards. And many dedicated gamers want to detail their systems like hot rods and many cards now add colored lights around the chips and fans to make them stand out. For those gamers obsessed with achieving the most power, many of the ATIand NVIDIA-based cards can be run in tandem (ATI CrossFireX or NVIDIA SLI respectively), linked together for higher performance. First-person shooters like the Call of Duty franchise often encourage high-end graphics to render their large worlds and high-quality environments at insanely high-resolutions and frame rates. The requirements for Massively Multiplayer Online games are generally lower to run on a larger number of PCs. A recent DFC Intelligence survey of World of Warcraft players,found over 500 different graphics cards in use. The top five cards were all using NVIDIA-based GeForce 8000 series graphic components.

It’s not unusual to find dual video cards in gamer rigs.

www.pcgamingalliance.org

24

f. Mac
line purchases of the full game. Additional Mac game development will likely be driven by iPhone development. The operating system running the iPhone is OSX iPhone. As the name suggests, the OS was derived from OS X and shares many of the same development tools and environment. That makes it easy to take a Mac game to the iPhone, and the reverse should also be true. Both PlayFirst (Bejeweled) and PopCap (Diner Dash) have taken their experience in publishing on the Mac platform and successfully jumped cent years including EVE Online, into iPhone development. Everquest, Lineage, Shadowbane, World of Warcraft, World War II And unlike most of its mobile phone Online, and soon, City of Heroes. competitors, the iPhone is proving Also available are the major FPS to be a great place for games. At franchises: Doom, Quake and Un- the beginning of 2009 there were real Tournament. Lego Star Wars 18,737 iPhone titles available and Lego Indiana Jones: The through Apple’s AppStore, 4,078, Original Adventures have made it or 22% of them, were games. to the Mac, and Rome: Total War ComScore reports that 32.4% of iPhone users have downloaded at Gold is scheduled for 2009. least one iPhone game, compared In addition to market share growth, to 3.8% of average cell phone usanother reason it has become ers. According to Electronic Arts, easier for PC games to appear on 70% of Apple’s Top Paid Apps list OS X machines is a utility called were games selling for between Cider. Both OS X and Linux have 99 cents and $1.99. their origins in Unix, and share many similarities under the hood. Adapted from Cedega, a project that allows many Windows games to be run on a Linux PC, Cider does the same for Intel-based Macs. Cider is making it quicker and easier to bring major PC titles to the Mac.

Historically the Apple Macintosh system has not been known as a platform for games. The number of games ported to the Mac were limited. However, recent trends are resulting in the rapid emergence of the Mac as a platform for games. These days there is more in common between the Apple Macintosh and PC as game platforms than there is separating them. Back in January 2006 Apple Inc. swifty began moving all of its computer models over to Intel processors instead of the PowerPC architecture it had championed for more than a decade. With Macs and PCs running in the exact same hardware environment, and Apple providing the optional Boot Camp application enabling the installation of Windows XP or Windows Vista on all Intel Macs, every Apple desktop and laptop has the option of running PC games. Apple’s high-end Mac Pro desktop arrived in August 2006 with the mainstream Nvidia GeForce 7300 GT installed. Gamers interested in dedicated gameplay could upgrade to the ATI Radeon X1900 XT. By mid-2007 Nvida GeForce 8600GTs became available for MacPro systems, and by the next

spring GeForce 8800 series cards were appearing in MacPros, iMacs and MacBooks. Summer 2008 brought in the high performance ATI Radeon HD 3870 Mac & PC Edition cards as a retail upgrade and during the fall of 2008 these systems saw availability of the GeForce 9400 series. Every Mac system since 2006, therefore, has been a serious game platforms from a hardware standpoint. While Boot Camp gave dedicated Mac gamers access to the wealth of PC titles available, more mainstream Mac owners don’t have to go to such extremes thanks to a steady flow of games designed to run on the Mac’s OS X operating system. A major reason for that is the continued success of the iPod and iPhone, both of which have encouraged a lot of satisfied consumers to check out Mac computers. It’s no coincidence that the iPhone was launched during 2007. Between February of 2007 and February of 2008, Apple’s share of the U.S. market grew from 9% to 14%, according to the NPD Group. That kind of growth makes OS X a decent bet for the right kind of game.

Those are low margins, but many popular iPhone games are short experiences treated as impulse items by consumers to be enjoyed for a short while and then put aside in favor of the next download. In that scenario, low download pricing can work since there is no retail packaging, and developCasual games are also migrat- ment budgets on smaller games is ing to the Mac. With similarities much less costly. to Xbox Live Arcade, Mac Games Arcade (www.macgamesarcade. In our view, the more successful com) launched at the end of De- the iPhone becomes as a game cember 2008, and in three weeks platform, publishers will watch racked up 250,000 downloads. Apple computer sales carefully to Another recent arrival to the Mac be ready to channel iPhone comMMOGs seem to have a found a is casual game developer Playrix, plementary products to the Mac welcome home on the Mac in re- which offers free trial play, or on- platform.
www.pcgamingalliance.org

25

g. Windows Vista Operating System
rebuilt the way the operating system worked with video chipsets, and thus established the DirectX 10 tool set, and its additional 3D graphics features. Due to the changes in architecture, this resulted in DirectX 10 being Vista-exclusive. Gamers soon started to observe that their cutting-edge, high-end graphics cards had to dedicate more GPU resources to the DirectX 10 features, which slowed down the game performance from that seen with DirectX 9. DirectX 10 graphics looked better than their DirectX 9 counterparts, but that improvement usually was not deemed good enough to justify the loss of performance. If they wanted to make up the performance drop, they would need to buy a newer generation of graphics GPUs. Many choose to downgrade back to XP. Worse, too many gamers tested DirectX 9 games running under DirectX 9 in Vista and reported that the titles ran slower in

Gamers were one consumer category considered lock-and-loaded for Microsoft’s Windows Vista operating system. If there was to be any consumer category that was supposed to help drive Vista adoption, it was PC gamers. Dedicated gamers are more inclined to run cutting-edge PCs with more memory, faster multicore processors, and high-end graphics cards – all perfectly suited to Vista’s additional resource requirements. When it comes to computer hardware, however, enthusiast gamers are highly competitive. These are people who routinely push their rigs beyond default (safe) performance settings to wring every last extra frame per second at the highest screen resolutions possible. These are individuals who routinely test their equipment to make sure everything is operating at peak efficiency. When those gamers who installed Vista found their existing performance results dropped under the results run under XP, the wails of dissatisfaction were loud and wide. Reduction in performance is to be

expected in any new release of an operating system as system and hardware manufacturers rebuild device drivers to interface more efficiently with the system and helped contribute to overall negative perceptions of Vista that exist in the market to this day. Also as part of the release of the new operating system, Microsoft

www.pcgamingalliance.org

26

Vista than in XP. There was also an erroneous yet prevalent complaint that Vista gobbled up more memory resources for its attractive Aero interface and other cosmetics. This complaint was spurious since resources dedicated to Aero are released when a game is launched. Yet the mindset of Vista as a resource hog was firmly entrenched within the game development community.

While launching a game would cause SuperFetch to dump all the other pre-loaded applications from system memory, not long after the game was up and running, gamers reported SuperFetch would start pre-loading other applications during gameplay – causing a drop in game performance. There were also consistent complaints that all of the hard drive churning that SuperFetch promoted caused older It didn’t help that legitimate Vista hard drives to fail. By the time features only made it harder to tips on how to disable Superdebunk misconceptions. Fetch began circulating, many gamers had already decided to One standard Vista feature that stay with XP. drew enormous gamer ire was SuperFetch. Microsoft intended The release of Service Pack 1 SuperFetch as a background (SP1) in February 2008 went a utility to speed access to appli- long way to addressing many of cations used most often. Super- the resource and speed issues in Fetch operates by pre-loading Vista. The time needed to access the computer’s systems memory files and share data between with the applications that you use components was significantly opmost often. timized, as was SuperFetch. SP1 also introduced DirectX 10.1, an This process tended to increase enhancement of DirectX 10 that the time needed to boot to the was capable of improving perfordesktop, however. And after Vista mance for techniques such as anwas loaded, gamers noticed their ti-aliasing and shadow rendering copious amounts of free RAM on supported GPUs such as the was completely gobbled up by ATI Radeon HD 3000 and 4000 Super- Fetch, their CPU use was series. These changes went a cycling between 50% to 100% long way of easing resistance to full use, and their hard drive was the operating system, and even always being accessed. And this speed comparisons between XP was without them launching any and Vista with SP1 resulted in program or game. on-par if not faster results in Vis-

ta. Yet many gamers decided to stay with XP as soon as reliable details on Microsoft’s upcoming operating system, Windows 7, became available. Windows 7 is built on the solid foundation of Windows Vista which is an advantage for gamers and developers. A beta version of Windows 7 was widely distributed in early January of 2009. The beta version of Windows 7 demonstrated optimizations and changes that have been well received and generated great press. What’s more, the Windows 7 beta passed the real-world test of ably operating well on notoriously resource stingy Netbook computers. The Windows 7 beta also featured improved PC management and introduces compelling new experiences. It is currently slated to ship approximately three years from the Windows Vista Consumer launch. Hopefully, DirectX 11 will be another inflection point in PC gaming and will unlock the latest graphical features on next generation GPUs. Some of the promised benefits of DirectX 11 include continued support for tessellation, which can add large amounts of fine detail to 3D objects with a minimal performance cost, and Compute Shaders, which will enable advanced new rendering algorithms as well as accelerate non-rendering tasks on the GPU and Multithreading support for multi-core CPUs. As far as backwards compatibility is concerned, it is important to note that DirectX 11 will be supported on both Vista and Windows 7 operating systems and will support existing DirectX 10 and 10.1 hardware in addition to the new DirectX 11 hardware set

to be released in the next year. Given all of the positive word-ofmouth, we believe gamers will adopt Windows 7 in significant numbers. Another factor to consider are those gamers who have been thinking about finally running a 64-bit operating system with their 64-bit processors. While powerful 64-bit processors have been standard equipment with most dedicated gamers for several years, many of them have been running 32-bit Windows XP with those CPUs due to uneven device driver support and steep RAM requirements for 64-bit Windows. However, by the time Windows 7 becomes available, 64-bit driver support will already be much better, and memory prices are at historic lows, so the main barriers to 64-bit adoption are no longer issues. By the end of 2008 Microsoft estimated that approximately 10 percent of the Vista installed base in the U.S. was 64- bit. It is expected that many computer makers will shift to selling PCs with 64-bit Windows 7 installed. In our view, gamers will likely stay ahead of that curve and take the 64-bit plunge with Windows 7. All of which should help make Windows 7 the gamer platform of choice.
27

www.pcgamingalliance.org

4. Software
a. Overview
competition for high-end games. • The PC game business has exThe top high-end games are panded far beyond the traditionnow able to generate over $50 al definition of a product sold in million in revenue. a box at retail. In this report, we look at four major categories of • Subscription MMOGs continue to grow, with two major WestPC games: ern product releases in 2008. In Asia several MMOG games 1. High-end retail games have over $100 million in an2. Subscription MMOGs nual revenue. 3. Casual games • Casual games have become a 4. Free to Play and Virtual Item global phenomenon and with Driven Products. the new virtual item model have an opportunity to further expand • The decline of PC games at rerevenue. tail has actually resulted in less

b. High-End Games
Few of the hundreds of PC games • Spore, developed by Maxis for parent Electronic Arts, generatreleased every year garner an 80 ed huge attention for itself and percent rank or more on MetaPC gaming when it launched Critic. Fewer still reach that special in September of 2008. Accesplace in the collective conscience sible for casual and dedicated of gamers that turns a PC game gamers alike, Spore lets playinto the kind of must-have expeers explore fully realized worlds rience that can generate $50milfrom microscopic detail to full lion or more in worldwide sales. galaxies, while taking their civiThat said, the following are some lization into deeper and deeper significant PC games from 2008. These are the games that are gameplay. The game came with robust online components expected to earn over $50 million including a shared database of in traditional sales (not including user-created worlds and crea- • extra subscription fees etc). tures. To tailor the way the • When BioWare’s Mass Effectplayer’s civilization developed, Sporemade heavy use of conwas released for the PC in May, tent generated by algorithms many in the press stated it was based on player choices, rather more than a port, it was one of the best RPGs ever made – pethan typical scripting and design work. riod. In addition to an epic storyline and a new branching-dialog system, optimized controls • Probably the MMO with the were designed specifically for most ambition since WoW was the PC – fully customizable so Warhammer Online. That made the game one of the most anplayers could re-map the conticipated MMO launches of the trols any way they liked. year. Warhammer Online was praised by the press as one of
www.pcgamingalliance.org

the smoothest, most complete MMO launches ever seen. Although the MMO had a traditional fantasy feel, Warhammer Online offered a better take on player-vs-player combat than WoW and other MMOs. Buoyed by a strong launch, Warhammer Online has sustained a steady positive response from gamers, and seems to have held onto a good portion of its initial subscribers. Ubisoft Montreal was responsible for Far Cry 2, which displayed a palpable realistic environment and excellent artificial intelligence. Unlike the lush tropical island jungle of Far Cry, the sequel took players to a unique and gritty African setting with open-world gameplay – one that took full advantage of high-end PCs to display. Far Cry 2 also got kudos for experimenting successfully with freeform storytelling.
28

was a shooter with that drew • To many, Fallout 3 from Bethes- • Crysis Warhead debuted for the in casual and hardcore players da Softworks was a classic PC in September of 2008. Pubalike. Besides striking battle even before it’s release. Based lished by Electronic Arts, and sequences, the game also had on the highly successful RPG developed by Crytek, the game a tongue-in-cheek mode where franchise from the 1990s, Fallserved as a hybrid sequel and gamers fight off hordes of Nazi out 3 gave PC players an acexpansion to the 2007 showzombies. tion journey through the vast case for computer technology, landscape of a post-apocalyptic Crysis. For $30, gamers were Washington, D.C. Visceral and able to reenter the storyline of • Valve Software’s November release of Left 4 Dead highlighted harsh, the game managed to the original, playing as an althe power of co-op play. Novel keep a sense of humor, and ternate character with a unique for both PCs and consoles for incorporated 1950’s pop art to story arc. Besides new weapsuch ambitious multiplayer dekeep players entertained for ons and abilities, the game sign, four players join online endless hours of RPG quests featured a fresh single-player to help each other survive the and up-to-date 3D graphics. campaign and additional multicrossing of a city filled with atplayer content. tacking zombies. Built with the Source engine used for Half • Activision returned to Life 2, the game incorporated WWII with Treyarch’s Call version two of Turtle Rock’s arof Duty: World at War. tificial intelligence, to deliver a Designed to be the most memorable and experience. chaotic and gory cinematic first-person experiences to date, and gobling • Rounding out the year was Grand Theft Auto IV, released up system resources on the PC at the start of Deaplenty, Call of Duty: cember. The game had already World at been hailed for its fully-realized W a r world and important commentary on the American dream today. Grand Theft Auto IV’s already exceptional graphics on consoles was tweaked further for computer players. The PC version also added a movie-editor, plus a 32-player multiplayer mode.

Characters from Mass Effect.

www.pcgamingalliance.org

29

c. MMOGs
In Western markets, most of the big MMOGs have had a retail sales plus a subscription model. In Asian markets, the model is very different. MMOGs are not bought at retail, but distributed entirely online in a pay-per-use subscription model. One advantage in South Korea that helped boost pay-per-use was the preponderance of fast broadband access in the country. Asian markets overall are pioneering many of the emerging digital distribution models, including pay-per-component models that involve digital distribution of virtual items. The market for traditional online multi-player role-playing games continues to do well, particularly blockbuster titles. Recently, World of Warcraft’s latest expansion, Wrath of the Lich King, outperformed its predecessor by selling 2.8 million units, roughly half a million more than its predecessor Burning Crusade, within its first 48 hours. The 2008 release of Electronic Arts’ Warhammer Online and Funcom’s Age of Conan combined for another two million+ sold units for 2008. While these game’s early successes have yet to prove consistency (and therefore may be somewhat inflated) the overall MMOG industry shows that large-ticket titles, backed by a sufficient marketing budget, can do well, and maintain growth in the overall market.

• With the ability to sell a game at • Several Asian MMOGs are the MMOG market is maturing. full price at retail PLUS charge generating over $100 million a This raises a few issues. For one, an additional $10+ a month year after over five years in the an important distinction to make in the MMOG market is whether or to play the game, successful market. Massively Multiplayer Online • Two major Western MMOGs, not the end-user owns the game Games (MMOGs) are among Funcom’s Age of Conan and after the subscription expires. the most profitable entertainElectronic Arts’ Wahammer Under digital distribution the conment products ever. Online launched in 2008 and sumer buys the product and has • Blizzard Entertainment’s World quickly sold more than one mil- it delivered online. In other words a subscription is like a rental and of Warcraft is now generating lion units. over a billion dollars a year in • MMOGs are primarily found on digital distribution is more like the revenue. The Lich King expanthe PC and with their long life traditional retail model. A pay-persion pack sold 2.8 million units spans do not translate as well use business model where a consumer is charged by the hour falls in its first two days. to console systems. under subscription. A pay-perThe massively multiplayer online user base of consumers that pay component model that includes game (MMOG) has been around $10-15 a month. These include virtual item sales falls under digital for years. In the past five years CCP Game’s EVE Online, Sony distribution. the market has exploded on two Online’s Everquest and Star Wars fronts: 1) World of Warcraft and Galaxies, Turbine’s The Lord of 2) China and Korean MMOGs the Rings Online and several oththat regularly generate over $100 ers. In 2008, Funcom’s Age of million a year each. World of Conan and Electronic Arts’ WarWarcraft, launched in late 2004, hammer Online were added to is really in a category of its own this list. and nothing has come along to With the success of World of Wartouch it. However, several other craft, and the entry of several large MMOGs have carved out a steady game publishers into the space,
www.pcgamingalliance.org

30

As digital distribution continues to Online by Level 5, developers of console based. grow, high-end MMOG titles raise • A wide variety of factors includ- Dark Cloud. In the middle of develthe technical demands they make ing more flexible payment op- opment, Microsoft pulled the plug, on consumer’s hardware. Age of tions, new settings, new game- because the Xbox was nearing Conan and Warhammer Online play styles, increasing digital the end of its life cycle and projecrequire 13.7GB and 11GB of hard distribution, and different so- tions indicated the MMOG would disc space, respectively and are cialization options will continue need at least two years to achieve pushing the envelope for digital broadening the MMOG custom- profitability. With too little time left, distribution. Microsoft decided against releaser base into different niches. • MMOGs are in the vanguard of ing the game. Overall the MMOG demographics lowering cost for a fun experiare very attractive: ence in terms of both money True Fantasy Life Online illustrates a major reason why the PC and time. • In the west, since 1997, MMOGs remains the primary platform for have had a stable, niche audi- The MMOG market is one that is MMOGs. These titles are extremeence. They were 90% male, rel- almost entirely PC based. With ly resource-intensive to develop, atively wealthy, and averaged the establishment of stable con- and can take many years to creabout 25. Now this audience sole online networks, MMOG ate. Once launched they can have appears to be growing. developers have been intent on a lifespan of well-over five years, • Younger consumers have had a breaking onto video game con- longer than that of most dedicated significant impact on the video soles. Both Sony’s and Microsoft console systems. Windows XP has game industry as a whole. Un- have been supportive of this inter- been on the market since 2002. conventional, inexpensive vir- est as a way of cementing use of And newer computer operating tual worlds like Club Penguin, the PlayStation Network and Xbox systems like Windows Vista are Runescape, Silkroad Online, Live, and they regularly experi- generally backwards compatible. and Habbo Hotel have broad- ment with MMOG titles on their Compatibility with older consoles ened this audience to include own. The notion of MMOGs on is expensive, and generally not many more women and under- consoles, however, is not new. fully supported by console mak18 consumers. This is an audi- One console MMO that never saw ers. Since the entire console life ence that before was primarily release was True Fantasy Live cycle tends to be in the five-year range, creating MMOGs for them is a very risky proposition. Therefore, PCs remain a much more pliable platform for MMOGs.

www.pcgamingalliance.org

31

d. Casual Games
• Casual games have developed appeal than high-end games. into an entire sub-segment led • Companies like PlayFirst and by large industry portals such PopCap have developed major as Electronic Arts’ Pogo, Yahoo, franchises like Diner Dash and MSN, Big Fish, Real Networks Bejeweled that have proved to and others. These top portals have a long lifespan and have can now generate well over enormous appeal to non-tra$100 million in annual revenue ditional gamer demographics from casual PC games such as adult women. • Casual games offer small • Casual games fit seamlessly (<100 MB) accessible games into a larger overall social exthat have led the way for digital perience. In 2008, social gamdistribution. These games can ing, which takes place on social be played on low-end PCs and networking platforms like Facehave a broader demographic book, has emerged. The online casual PC games business has been around for years and continues to grow. The business is driven by large portals that aggregate and distribute hundreds of different games. The primary revenue driver is advertising and digital distribution where consumers purchase and download a game right to their PC with no need to ever visit a store. Several premiere casual game developers like PlayFirst and PopCap Games have actually developed significant, long-lasting casual game franchises. Casual games continue to do well. Despite a forecast of depressed growth following the current economic downturn, DFC expects online advertising to continue to grow as broadband rolls out in emergent markets in Eastern Europe, Latin America and Asia. Online ad spending, which is the financial backbone of casual games, will suffer on the short term, but should show signs of recovery in late 2009. After several years of explosive growth, DFC forecasts a moderate growth percentage in the years ahead. Specifically, with “rich media,” only accounting for approximately 9% of online advertising, as reported by the Internet Advertising Bureau in late 2008. As advertising is the financial backbone of this industry, a decline will negatively affect growth in the sector. On the other hand, portals are experiencing increasing competition from social network sites, which over the past year have become a hot zone for casual game development. According to ComScore Global, large portals like Yahoo! and MSN saw a decline in the time people spent on their sites from 11% in June, 2006, to 5% in September, 2008. Over the same period, Facebook and YouTube saw an increase from 0% to 5%. This trend suggests that consumers are looking for a ‘richer’ online experience. Casual games, and specifically social gaming, are well positioned to capitalize on this trend. The next generation of casual games will be predominantly browser-based. Traditionally casual games are distributed online, but played locally. Developers and publishers are now increasingly releasing titles that are entirely playable online. The success of outfits such as Kongregrate, as well as their substantial backing by venture capital, indicates that cawww.pcgamingalliance.org

sual game play will increasingly be gambling legislation that could browser-based and flash-based in render this sub-segment worthless the near future. overnight. One business model in the overall casual game space that deserves attention is skill-based gaming. Since it does not involve “chance” or “luck,’ this type of game play is considered legal. Players play against each other for small currency amounts and companies take a cut in exchange for hosting the game. Nonetheless, skill-based gaming has experienced a lot of growth and a few big names with deep pockets have invested in this space. Liberty Media Corp., a media conglomerate that posted almost $10 billion in revenues in 2007, acquired the remaining shares of FUN Technologies that it did not already own in 2007 for $99 million. FUN Technologies had previously been on a shopping spree, spending $55 million between 2004 and 2006 on companies such as Worldwinner (SkillJam), Fanball.com and Octopi and others. This collective operates as an online casual games portal that hosts both skill-based games (for money play) and regular casual games. Skill-based games are also available online for free (“for practice”), and the average entry fee per game is $1.90 per person.

All the skill-based gaming sites work pretty much the same way. Users create an account and then deposit money into that account. The user can then compete in tournaments and head-to-head game play where everyone pays an entry fee, generally between $0.25 and $1, but ranging up as far as $10. Entry fees are pooled and the winner gets the money minus a commission of around 1535% paid to the site operator. The money is drawn from each user’s account. Emergent markets in Eastern Europe will carry sufficient momenThis model goes against the bulk tum to sustain overall growth in of the industry because it gener- this segment. In addition, the presates enough money to not have to ence of large-scale aggregators rely on advertising. However, while (e.g. RealNetworks, MSN Games) this is a considerable strength, the combined with local distributors business model is under constant expand the overall audience and threat from legislators looking for facilitate advertising on a global an easy target for supposed anti- scale.

32

e. Free to Play and Virtual Items
However, in order to unlock premium content, payment is required. Premium content can vary from being able to access new and more challenging environments to the ability to store and save items acquired through game play. Fundamentally, these games tend to focus the player on committing to a monthly fee, similar to renting or leasing. Knight Online, for instance, can be downloaded and played for free. But at the same time the game offers four different premium packages. Recurrent features offered by these titles are increased experience points per encounter, a greater ability to carry items, and more sophisticated skills and magic spells. In-Game Advertising Instead of charging customers a fee for entry or game play, the whole is financed by advertising. This is perhaps the most volatile model, because online ad spending is still relatively new and unpredictable. “Rich media,” which is the category of online ad spending that finances online games, represents about 8% of online advertising expenditure. In comparison, Banner Ads take 21% and Search 44%. DFC estimates that 2009 will see suppressed growth in advertising revenue for casual games, but that ultimately the ongoing expansion of the Internet and broadband penetration in combination to innovative revenue models will continue to drive traffic to game sites. Often, in-game or aroundgame advertising serves as a secondary revenue stream, rather than a primary form of income, although some companies have been trail blazing an all-ad model. Kongregate, a site that hosts user-generated flash games, has gained a lot of momentum in late 2008. It offers amateur designers a change to publish their games to a large, mostly indie, audience and receive a percentage of aroundgame advertising. Item Sales This model bets that consumers are willing to pay for virtual goods once they’ve come to like the game. The game itself is free, and generates revenue by generally selling a form of in-game currency which can be used to purchase items, weapons and other upgrades. Essentially this follows a razor-blade business model in which the razor is sold cheaply, and the customer continues to spend money on blades. This model, which is very popular in Asia, is contingent on a solid method of payment. Whereas in Korea gaming has traditionally been a more onlinefocused activity, the retail-centric West is slowly starting to catch on. Companies like Nexon and NHN are doing exceedingly well. For many game companies item sales are somewhat of an ideal. Says Robert Kotick, chairman and chief executive of Activision, Inc., “That’s my favorite thing, no manufacturing costs, not too many employees.”

Shanda bills itself as the online game leader in China.

Beyond offering part of a game for free to lure a customer, an increasing number of titles are entirely free to play. Traditional online game business models hinge on advertising for their main stream of revenue or offer premium content for a fee. But a growing number of games are available for free, with no strings attached. By moving away from the traditional retail model, games generate revenue through online subscription (e.g. Knight Online) and micro-transaction (Dofus). These emergent business models allow restricted access to their games for free, relying either on advertising or hoping to convert their freewheelers to paying customers. This model has proven very successful in Asia. South Korean portal NHN Corporation has seen its revenues derived from its games operations consistently increase

over the past few years. In late2008, game revenues presented 30% of NHN’s total, an increase from 28% a year earlier. NHN is a portal, and its subsidiary Hangame counts 30 million registered users and a portfolio of 335 games. An important part of its revenues are derived by offering premium game play for a fee. Examples of free to play game titles include Runescape (Jagex) Dofus (Ankama), Club Penguin (Disney) and Muniz Online (Acclaim). These games do not charge an initial entry fee, but generate revenue in a variety of, often complementary, ways: Subscription In this scenario, a game makes a try-before-you-buy offer. The game can be installed and played, without having to send any money to the publisher or developer.

www.pcgamingalliance.org

©2009 PC Gaming Alliance. All Rights Reserved.

33