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On demand games offer new revenue stream

The digital distribution of video games is exciting game publishers like Atari which see a way of extending the life of older titles, while attracting new audiences to video games.
Older games, such as the two-year-old “Rollercoaster Tycoon 2,” which lets users create their own exotic theme parks, are popular with on demand game players.
Older games, such as the two-year-old “Rollercoaster Tycoon 2,” which lets users create their own exotic theme parks, are popular with on demand game
/ Source: Hollywood Reporter

While Hollywood essentially has three chances to wring profits out of a movie -- at the box office, on video, and on TV -- the video games industry has historically been limited to just one -- the retailer. And once a game has ended its typical 6-8-week lifespan on a store shelf, it no longer generates revenue.

Until now.

The digital distribution of video games, commonly known as games on demand, is exciting game publishers like Atari which, three months ago, launched Atari On Demand to extend the life of its vast portfolio of older, mainstream titles. Gamers can pay $14.95 a month and play to their heart’s content or try a game and then purchase it with the click of a mouse and a blazingly fast download. There’s no need to head to the local Blockbuster or even subscribe to a games-by-mail service.

“We learned from our friends in the music industry all the things not to do when it comes to digital distribution,” says Wim Stocks, Atari’s executive vp sales and marketing. “In the face of some huge evidence that the consumer wants to be able to have access to and consume music via digital distribution, the music industry turned its back on that model and did everything it could to push it away. We are beholden to them for showing us that this is a great model and that it can be used to our and to our customers’ benefits.”

In addition to Atari, a number of communications and consumer service providers -- including Comcast, RCN, Bell Canada, and Yahoo -- have launched games on demand services. And they all have one common denominator -- a tiny, 70-person, 12-year-old company headquartered in Petach Tikva, seven miles east of Tel Aviv, called Exent Technologies.

Exent supplies its customers with the technology that enables games on demand and can also act as a one-stop shop by aggregating and hosting the licensed content.

According to Yoav Tzruya, Exent’s vp of products and markets strategy, each of his customers sees different reasons for embracing games on demand.

For consumer service providers like Yahoo, there is a constant search for “killer services” to offer customers. In addition, such providers can earn higher ad revenues if they are able to prove to advertisers that their subscribers include high percentages of targeted demographics, like the 18-34-year-old male gamers who traditionally make up the majority of hardcore gamers.

Indeed, on Yahoo, the Top 10 games on demand titles are invariably popular “hardcore” games, both new and old, more often the latter. Most recently, the number one game was the three-year-old “Civilization III,” followed by last year’s "Rise Of Nations,” the two-year-old “Rollercoaster Tycoon 2,” and the three-year-old “Dungeon Siege.”

Services less frustrating to some
“For the broadband communications services, like Comcast, RCN, and Bell Canada, games on demand means an increase in revenue, an incentive for customers to upgrade their bandwidth
packages, and a powerful mechanism for decreasing churn,” says Tzruya. “Users who subscribe to games on demand services are 75% less likely to switch to other broadband providers.”

That’s because inexperienced video game users who feel uncomfortable walking into a game retailer and selecting a game that may or may not play on their PC often find games on demand
to be less frustrating.

“You don’t have to go through the rigorous process of installing a game,” explains Tzruya. “One click starts the streaming process onto your PC and, after you’ve buffered about 10-15% of the game, it starts playing. The rest of the game continues downloading invisibly while you play.” Games on demand services require broadband service and typically offer
PC games rather than console video games.

At Comcast, the decision to launch a games on demand service just a month ago was a lengthy one.

“We started to develop the audience over a year ago when we opened Comcast Arcade, in partnership with Real Network, as a casual games channel,” notes Charlie Herrin, vp of business
development for Comcast Online. “And it’s been one of our most successful channels. When we felt our customers there had reached critical mass, we started working with Exent to bring a very compelling, cross-demographic list of titles to those people so they could really take advantage of some of our recent speed improvements. We had the audience, we have the speed, they were familiar with us as a provider of games, and this was the next logical step.”

Comcast now offers more than 70 game titles that can be accessed by subscription (but not purchased) and is adding new ones every other week.

Avoiding cannibalization
Meanwhile, Atari sees advantages to games on demand that go beyond extending the life of its classic-games catalog. It is currently in discussions with its retailers to determine how
its newest titles, too, can also be distributed digitally.

“But we need to be careful not to undermine our retailers’ work,” says Atari’s Stocks. “And so we’re looking at models in the new-release-launch scenario where we could make the games
available for digital download but also enable the retailers to share in the model. We won’t do it unless we get the retailers’ support.”

In fact, one of the biggest concerns of game publishers is to avoid cannibalizing the retail channel.

“Publishers have to be really careful not to offend the large retailers who could easily cut back on their shelf space,” says Michael Cai, senior analyst at market research firm Parks Associates. “And if that deters publishers from jumping on the games on demand bandwagon, it will surely slow the trend.”

According to a Parks Associates study, over two million broadband-enabled households will be subscribed to games-on-demand services by 2007. But, as of year-end 2003, only 100,000 subscribers comprised that market.

According to Exent, the lack of enthusiasm by game publishers won’t be a problem. The company claims it is currently working with nine out of the 10 largest publishers -- from Activision to Vivendi -- which license their games to the Exent service. (Missing from the list is Electronic Arts.) They do not, however, feature digital downloading on their sites as Atari does.

“I think we’ve proven to the publishers that games on demand (don’t) cannibalize anything,” says Exent’s Tzruya. “We approach a different set of gamers who don’t go into the stores
that sell games. More than 50% of the games on demand customers are women, and we have quite a few who are 25-plus years old. We are approaching different decision makers and different budgets.”

In an industry in which game development costs are increasing and, according to market research firm The NPD Group, there has been an 11% decline in unit sales and a 14%
decline in revenue from 2002-2003, Tzruya predicts that the games on demand sector is going to look awfully good to publishers seeking new revenue sources.