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An introduction to online games and e-business infrastructure
By Chris Sharp - 2004-08-12 Page:  1 2 3 4 5

Middleware to enable new business models

Online games are the future of the interactive entertainment industry, seeing the convergence between the traditional media, and entertainment industry, and the gaming industry in an effort to develop new and sustainable business models and revenue streams in an increasingly online world. They move the gaming industry into a more functionally rich online environment from which the majority of the revenue stream will come -- an e-business environment. But moving to this new model presents a number of challenges to the games developers, the players, and the service providers who ultimately will need to support this new environment.

However, it also presents a number of exciting opportunities for new business models, new markets, and new growth.The main problem faced is a solution integration issue. The player wants to pay for online content with their existing channels, but they also want security and privacy. The developers need cross-platform integration and support for multiple services, channels, and providers. The service providers need to build reusable business function that is robust, efficient, and generic -- it should work for all business models, not just the gaming industries. This article describes a framework using Web services as the underpinning technology that can take advantage of reusable business function, distributed throughout the network with a solid integration story.

The business problem

The difficulties with the business of building online games consists of determining an appropriate Business model for the game, and an appropriate Revenue model.

The Online Game Business Models

As a gross generalization, games today are either expensive and solid, or free with a diverse range of quality. The challenge for mass-market online games is generating enough advertising/sponsorship revenue to cover costs and turn a profit, or alternatively getting enough Casual and Resistance consumers to pay to play. These consumers will pay for entertainment, but the product and business models aren't there yet. Hard core gamers are willing to pay for games, but not every $10/month game can be successful due to the limited number of hard-core gamers. Consolidation of some online games may be necessary. To understand the business models it is important to understand the value chain of the gaming industry and the relationship between the players in that value chain.

Figure 1. Online games value chain
Online games value chain

Figure 1 illustrates the six roles in the value chain, and calls out some well-known examples of each role across the industry. The chain starts with content owners producing a game that is then made available to the consumer through some aggregating or hosting entity. The online solution is supported by a number of services provided by, potentially, non-affiliated service providers, and finally delivered to the consumer through some network service using a game device.

However, content owners constitute a set of parties collaborating to produce the content. This group can usually be made up of some brand owner, such as Disney, who is licensing the use of their brand, a developer, such as iD software (developers of Quake), and a publisher, such as Electronic Arts. In the case of console games, the publisher may also be the console manufacturer, and licenses the right to develop content on their console to the developer. The developer may either be owned by the publisher, contracted out for piece work and ports, or funded for the whole program. The publisher may pay the developer a flat fee for their work, a usage-based fee (based on actual usage of the product), a royalty-based fee (based on revenue to the publisher from the product), or a hybrid of these.

The online game is then distributed to the consumer through one of a number of possible mechanisms, depending on the architecture and style of the game. The different mechanisms available are:

  • ISP or Portal site
    Partnership with an ISP such as AOL or MSN, or a major portal such as Yahoo!, where the partner acts as an aggregator for online games, and offers wide exposure through their customer base.
  • Dedicated online game site
    A game-specific aggregator company, such as GameSpy and MGON, whose business model is to attract a loyal customer base and offer peripheral value-add to the games such as community building, player matching, and other enhanced playing experiences. Often these companies produce a toolkit to allow developers to integrate their games with the sites specific value-add infrastructure.
  • Independent server
    A service dedicated to one specific online game, providing all of the required CRM and delivery requirements for that game. These are usually associated with a major publisher and a strong brand. A select number of larger online game providers have created proprietary game architectures dedicated to a select set of their game titles. An example of this is Blizzard Entertainment's Battle.Net, which provides online gaming for their premier real-time strategy (RTS) titles, StarCraft, Warcraft, and Diablo. Blizzard operates the Battle.Net game system, with hosting handled by AT&T (North America), Telia (Europe), and Dacom (Asia). Blizzard Entertainment is a Vivendi Universal business unit.
  • Peer-to-Peer
    Many popular current games, such as BioWare's Baldur's Gate and NeverWinter Nights, employ player-to-player online gaming networks, where each player machine participates in a peer-to-peer relationship to create the shared, online game environment. This is often called the Pen and Paper model of role playing games (in reference to the Dungeons and Dragons-style game play). In the examples from BioWare, both Baldur's Gate and NeverWinter Nights provide online gaming in this model for free. Further, NeverWinter Nights includes a toolset for creating persistent worlds; the general concept is to put the online gaming network into the hands of the players, very much like the "Dungeon Master" role of Dungeons and Dragons.

For any of these options, the infrastructure could also be potentially outsourced to a hosting company, such as IBM.

A number of service providers may also be required to complete the solution that makes up an online game offering, especially with respect to fulfilling the revenue streams from e-commerce and pay-per-play models. Such services as Payment Enabling, such as those provided by, and those integrated with other utility and Telco companies, may be required to be integrated into the game environment. If digital content is protected using some DRM solution, a clearing house service may be required. If e-commerce is required within the game experience, to support the purchase of either electronic or physical assets, then integration with the merchant site is required.

Access to the game is supported through some Telco or ISP. In the case of PC games, the ISP will be the provider of this service. In the case of consoles, the console manufacturer will partner with ISPs and offer a specific service for that console. In the case of wireless and iTV, the players access is provided through their Telco.

The Online Game Revenue Models

The current models can be broken down into three main categories:

  • Free Model
    All aspects of the game are free to the consumer. All revenue to the publisher comes from either sponsorship and product placement or advertising.
  • Pay for Play Revenue Model
    This can be subdivided into four main sub-categories:
    • Subscriptions
      Allows unlimited access to the player and supports the ongoing development and support of the online service. EverQuest and Phantasy Star Online are popular examples. An interesting recent development in the use of this model is to support clans in FPS-style games that do not require persistence, but require service provisioning of a game server for essentially private use. Dedicated players group socially together online in clans and then pay a subscription fee to an aggregator to host a dedicated server for their use. Quake3 and Counterstrike are popular examples of this phenomenon.
    • Metered usage
      This has faded in popularity in PC and console markets but is still a typical means of revenue in wireless gaming, usually implicitly through use of call time to play the game. It is also a popular means of revenue in Asia through PC baangs, or cyber-cafes oriented to online games playing. The baangs will charge players $1 per hour to play MMP games such as StarCraft and Lineage.
    • One-time fee
      Typically the cost of the game client as a boxed product to the consumer. This may or may not be linked with other pay for play models. For example, EverQuest also employs this model in conjunction with the subscription model.
  • Other Revenue Models
    Many hybrids and combinations of the above models can be employed, as well as incremental revenue from other sources. For example, a subscription model may also augment the revenue with one-time fees for participation in special events, like a tournament, or a One-time fee model may allow further episodic content to be downloaded for extra money.

The most interesting, however, is the capturing of e-commerce revenue streams, either in the form of handling/royalty fees to the merchant, or between players. The revenue from the "black market" economy of EverQuest makes auction sites and others a significant amount of money that EverQuest sees none of.

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First published by IBM developerWorks

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