E3 2006 Preview: The showdown between consoles and PCs

The emergence of ad-supported online gaming

With PS3 stealing the spotlight on Monday, and Microsoft's Xbox 360 and Nintendo's Wii (formerly "Revolution") following up with subsequent world premieres on Tuesday, you'd think E3 was all about consoles. But recent multi-million-dollar investments, such as Viacom's $102 million buyout of in-game messaging firm Xfire, and Microsoft's astonishing buyout just earlier this week of in-game advertising firm Massive Inc., estimated at as much as $400 million, suggest another set of dynamics is at work: The PC gaming market is in transition, as major media and software companies are placing huge bets on gamers' receptiveness to commercial messages during high-adrenaline online tournaments. Their investments could change the entire business model of PC gaming to something almost unrecognizable by just the end of this year.

Conceivably, as expert gaming analyst Michael Cai of Parks Associates tells TG Daily, a new, ad-subsidized PC online gaming market could shift the focus of game development itself, perhaps away from the "core" segment of tournament games and first-person shooters, and toward two emerging segments, both on opposite extremes: 1) massively multi-player games (MMORPGs) that depend on the Internet connection which serves as advertising's principal pipeline; and 2) casual games, which take a moment or two of the player's break time, and could very well be the new home for "breaks" of a different sort.

"The online market is very dynamic and lively," Cai believes, "and there are a lot of new business models emerging, generating new revenues." Because next-generation consoles will rely on their Internet connections for consumer services, they won't be left out of the loop. Thanks to World of Warcraft, Cai said, MMORPGs have broken out into a huge potential market - which we could see others capitalize on, especially if Namco makes a splash with its much-anticipated Warhammer: Mark of Chaos next week.

But the problem with gothic fighting games, we believe, is the context they create: In mythical worlds, it's a little hard to plant a billboard for Sprite or Nike. That's why "sim worlds" of the kind featured in the online role-playing game Second Life are generating quite a bit of buzz. In a world that looks more current-day, where the characters do more current-day things, it's just as easy - if not easier - to bombard virtual people with commercial advertising as it is real people. With hundreds of millions in subsidies at stake, it may soon become a possibility that, even if Warhammer attains tremendous popularity, the games that get front-burner treatment in coming years could look less gothic and more like a sitcom.

On the other hand, Viacom's investment in Xfire suggests an alternative: The Xfire instant messaging platform gives gamers a way to connect with and send live messages to one another, without breaking the context of the game they're playing. If Viacom - which originally got its big boost as an outdoor advertising company - takes advantage of this, it could drive growth in advertising vehicles that don't steer the direction of game development. On the other hand, they don't necessarily subsidize game development either, which may make reliance upon Xfire a less attractive option in the future for some game publishers.

Michael Cai breaks down the math for us: Just last year alone, advertisers spent over $60 billion on TV advertising. With 108 million households, that's a total investment of $45 - 50 per month. That's not much from each advertiser's perspective, but if you did away with ads, that's how much money consumers would need to spend to compensate.

"For video games, especially on the PC platform, there are more than 50 million US Internet households who have active Internet gamers. Only about 1 to 2 million of them are paying for casual online games." Recent buyout announcements that first put in-game advertising in the public spotlight, Cai believes, may be focusing too much on what ads may provide to the core gamer segments, while it's casual gaming that could provide the more fertile proving ground.  "I understand Wild Tangent is doing something in the casual space in terms of in-game advertising," said Cai, "but I think more companies need to step up as they figure out the in-game advertising technology and business model for the casual games as well. That will provide more incentive for publishers and developers to give out better games for the casual market."

E3 2006 continuing coverage throughout the week

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