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There's a lot to be said for digital content distribution. Unlike the physical product found at bricks-and-mortar retail, there's no packaging, shipping or storage to contend with, cutting down on overhead and bolstering sales margins. And looking at the success of on-line digital sell through services in the music biz such as Apple's iTunes (where you plunk down US$1 and download a song for keeps), it was only a matter of time before game publishers and manufacturers began to pursue digital direct-to-consumer distribution seriously.
May 1, 2006

There’s a lot to be said for digital content distribution. Unlike the physical product found at bricks-and-mortar retail, there’s no packaging, shipping or storage to contend with, cutting down on overhead and bolstering sales margins. And looking at the success of on-line digital sell through services in the music biz such as Apple’s iTunes (where you plunk down US$1 and download a song for keeps), it was only a matter of time before game publishers and manufacturers began to pursue digital direct-to-consumer distribution seriously.

Talk of how to make the most of this growing distribution opp will be ringing through the conference rooms and hallways at E3 this month. Many industry types are keying into the fact that older, less-data heavy games are better suited to digital downloading and on-line game play, attracting demos beyond the hardcore gamer. The good news for those with kid-oriented IPs is console manufacturers and specialized PC-game subscription services now have children and families squarely in their direct-to-consumer distribution sights.

The on-line games market might

The on-line games market, particularly for PC software, has been on a tear in the past three years. According to Alexis Madrigal, research analyst for San Diego, California’s DFC Intelligence, a worldwide industry tracker for the game industry, the market is growing at an exponential rate. He says internet-related game revenues in North America rose to US$1 billion in 2005, with 25% coming from digital game distribution. Madrigal expects that number to climb to US$1.4 billion by the end of 2006. This is a huge jump compared to the US$160 million internet-related game revenues generated in 2001. While digital distribution grows, the retail market for PC games in the U.S. is shrinking steadily. According to Port Washington, New York’s The NPD Group, PC game retail sales brought in US$1.5 billion in 2001 – that number dropped by 36 % in 2005 to US$953 million.

The gaming audience’s changing composition is even more encouraging when looking at digital distribution’s potential growth. According to several industry analysts, gaming is becoming a more family-friendly pastime and kids are making up a bigger piece of the gamer pie. NPD Group says kids under 12 shelled out 43% of the cash spent on video games in the U.S. in 2005, which may come as a shock to those who believe the hardcore adult-male gamer accounts for the bulk of sales. ‘I always laugh when people talk about the core gamer being 18 to 34,’ NPD entertainment industry analyst Anita Frazier says. ‘They’re not the core in terms of dominating market share, they are usually the core passionate gamers who evangelize big titles, but kids are huge for the industry.’

Frazier’s not alone. A recent study conducted by Minnesota-based national U.S. securities firm Piper Jaffray found American teens are increasingly losing interest in video games. The survey revealed that almost 80% of American teens – who play games regularly – plan to spend less time with their video games in 2006, and nearly 70% say they’re losing interest in gaming as a whole. But as teens move away from their consoles and PCs, families are picking up the slack. A report published by the Entertainment Software Association last January showed 35% of American parents are gamers and among this group, 80% said they play video games with their children. Furthermore, approximately 70% admit co-gaming has brought their families closer together.

Reaching beyond the core

With this new family-gamer demographic ripe for the picking, gamecos are making moves. Microsoft is one of the more aggressive players looking to tap into this trend of parent/child co-gaming with Xbox Live Arcade, the company’s latest on-line offering.

The current top performer on the service is Geometry Wars: Retro Evolved, a wholly original game designed specifically for the Xbox 360. But according to group manager Greg Canessa, retro arcade classics such as Gauntlet and Smash TV rank amongst the most popular game offerings. He concedes part of the reason for hosting this content is to make the system more family-friendly and go beyond Xbox’s traditional teen and young adult target.

Its first iteration, Xbox Live, went on-line in 2002. Players looking to connect with fellow gamers around the globe for a face-off flocked to the site. So far it’s logged 1.5 billion hours of playtime, while Xbox Live Arcade has seen more than 6 million downloads since launching in November 2004.

While consumers still have to buy full-on versions of Xbox/Xbox 360 games from retailers, they can log on to Live Arcade for smaller, less data-rich titles. Xbox currently hosts a library of games available for download and more than 95% of its titles are licensed from third parties. Users can beam games directly to their consoles and every game has a trial version to test drive before plunking down cash.

Of course, purchasing content on-line is problematic for kids. Without access to credit cards, they can’t sign up for on-line game subscription services or buy titles outright via a digital sell though model. But Xbox Arcade Live was created with these barriers in mind. Instead of demanding a credit card number, Microsoft has opted to fuel its content distribution economy with a points system.

Kids can create a free basic account on the site and then accumulate points to spend on console-ready downloadable games. While consumers can purchase points directly from Microsoft with a credit card, kids can also buy preloaded cards at Xbox retailers including Wal-Mart, EBgames, Target and Best Buy. Then it’s simply a matter of entering the card’s 25-digit code into the website account to redeem the points. A 1,200-point card costs US$20, which is enough to buy approximately three games.

On the PC-game subscription side, TBS’ GameTap (www.gametap.com) has also found a way for kids to enjoy the subscription service without requiring the use of their parents’ credit cards. As part of Atlanta, Georgia media giant TBS, GameTap leverages its parentco’s promotional partnerships. For example, TBS set up a deal where consumers of any age can log on to www.mycoke.com to collect Coke points and then trade them for prizes, including a GameTap membership. Gift certificates delivered via e-mail are another option. Ricardo Sanchez, VP of content for GameTap, says the company is also looking into setting up a pre-paid card system to sell at bricks-and-mortar retailers.

GameTap subscribers pay US$9.95 per month for unlimited on-line access to its 400-plus title library. Between five and 10 new games are being added each week, and like Xbox, it has opted for a family-friendly approach to gaming.

Newer titles such as Prince of Persia: The Sands of Time log the most playtime, but the games based on older arcade titles attract the largest overall number of players. The majority of GameTap’s library consists of simple and largely non-violent games, none of which have a rating over T. Rodriguez says this is no accident. Even though the majority of subscribers are 24- to 39-year-old males, GameTap was definitely designed with kids and families in mind. Aside from licensing hundreds of games that are easy to play, GameTap carries more than 20 titles designed specifically for kids such as Reader Rabbit and the Lego-based Loco and Rock Raiders.

Another prominent subscription service, Comcast Games on Demand (www.comcast.net/games/gamesondemand), is also targeting the younger demo by offering more than 75 titles in its kids package, including games based on properties like Clifford, My Little Pony and SpongeBob SquarePants. Because these titles appeal to the under-10 set, Comcast has chosen to advertise directly to parents and forego alternate payment options. ‘Many of the titles here are for children under 10, and we absolutely don’t expect them to have their own credit cards,’ Comcast’s senior director of entertainment and gaming Jen MacLean says. ‘So we’ve really made an effort to reach out to parents and educate them about what a value this is.’

Comcast advertises its kids games package through www.comcast.net and consumer campaigns including newspaper advertising and direct mail. The company launched this service in June 2004 with 60 titles in its kids lineup. The number of games has since grown 25% and although she couldn’t reveal percentages, MacLean says subscriber figures have grown steadily each month. The kids package costs US$7.95 per month for unlimited access, and MacLean says she’s always on the lookout for new titles, licenses and partners.

Mass retailers remain big players

While the market is warming to digital sell through for PC games as smaller console titles and subscription services continue to build steam, it’s going to take some time for full-scale console games to migrate to this space. Typical household broadband pipelines, despite representing a quantum leap in digital delivery when compared to old-school dial up systems, remain unequal to the task of transporting the huge data files that make up a full-on console game. Also, bricks-and-mortar retail continues to move the bulk of console software and competing directly with giants such as Wal-Mart and Best Buy seems unwise. Xbox’s Canessa, for one, is keeping a level head. ‘Digital distribution functions well as a complement to retail,’ he says. ‘But it’s by no means a replacement for it, yet.’

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