We’ve recently had internal conversations about online gaming and potential investments we may make in the sector (we’ve come close to investing in a few game companies but haven’t done so yet). Our interest is driven primarily by phenomenal growth in the gaming market, and, more thematically, an investment strategy targeting emerging content and digital lifestyle opportunities.
Turns out that Microsoft’s online gaming service, called Xbox Live, acquired 1 million subscribers faster than AOL, HBO, or Tivo did (today, about a year after hitting the 1 million mark, Xbox Live has about 2 million subscribers). Each player pays about $70 for a 12 month subscription starter kit, which includes a headset like those used at a Burger King drive through (this wouldn’t bother me–my office colleagues regularly mock me for the wireless headset I use for phone calls).
Slate has a great article describing the experience of two “greybeards,” or thirty-year-old men, who recently played Xbox Live for the first time. They were clearly out of their element–a few of their favorite moments:
1) I liked how—just so we could log on and play the shoot’em-up game Halo 2—I had to spend 10 minutes downloading ancillary programs, including something called the “Killtacular Map Pack.”
2) I liked how, when we finally started, I was killed within eight seconds. Then I came back to life in another part of the game … and was again killed within eight seconds. I don’t think I ever survived longer than 20 seconds. At one point I accidentally detonated something (maybe a plasma grenade) right next to myself. In that instance, I committed suicide before other players had a chance to kill me.
3) I liked when I got in the driver’s seat of the “Warthog” assault vehicle and one of our remote Xbox Live teammates quickly hopped onboard and manned the turret gun, as though he expected me to drive us somewhere useful. I instead drove off a cliff and killed us both. Boy, was he surprised!
One of the more intriguing aspects about online gaming–and emerging media, in general–is the community of users, which varies according to a game’s genre. In Xbox Live’s case, many of the most popular games are “hardcore” action or strategy. The dominant personalities there tend to be 13 year-old-boys with seemingly little to do other than hone their already formidable skills. And why not? The better games are amazing: superb audio and video quality, epic stories, and performance (lag) generally isn’t bad. Plus, you can mock your friends (or strangers) via the Burger King headset while you play.
13 year-olds don’t run the show everywhere, though. The players on many “casual gaming” sites (which, like Games.com, usually feature card or word game titles like Boggle or Yahtzee) tend to be female and older (35+). Overall, according to this report from the International Game Developers Association, women actually play online games more than men (9 vs 6 hours per week). No matter how the numbers are sliced, it’s clear that there is a significant market opportunity: $7.3 billion of games were sold last year, according to the Entertainment Software Association.
From an investment perspective, the economics of casual gaming can be attractive: such titles can often be developed for $100,000 - $200,000. “Major” console titles, such as those played on Xbox Live, usually have a multi-million dollar budget–sometimes as much as $10 million. Casual games generally sell at retail for about 40% of what comparable “major” console games cost (often $50 vs $20).
Where are venture capitalists looking for the next gaming opportunity? From a business model perspective, companies with an existing title and a predictable, subscription-based revenue stream (Mythic, Turbine, Second Life, etc) have recently attracted serious interest. At a high level, I think two primary requirements must be met:
1. Rapid, low cost customer acquisition,
2. Metrics indicating existing users are spending more and more time playing.
There are other key factors, also, but getting these two right is generally very positive. The implication for my investment strategy, then, is that it’s difficult to fund developers–even if they are very talented–if they don’t yet have a published product (others firms have different strategies, and there are always exceptions, such as Digital Chocolate).
Despite the incredible market size numbers, gaming, as a category, hasn’t produced many significant wins for venture investors. I think this will change as the underlying technology continues to improve and as people–not just kids–spend an increasing amount of time and dollars playing games.
Update: You can play an Ajax-ified version of Boggle here (via Logan).
Why aren’t you looking at the “cousin” industry — Simulations/Distributed Simulations? There are a lot of opportunities for R&D cooperation between the two fields.
Frankly, I’m really surprised that gaming industrial leads haven’t tried collaborating more with their “grown up” cousins, tech developed by the big boys leads to all kinds of “trickle down” into the consumer market. This basically allows for someone to pay for all your R&D while giving you a steady source of new ideas/innovations.
Left by adin on September 8th, 2005