The World of Online Gaming

It’s the purpose of this blog to be informative about next generation technologies and the way they are shaping the world of finance. However, I would like to take a break, step back, and look at something changing the world of business. And far from what some people might incorrectly call the “stiff” world of finance, the arena that I would like to talk to you about is a bit more fun. But just a little. Let’s not get carried away. But hopefully after reading this entry you become aware of some new business opportunities.

Online Video Games
Let me start of by asking you a question. If you were an executive, would you like to find a tool that supports collaborative tasks, accommodates large or small teams, operates in real-time, provides rich content, is immersive and compelling, and last but not least makes collaboration both fun and productive? Like such a tool exists. Well, it does. And it might not be exactly along the same lines with what you’re thinking. It’s not from SAP, Oracle, or IBM. The developers of these wonderful tools are- get ready for this- Sony, Microsoft, Blizard, Mindmark, and the list goes on. That’s right I’m talking about video games; online video games to be specific.

Don’t believe me? Well, just ask Gartner, who published a report in March of 2006 naming MMOG’s or Massively Multiuser online games as an important and sophisticated collaboration tool (Jones, Nick. “Playing the Collaboration Game”. Gartner. March 23, 2006. ID: G00129452). But let’s not get ahead of ourselves. The same report states that these tools are still not perfectly suited for the business environment because of “technical and social” inhibitions that include but are not limited to: culture clash and the need for sophisticated hardware.

But that's not to say that online games are not helpful to businesses and corporations. The potential of online games has managed to peak the interests of many in the corporate world. In fact, businesses have already undertaken several of their own experiments with virtual environments, aiming to benefit from their use. Take Virtual Reality Modeling Language, spatial audio conferencing, and Ygdrasil which is a special purpose tool to build virtual 3D worlds as some examples. But according to Gartner these have had very little success compared to MMOG’s. Why is that? Well for starters, MMOG's are fun and easy to use. They are also readily available, and there are no development costs involved. It’s precisely these qualities that make the future so promising. And if you’re still not convinced let me tell you a little bit more about the world of online gaming that you may not be aware of. There are several opportunities being created centered on the online gaming market. And if you think that playing games is a frivolous activity that is just for kids, you might want to read the rest of this blog…I bet you’ll be surprised.

Virtual World- Real Money
There is a whole virtual economy taking place, and it’s been around for a while. In an article published in 2005 by Knowledge at Wharton, a publication from the Wharton School at the University of Pennsylvania, Dan Hunter talked about the growing financial importance of MMOG’s: “Increasingly these virtual economies are translating into real dollars” (Try reading the whole article at http://knowledge.wharton.upenn.edu/article.cfm?articleid=1302 but you might need to create an account first). Just ask Linden Labs, the San Francisco-based game developer responsible for Second Life whose linden dollars hold a ratio to US currency. The reason behind that is that companies like Internet Gaming Entertainment began dealing in everything from magic shields to potions; which by the way the virtual audience can’t seem to get enough of as you shall see.

Edward Castronova, a Professor Indiana University, estimated this virtual economy to be worth between 200 million and 1 billion dollars in 2005 with the potential of hitting the 1.5 billion dollar mark. Hunter even saw these online virtual markets as having the potential of becoming “economic petri dishes to monitor consumer behavior, currency exchange and productivity”. And I can’t say that he was wrong. It’s true that companies like Linden Labs are beginning to take on the look and feel of a financial institution.

As a whole, most agreed, the market had a great potential for growth. The growth of the market even prompted the attention of the US government; something which I think is still in play. Still, with all that success no one thought at the time that a virtual world worker could earn a living, at least not in the US. The potential always lay in Asia, whether that is an underestimation of the US market I can’t say-let us remember that even today the market is still in its early stages. But the potential to make money has been there. The proof came in 2006 when Ailin Graef became Second Life’s first real millionaire (Read Business Week article here).

Could you imagine making a million dollars trading for something that wasn’t even real? Amazingly enough this happened in only 2 and a half years, and she started by making small scale purchases of real estate. And this type of spending hasn’t ceased in 2007. Consumers have increasingly become crazed for luxury goods. The market is so hot, that it’s even seen a flood of media, automotive, and entertainment brands establish their presence in second life (Read Business Week article here). Castranova was right when he said he expected virtual markets to be more “commercial”. But regardless of who is spending what, or where, this clearly demonstrates the value that’s buried deep within this virtual goldmine. That is if you can find a way to make those virtual dollars into real ones. I think that’s what online gaming has become. It’s creative, and it’s not limited by the constraints of the game industry of old.

Online in Asia
But what about the Asian market? Well, take Korea for example. 26-year-old Lim Yo Hwan is a superstar. But it’s not like he is an athlete or a movie star. The reason he is famous is because he is a gamer…professional gamer that is. He has a large number of fans flocking toward his website, and in 2005 alone 100,000 fans gathered just to watch him play World of Warcraft (Read full story here).

This is part of a cultural phenomenon taking hold of Korea. This is fueled by the fact the Korea is probably the country with the highest level of broadband connectivity. In fact according to a survey conducted by the Korean government in 2006, 30% of the population was reported to be a registered online gamer. And just like in America, virtual goods are traded for real cash. Nearly 3,000 Korean game developers combine for a total revenue stream of about 4 bn. This is a real passion which people are turning into a money market. And it has teens and even some adults packing the 28,000 baangs, or internet cafes to play online games.

It’s happening in China as well. The market for fantasy and adventure games in China is growing at an astounding rate of 50% per year. And according to IDC this trend will lead China to overtake Korea as the largest Asian market by the end of this year (Read full article here). That’s a 2.1 billion dollar market according to Business Week.

If this is a fledgling industry I wonder what it will be like when it is full grown. And just as proof that the industry is aging, competitors are sprouting up all over the place. Think that Second life is the only 3D –virtual reality game on the block? Think again. For my example we head back to Korea where Nexon is beginning to step on Linden Lab’s toes (Read full story here).

At this point I feel it necessary to make the following point: Online nowadays implies global. And whenever cultures collide you are bound to have friction. Online gaming is no exception. In an attempt to seize a piece of the Chinese and Korean markets, EA has recently acquired Neowiz. This is only one part of what has been on ongoing effort in a sense to “westernize” the content of the games; however, the efforts have not been very successful. Instead the markets under siege have found ways to make the content their own (Read full story here).This is certain to be an issue for the advertisers. A business model takes into account environment as well as the culture. In order to capitalize on the explosion taking place with online gaming, it’s necessary to take into account a global market and expand the project scope. But that is not to say that western games are not successful in Asian markets. It’s simply another case of what Dan Hunter was talking about. Credibility is a key issue. Just as the consumers must trust the emerging vendors, new markets must trust the content of incoming entities seeking to advertise, sell, or promote their products. Nonetheless, markets are opening up, and their potential value makes them hard to ignore. But it’s the internet, and of course internet gaming that is bringing these problems to surface just as it’s creating new markets.

From Consoles to Online
These trends have not been overlooked by the game console makers like Microsoft and Sony who have made a move to capitalize on this online craze. Microsoft has already launched its X-Box live which boasts of six million users and has online services which include buying games online and chatting with friends; and that’s on top of the ability to play with multiple players from all over the web. But now it seems as if they are in an all out brawl for supremacy. It’s almost as if the two systems can’t exist in the same market, well more so than usual.

For Sony it’s a matter of catching up. It has recently launched its latest version of the Play Station system. I here that its not going that well, but it has no choice as to whether the new system has the ability to link with the web. Moreover it has to deal with the fact that development costs are increasing for hardware gaming (Read full story here).X-Box incurred a great deal of costs on development of the 360 system alone. This was despite the fact that Microsoft had already tested the water with the original X-Box system (Read full story here). The fact of the matter is that if they want to survive the have to go the way X-Box did…live. Gamers want it therefore developers need it.

Still the MS system is expected to lead the market through 2009 and that is largely due to popularity of the online features, this is despite the fact that Sony is coming up with there own version of live (Read full story here). It’s not just about the software anymore (See the graph below from BBC). There is something very attractive about having the option to connect to millions and millions of other players. Microsoft has the first mover advantage, but I think the definitive factor is that it’s more like an actual computer. The online movement is so strong that standards are quickly becoming things of the past. If they are not completely done away with they have to morph into something that as a console is unrecognizable, at least in the traditional sense.


Online Gaming-Vegas Style
The internet is even competing with Las Vegas. Well, at least on some level. Though it may never compete in terms of experience, the amount of money spent gambling over the internet is indicative that this is a viable alternative for many gamblers. The difference is that those seeking to gamble have access whenever there is a computer around. The problem for Los Vegas would be to see online gambling become legal, which is already happening in many states. And although many are sticking to their claim that online gaming is not a direct form of competition it has prompted some established Casinos as to create their own online gaming sites (See video here).

This is not just a problem for Casinos. The United States government has cause for concern as well. Online gambling runs through almost 7 billion dollars a year, a large part of which comes from US gamblers. The problem is that some of that money is non-collectible. Countless users connect from home and transfer their money to private internet casinos which are often located of shore. There is of course no way to prosecute and that has caused the focus to shift on some banks that have previously provided financial services for online gamblers. The worst thing for the United States would be to have the UK legalize online gambling. The United Kingdom would then be able to take US bets and US dollars away from both casino and treasury coffers (See video here).

The internet has a unique ability to disassociate. The same property that allows processes to be separated from the analytical, is in this case what limits accountability and creates the problem that we se present with online gambling today. It’s a more sinister side of online gaming. However, it is important because it demonstrates the reach, and power of the internet. The funny thing is that it’s only a game. But that’s what you probably thought at the beginning of this blog- how can online gaming be used for collaborative training…it’s only a game? But we’ve seen that virtual reality has some unique properties that translate into the real world.

Signing off
I honestly believe that we are only taking a glimpse of what can be done using video. Broadband has been the vehicle that has propelled online gaming into the homes of countless individuals all over the world. But it has also transformed gaming into something more than a form of entertainment…something that can be a new business opportunity or a great tool for collaborative training.

As for the video game industry itself, the inclusion of the internet is changing the way that games are being made and developed (Read article here). However this hybrid has revealed stored potential perhaps not seen in years past. Online gaming has become a conduit for innovation that is responsible for entities like second life. It now has the power to alter orbit industries, and has really added to the creativity of creating business models. Moreover it’s also offering new sources of revenue for brick and mortar companies (Read full article here). Going online has added to the arenas that gaming can reach, and I think that it will continue to add to the list of possibilities….perhaps even in the financial sector.