The Growing Business of Virtual Entertainment

By Alan Breznick

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“One of the cool things about online games is that they’re constantly getting refreshed.”

— Laura Sandoval, MBA ’05,
Disney Interactive Studios

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Club Penguin, an ad-free virtual world for children, was launched in October 2005 and joined the Walt Disney company in August 2007. Since its launch, it has become a virtual playground for millions of children from around the world, where players create their own penguins, interact with friends, explore, and play games.







“Hippogryph,” a screen shot from Blizzard Entertainment’s World of Warcraft: Wrath of the Lich King. World of Warcraft has become the world’s most popular massively multiplayer online role-playing game; Wrath of the Lich King sold more than 4 million copies in its first month of availability. Available in eight different languages, World of Warcraft is played throughout the world.

“Everything can now basically connect to the Internet,” said Greg Galvin, MBA ’93, PhD ’84, president and CEO of Kionix, an Ithaca-based manufacturer of tiny, silicon motion detectors used in gaming devices. “Every platform can connect to the Internet. The previous generations of these devices didn’t have that ability.”

While still flying somewhat under the radar, the online gaming business generated about $9.4 billion in worldwide revenues last year, according to the latest estimates from PricewaterhouseCoopers, a leading accounting and consulting firm. Although this total pales in comparison to the $55 billion in revenues that the entire video game business generated worldwide, industry experts consider online games one of the fastest-growing portions of the overall gaming market, if not the fastest-growing portion.

“Online gaming is taking off and growing extremely rapidly in a worldwide fashion,” said Galvin, who has seen the numbers jump, especially over the last two to three years. “The adoption rate is increasing very rapidly.”

This trend is playing out in Galvin’s “own mini-focus group” at home, where his three young children have all plunged into the online gaming world over the last couple of years, thanks to their Web-enabled Sony PlayStation 3 game consoles. While his two sons, eight and 12 years old respectively, favor action games, his daughter, who is 10, uses the online platform to play social games in various virtual worlds with her friends.

China Takes Online Gaming Lead

The popularity of online gaming is particularly surging in the Far East, with China leading the charge. As China Daily and the Wall Street Journal have both reported recently, online gaming revenues in the Chinese market jumped 39.5 percent last year to 25.8 billion yuan, or about $3.7 billion, according to the Chinese Ministry of Culture.

Moreover, in December, the China Internet Network Information Center estimated that about 69 million Chinese Internet users now play such popular massive multiplayer online (MMO) games as World of Warcraft and World of Legend. The Chinese government agency said it expects that number to more than triple to 230 million online game players over the next two years.

Industry observers generally credit the Far East surge in online gaming to high broadband availability, the popularity of roleplaying games like the two mentioned above, the free nature or low costs of the games, and the scarcity of relatively pricey video game consoles in many developing countries, such as China. They also credit the trend to faster broadband speeds and greater use of Webenabled mobile phones in the East than in the West.

“The two main differences between gaming in Asia and North America are: one, high broadband penetration and performance in Asia; and, two, advanced mobile usage and technology,” said M. Lee Clancy Jr., MBA ’97, senior vice president of product management and general manager of direct revenue for IMVU Inc. in Palo Alto, Calif. Clancy — whose company builds virtual worlds like Second Life, where members use 3D avatars to meet new people, chat, create, play, and buy virtual goods — noted that “predictions for the virtual goods market in the U.S. are $1 billion to $1.5 billion in 2010. But that market in China, for example, is already five to six times that figure.”

U.S. No Slouch Either

Even though it’s not experiencing quite the same explosive growth as China, the U.S. is seeing a strong surge in online gaming as well. In 2009, for instance, the average number of hours that Americans spent on online gaming jumped 10 percent from 7.3 hours per week to 8.0 hours per week, according to the latest statistics from The NPD Group, a research and consulting firm that focuses on the gaming business.

While the most established console-based games are still more popular in the U.S., online games are drawing in more and more players. For instance, NPD reports that more than half of the nation’s 70 million-plus game-playing households (54 percent) now indulge in online gaming.

“Online gaming is enjoyed by a diverse group of players,” said Anita Frazier, an industry analyst for The NPD Group in Port Washington, NY. “The sheer variety of content and ease of access make online gaming attractive to a much larger demographic than what we typically see in retail.”

Why Now?

What makes online gaming so compelling right now? Industry experts cite several major factors behind the rise of online gaming over the last few years. For one thing, they note that online games are generally cheaper, simpler, shorter, and less warlike and intense than the action-oriented and first-person shooter games typically found on the PlayStation 3 (PS3), the Microsoft Xbox 360, and even the market-leading Nintendo Wii console.

MyTown, Booyah’s new mobile app, boasted more than 450,000 users just one month after its launch in December 2009. MyTown is a location-based app for the iPhone and iPod Touch built around local shops, restaurants, and hangouts. It uses GPS features to check in at real-world locations to unlock rewards.

Online games also have much greater freedom and flexibility to change and grow than more traditional console-based games. Online game developers can add new features, fix problems, and take players in new directions on the fly much more easily. In contrast, console game developers must produce and sell new game discs when they make changes.

“One of the cool things about online games is that they’re constantly getting refreshed,” said Sandoval. “That’s tougher to do with consoles. Online games allow us to constantly refresh characters, worlds.”

Let’s not forget the human element either. Susan Wu, MBA ’06, formerly a venture capitalist with Charles River Ventures, is now CEO and co-founder of Ohai, a San Francisco-based developer of such new MMO games as the vampire-themed City of Eternals.

She believes that people are flocking to online gaming because the games help players feel better about themselves and their lives. She also believes that play is a “necessary … not frivolous” part of living. “[We believe] that something like a game can transform peoples’ everyday lives, and through the daily practice of playfulness, we can learn something about ourselves and grow,” Wu said. In a recent entry on her blog at Ohai, she likened her daily practice of yoga to the daily practice of playing an MMO.

“If an MMO could help you feel heroic and accomplished, a little bit each day, how would that translate over time into a new kind of muscle memory?” she asked. “What could you be in your everyday life if you felt heroic rather than defeated and hopeless? And if you felt heroic and acted as such, how would that then spread to your friends?”

Continued on page 2

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