"Cracking the online gaming market is still viewed as an ultimate win. And it's become a multi-faceted opportunity with the proliferation of new platforms and the changes occurring in adjacent industries. There's the growing mobile-phone gaming market, of course. And then there's the emerging battle for the living room—the triple-play bundle of video, broadband, and voice—that's taking place among telcos, cable companies, and satellite operators. They're all looking to differentiate themselves—and the services that they provide, including gaming, can help do that." -- Christine Wendin, an analyst with PricewaterhouseCoopers' Global Technology Centre.
It seems that real exuberance is alive and well, despite the tarnished reputation of its "irrational" twin. The PricewaterhouseCoopers-sponsored MIT Enterprise Forum held on January 19 in Westlake Village, California, gathered a panel from discrete corners of the gaming world, both interactive and online. This article is a continuation of the online gaming conversation that began at the conference with additional entrepreneurs and investors from far-flung locations.
The MIT Enterprise Forum keynote speaker, Andy J. Funk of Funk Ventures, a multi-faceted private equity and VC firm headquartered in Los Angeles, kicked off the evening by announcing that he's gearing up an accomplished engine technology and content team with an eye toward becoming the Pixar of the next-generation (next-gen) console technology market with a focus on Playstation3 and XBOX2. It's what he calls a "custom investment related to single opportunities," and as he suggests, it's simply not for most VCs and private equity investors. Since fall 2004, Funk has fortified a fund team led by corporate visionaries with significant track records: Jan Smith, former president of Disney Interactive; and Craig Allen, who heads up Spark Unlimited as CEO, are both venture partners at the firm.
But, this is a discussion about those who literally think outside the box. If there's any up-and-coming area of gaming that has been attracting investor and developer interest it is the online variety consisting of massively multiplayer games for role playing real-time over the Internet. It's the area that Funk says when broadband and Internet capabilities advance sufficiently he believes is going to generate a significant portion of the revenues in the future. Funk Ventures is planning to put in place a second fund in two to three years to invest in wireless technology and online gaming.
"The Korean market has a community now that has over 4.5 million paying gamers connected to a single massively multiplayer game," says Funk. "Those numbers are significant. If you can get four million people into a single community to play a game, that provides for a good user base to target your advertising dollars, and obviously if you have a subscription base model, you can generate significant revenues depending on how much you charge."
The potential for the online gaming market hasn't escaped Jerusalem Venture Partners Venture Capital group. JVP general partner, Allon Bloch, wasn't at the recent MIT Enterprise Forum but he was happy to call and discuss the topic from his office in Jerusalem.
"Gaming is a focus area of investment for us," says Bloch. "There has been a lack of infrastructure, and there is just a tremendous medium happening here. It's not only a bunch of 12-, 15-, and 20-year-olds playing games for fun; this is becoming a major channel to the world."
To date, JVP has made three investments in the gaming space: Two U.S. companies—Forterra Systems, formerly There, Inc., which branched out from its consumer game focus to defense, homeland security, educational, and healthcare online simulation—and Butterfly.net, a platform for both back-end and front-end tools to enable game developers to develop, launch, and then manage massively multiplayer games; and, Israeli seed company Double Fusion, which provides creative in-game in the form of billboards and scenarios integrated into the game. Double Fusion is expected to be coming out with its first customers towards the end of this quarter.
Forterra is a technology platform company for building virtual worlds on the Internet that enable very large numbers of people to inhabit these virtual worlds and collaborate and do the kinds of things they would do in the real world. The company began in 1998 as "There," and still runs a consumer online service called There.com. However, not long after 9/11, the company shifted its focus to the U.S. Department of Defense and homeland security training and simulation-based applications for emergency preparedness.
"It's a category that some people are calling serious games," says Forterra's CEO, Robert Gehorsam. "We are taking game technology and applying it across a range of applications to solve real-world problems. We're not a gaming company; we're becoming a technology platform company."
Such serious games are tapping serious budgets. The U.S. Army alone on the defense side has a formal simulation-as-training budget of about $1.2 billion a year. In the Department of Homeland Security related to emergency preparedness it's about $1 billion a year in training for emergency response.
"Those are fairly discrete lines," Gehorsam notes. "There are areas both in the U.S. and overseas that are five, ten, twenty times that. We're also in discussion with education companies, things like language training and related cultural areas. I believe the English-as-a-foreign-language market in Japan is about $15 billion. What we can do is not just limited to the institutional market, but in ongoing professional development there are other opportunities. I don't think we have fully touched the boundaries of market size."
Recently, Forterra was thrilled to receive a contract from the U.S. Army in a partnership the company has with Stanford University Medical School to develop a medical education curriculum. Stanford's medical school just recruited a VP of Simulation.
"Forterra is at the edge of a fundamental change in how individuals and organizations are going to communicate and collaborate in the future," says Gehorsam. "What we're really doing is leveraging the fusion of networking and graphics and human interface—something the game industry does very well—to create a platform that is going to allow any kind of organization and any kind of team to improve the way it operates. By taking the position of being a platform, we're really looking at this for the long term."
Thanks to JVP's global perspective and contacts, Forterra currently is talking to three or four countries about its platform.
On Forterra's wish list:
1. To integrate the work of companies that develop and maintain databases of detailed geographic locations for the ability to rapidly construct accurate 3D environments.
2. To partner with others to create compelling artificial intelligence characters for its crowd scenes, when it must portray a dense population of characters that are autonomous.
Speaking of autonomous characters, one of the companies at the recent MIT Enterprise Forum is a company called PlaySpace that is developing a platform so that players in multiplayer online games can have their characters capture their personality based on their choices in the game. Eventually the players could walk away and have their characters continue to play. Consider the possibilities.
Games for fun—and now profit
While high-end video games and simulation-based applications cost about $10-20 million to produce and market, there is a smaller-but-growing casual games segment offering simpler games that cost about $100,000-$200,000. Game Trust created a platform to help casual game developers generate revenue in this market.
Game Trust was founded in 2002 in the midst of a renaissance of high-quality casual games being created by designers and developers, many of whom may have found themselves out of work, or simply doing less fulfilling jobs. Media Metrix estimates that 49.8% or 250 million people a month play games—largely for free.
"Most of the money today in the casual game market is made by advertising," says Adeo Ressi, Game Trust's Chairman and CEO. Simply put: Game Trust has written a platform that gives developers the tools to make money from their games for any of the four basic business models: Paid Download; Cash Tournaments; Subscriptions; and Virtual Merchandise Sales. Screen Digest estimates that those sum up to about $700 million in revenues a year, a fairly small market compared with the PC and console world at about $30 billion, but it's expected to grow rapidly in the next two years.
"Game Trust management accepted from the start that casual games would be played by millions of people worldwide, replacing television and other entertainment options," says Ressi. "It is our vision to build a scalable back-end that can manage all of the free and paid casual game play worldwide. We are already working with the largest casual game portals in Europe, North America, and South America—operating in six different languages. It costs the industry $.04 per player per month to provide the average online casual game player with a fun experience. On the Game Trust platform today it costs $.02 for one of the best online gaming experiences available. We want to drive that cost down to under $.01. Scalability and efficiency is the only way to do this."
Game Trust sees itself as an economic engine for innovation because as developers start to make more money they tend to invest it in better games, which in turn leads to more sales—part of what Ressi calls "a virtuous cycle."
"There is a huge opportunity for certain kinds of infrastructure companies to capitalize and facilitate this market growth," says Ressi. "There are a number of VCs who share the view that the next large public company is going to come from the online game market. Casual games, for example, have a large audience of mature players with disposable income, and they are used to paying for entertainment. It is clear that one or more infrastructure companies are going to help unlock the financial potential of this market and reap the rewards with revenues in the seven, eight, or nine figures."
Game Trust has raised over $5 million from VCs to date, in a syndicate deal that included Intel Capital, CSK Ventures (Japan), Draper Associates, Topspin Partners, and others. Companies it currently works with have games on AOL, Yahoo, Shockwave.com, and Miniclip.com.
"Right now we are evaluating closing a series B in Q1," says Ressi.
The online world certainly has changed since Alex Suh, a California Technology Ventures managing director, tried to convince others to syndicate with him on Turbine Entertainment Software, the Westwood, Massachusetts-based firm that developed the proprietary technology for the second or third massive online role playing company back in the early'90s since they got exclusive rights to Dungeons and Dragons, Lord of the Rings – Middle Earth, and the first game for Microsoft, Asheron's Call 1 & 2, which it recently bought back and now publishes itself.
"Everyone we approached very early on to syndicate with us on Turbine was afraid to do it," he smiles. "They didn't understand the industry or see its potential. Now that the gaming space has taken in more than Hollywood box office revenues for the last three years we're seeing some very large venture firms starting to get into the space. Highland Capital and Polaris Ventures are now investors. Today, Turbine is a profitable company and may raise funds in the future to expand its capabilities."
California Technology Ventures has been looking at companies developing technology for the online game market. One profitable Swedish company of interest has developed a system where people can buy virtual and real-life items online securely using a digital credit card that continuously changes the password and account numbers. "It is interesting technology," Suh observes, "not just for games but for other applications as well."
He concludes: "We're definitely interested in platforms that enable development of game time and costs, particularly massive multiplayer games, to be cut in half. We're checking how big the market is for that in terms of continued growth. The big question is: Is the market willing to pay and how much on the lower end and how fast will consolidation of the industry be?"
One thing is sure: Opinions will continue to fly.
"If people want to be part of this market they have to start doing their due diligence now and cultivating their relationships because over the next two to three years they will be able to make a lot of investments," Funk concludes. "Of course, mobile phones and handhelds are the next big thing, but those games are not technologically advanced when compared to consoles and still have lots of limitations. I think the opportunity for the investors is the overall convergence that will occur in the industry. The whole idea is that you will be able to play games any time, anywhere, on any device. That's where I think the money is. But that's a cycle that is still five to ten years away from generating serious money for investors."
Perhaps from time-to-time it's best to remember we're talking about games here.
nextwave feature contributor, Janice K. Mandel, is an independent writer specializing in fast-growth businesses and the people who make them run. She can be reached at mandel.schneider@erols.com.
