Online Games Are Making a Play for a Mature Audience

TIMES STAFF WRITER

At 63, Elnor Smedley seems an unlikely target for a video game industry that zeros in on acne-prone adolescent males.

These days, though, the silver-haired grandmother of five is the belle at a billion-dollar ball thrown by video game companies eager to court mainstream consumers via the World Wide Web.

Microsoft Corp., Sony Corp., Vivendi Universal and Electronic Arts Inc. are among several companies pouring vast amounts of money into online games. It's a bid to both broaden the appeal of video games and establish long-term revenue streams through subscriptions to a constantly updated cache of games.

That strategy of selling digital fun as a service is the current rage among software and entertainment companies searching for ways to make money on the Internet and move beyond one-time sales of shrink-wrapped music and movies.

Succeeding online means expanding the customer base beyond hard-core gamers, many of whom already pay to play games such as "Ultima Online" and "EverQuest." So the game industry is plowing an estimated $1 billion into building and supporting sites to attract visitors such as Smedley. Doing that means stocking sites with a variety of simple games such as checkers and hangman. The plan is to convince visitors to stick around to play more sophisticated games they have to pay for.

Getting people to come to game sites has been the easy part. Visits are up, and players linger longer--an average of more than two hours per month at some sites. Parlor games such as backgammon are among the most popular activities on the Web.

Getting people to pay has proved more difficult. Many visitors are like Smedley--who plays more than five hours of online bingo a day but says she would never pay for it.

"I don't see any reason for them to start charging," said Smedley, a San Diego housewife who plays on Pogo.com. "There are other sites with free games."

Undaunted, the game companies are betting that as their offerings increase and high-speed Internet access becomes more common, consumers will shell out a monthly fee in much the same way they pay for cable television today.

"To be honest, entering the online arena is a challenge for any company, including Sony," said Scott McDaniel, Sony Online Entertainment's vice president of marketing. "There aren't that many tried-and-true business models out there. We're just trying to hit a moving target."

Consequently, forecasts for the online games market vary wildly. Datamonitor, a market analysis firm in New York, pegs the market at $5 billion by 2004, whereas Wedbush Morgan Securities in Los Angeles puts it at $1.5 billion in 2004. DFC Intelligence in San Diego puts the figure at $1.2 billion by 2004. And IDC in Framingham, Mass., estimates the market to be $1.7 billion in 2004.

One of the boldest players is Electronic Arts. The Redwood City, Calif.-based company has spent more than $250 million in the last two years to create EA.com, an online game portal that hooks visitors with free games such as Cribbage and Spades and tries to up sell them on "premium" games that cost as much as $9.99 a month to play.

The company is looking to online sales to eventually make up 20% of its annual revenue, which in the fiscal year ended March 31 amounted to nearly $1.3 billion.

But EA has already lost $149 million since 1999 on the venture. That includes profit from its highly lucrative "Ultima Online" business, which charges about 240,000 subscribers nearly $10 a month to access the multi-player fantasy role-playing game.

"Games take a long time to build," said Erick Hachenburg, chief operating officer for EA.com, which in February paid more than $40 million to acquire Pogo.com. "And we've been making the investments to build them. We believe people will pay for online games."

For now, the games are free and the sites are supported by online ads. But with online advertising dollars at a nadir, game sites desperately need other sources of revenue.

"The model is cable TV," said Stan McKee, EA's chief financial officer. "Years ago, people asked why anybody would pay for cable when they can get broadcast TV for free? The reason was that cable TV offered content that wasn't available anywhere else."

McKee predicted that EA.com's rate of loss will ease once it begins broadcasting games such as "Majestic" and "Harry Potter Online."

The riskiest game in the lineup is "Majestic," a conspiracy game in which players solve a mystery with clues delivered via e-mail, phone calls and faxes. Already several months behind in production, the game's four monthly "episodes" are due out sometime this summer. The fall will bring another lineup of games, including "Motor City Online," a game that lets players buy, collect and trade virtual cars.

The most promising moneymaker--"The Sims Online"--won't be out until early next year. "The Sims," EA's current offline game, draws more than 4 million players, half of whom are women. Many fans are already Web savvy. There are more than 600 independent fan sites devoted to the game.

Even the game's chief designer, Will Wright, is cautious about the future of online games.

"The economic model has yet to be proven," he said. "The cost of building these things is immense. We'll see some pretty spectacular failures in this market. In the packaged-games business, 10% of titles make up 80% of the revenue. Roughly the same will be true online. But if you can build up a player base and get people invested in the games, at some point, it will feel like a lower-risk venture."

Though EA is the furthest along the path toward delivering online games, Microsoft, Sony and Vivendi Universal are developing their own online strategies. Vivendi spent $140 million in cash earlier this year to acquire Uproar.com and combined the site with its own site, Flipside. Microsoft has invested untold millions in Zone.com and is exploring ways to link the site to the Xbox video game console, due out in November. Sony has Station.com and is considering the gamut of possibilities, from subscriptions to sponsored advertising to e-commerce.

Flipside plans to stick to advertising, said Kenneth D. Cron, chief executive of Vivendi's games division. Zone.com is looking toward advertiser-sponsored games as well as subscriptions for premium games and services, said Dean Hachamovitch, who manages Zone.com. Sony, which runs "EverQuest," one of the most popular subscription games on the Internet, is cautiously eyeing all of its options.

For some, the risk is too high.

"We love the idea of online gaming," said Bruno Bonnell, CEO of French-based Infogrames Entertainment, which has scaled back its investment in Games.com from $15 million a year to just $2 million. "But we also need to deliver. Right now, we don't think it's possible to deliver."

Bonnell said high-quality games can be delivered only through high-speed Internet connections. Yet, only 8% of U.S. households today have such so-called broadband access, according to Jupiter Media Metrix.

Even with broadband, there are technical hurdles. Retailer Electronics Boutique in West Chester, Pa., this month launched a site that lets visitors try out popular titles such as "Tomb Raider" for a limited time. To do so, users with high-speed connections must wait as long as two hours for the game to launch.

EA, however, is not waiting for broadband.

"There's a great opportunity for us to reach a new market with online games," said EA's McKee. "We believe everyone who is a user of entertainment on this planet is a potential user of interactive entertainment. Online is a great way to reach those people."

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More Minutes of Play

Video game companies expect online games to take off in coming years. Average time spent at game sites has surged in the last year.

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Average minutes per month

EA Online (includes EA.com, Pogo.com)

May 2000: 13.4

May 2001: 302.2

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Games.com

May 2000: 1.9

May 2001: 141.8

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Zone.com

May 2000: 26.7

May 2001: 114.3

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Uproar

May 2000: 32.2

May 2001: 45.6

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Sony Online (includes Station.com)

May 2000: 15.5

May 2001: 20.9

Source: Jupiter Media Metrix

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