Online gaming's store-shelf chains

Does's success mean that Net-based ventures are still dependent on retail sales?

Published April 21, 1999 4:00PM (EDT)

For years, people interested in online games have been saying, "We don't have a business model yet." By this they meant that no one is making any money, or has any clear idea how anyone can make money with online games. They debated what kind of model would work: hourly charges, monthly subscriptions, pay-for-play.

But as it's happened, the single most successful online gaming venture to date, and one of the few that actually operates in the black, doesn't charge. It doesn't have to. And yet it makes money. And paradoxically, its very success poses a threat to most other online game operations -- and suggests that it's the old store-based retail sales approach, rather than the new online medium, that's winning the war for gamers' dollars.

The success is called A free service run by Blizzard Entertainment, the developers of StarCraft and Diablo, allows StarCraft and Diablo purchasers to play online. StarCraft, not incidentally, was the number one bestselling PC game of 1998, according to the PC Data list -- and has sold 1.6 million copies to date. claims 2.3 million active users. The MSN Gaming Zone claims more -- 4 million -- but the numbers are not directly comparable; according to, "active" users are those who have actually played a game on their service within the past 90 days. The MSN Zone's figure presumably includes every account ever created on their (free) service, including ones that have never been used since they were created.

A better measure, anyway, is the number of simultaneous users at peak periods: boasts more than 50,000, while the Zone reaches a bit over 30,000. is clearly, by most measures, the single most-used game service on the Internet.'s integration with Blizzard's games is tight: If you want to play StarCraft online, for instance, you just fire up the game, click on "Multiplayer" and then "," and there you are, in a waiting room, looking at a list of open games and chatting with other waiting players. Join a game, and when the necessary number of players have joined, you're playing. As simple as that.

But more than this is going on behind the scenes. When a game starts, looks at the players' computers and chooses one of them to act as the "game server" -- it'll choose the one with the lowest latency (delay) and the fastest processor. And then goes away. The players' machines talk to each other, over the Internet, for the duration of the game. If the game server loses its connection, somehow, one of the other players' machines takes over smoothly, so the game is never "lost." The players never connect back to itself until the game is over -- at which point, takes the results of the game and integrates them into its "leaderboard," which lists the top players and player rankings.

The clever thing here is that's servers don't shoulder much of the burden. provides chat rooms and player matching and rankings, and that's about it. All actual game processing occurs on the players' machines, and doesn't handle any of that traffic. The result is that Blizzard can run the service very cheaply; at peak times, takes about 10 servers to operate. By contrast, a game like Ultima Online, which demands continuous traffic between Origin's servers and players' machines, requires dozens of servers to satisfy peak demand.

To be sure,'s approach is nothing new: If you play Quake on TEN, say, it works the same way. In fact, this is how online play of most Net-capable CD-ROM games works. The "aggregators" -- companies like TEN and MPath and -- were all founded as services to provide this kind of player-matching.

In other words, if you're a game publisher, and you want to offer online play, you have two options: You can make a deal with one of the aggregators, or you can, like Blizzard, implement your own service.

There are advantages to both approaches. If you make a deal with MPath, say, you don't have to pay to implement the server-side software and maintain the service. And that's not an inconsiderable concern; this is a technically demanding kind of operation.

But there are some strong advantages to doing it yourself, too. One is control over technology; when a problem arises, you can fix it yourself, rather than calling a third party, which has its own priorities and may choose to fix a problem with some other publisher's game first. Another is differentiation: All services on MPath, say, look pretty much alike, because when MPath implements a new feature, it spreads it across all the products it offers, not just yours, so there's nothing you can do to make your product stand out.

Perhaps most important, when you run your own service you have a direct connection to your customers. You see what they're doing and how they play; you hear their complaints and their praise; you learn how to serve them better; and you can reach them immediately when you've got a patch or a new game to offer. And of course, if the operation is profitable, you keep all the income yourself.

Blizzard isn't the only company to have done this; Sierra offers its games through, and Bungie through But is, far and away, the most successful such operation.

It helps if you have a game that sells 1.6 million copies as a basis, of course.

If lets people play for free, how does it make money? The answer is simple: advertising. Players waiting for a game-start, or chatting on, are exposed to ad impressions as they do. "We're serving millions of ad impressions every month -- 30 million last month," says Paul Sams, Blizzard's vice president of business development (last month being March 1999). Moreover, according to Sams, Blizzard supports higher rates for its ads than most other Internet sites because their click-through is substantially higher than average -- "around 4 percent in a good month, and at least 2.5 percent in a bad one."

Although Sams says Blizzard originally accepted that would lose money, the service has operated in the black since the third quarter of 1997 (it was launched in December 1996) -- purely on the basis of advertising revenue. In other words, it has more than covered its operating expenses since then, without including a proportion of boxed game sales or any other revenue as attributable to's existence.

Blizzard says it thinks sales of StarCraft were 10 to 15 percent higher than they would have been if the game hadn't offered free online play. Sams cautions that the number is a guess, not based on any hard research.

From where I sit, that number looks far, far too low. In the last 90 days, 2.3 million people have played on Seventy percent or more of them were playing StarCraft or StarCraft: Brood Wars, an expansion. That's 1.6 million separate IDs in play -- and only 1.6 million copies of StarCraft have been sold (and about a half million copies of Brood Wars, but almost every purchaser of Brood Wars will have previously bought StarCraft). Even assuming that some players have multiple IDs, and that some are playing with pirated copies of StarCraft, a very, very high proportion of StarCraft purchasers are clearly playing online. This should be no surprise; StarCraft is faster, more engaging and more challenging when played online than when played solo.

In a way, that's good news for other online game providers: 1.6 million people are being conditioned to enjoy online play. But in another way, it's bad news:'s success implies that the traditional retail channel for games sales is winning. So much for the long-awaited online gaming revolution.

According to industry wisdom, more than 90 percent of all computer games published lose money. At a typical development cost of $2 million, a game needs to sell 100,000 units to break even. Fewer than 100 of the 1,500 titles published annually do so.

A typical software store has 40 slots for computer games. So many releases never see much retail exposure, and many sit on shelves for a few scant weeks before being removed to make room for new products. It's a very difficult retail environment for computer game publishers.

The reason gaming is a big business is that the few real hits each year can make a lot of money. StarCraft retails for around $50; typically, half of that goes to retailers or distributors, meaning Blizzard makes about $25 for each copy sold. 1.6 million copies times $25 is a nice profit.

But the business operates in ways that fundamentally make no sense. What the game industry does is take a lot of bytes, copy them to a metal disk that's encased in plastic, stick the plastic disk in a plastic jewel box, shrink-wrap it, put it in a bigger cardboard box and ship it in a pollution-spewing truck to a retail shelf -- where you find it, pick it up, take it home, insert it in your CD-ROM drive and copy the bytes to your machine.

As it happens, you already have a wire, coming into your home, down which you can receive bytes -- in fact, to read this article, you did so.

Why not cut out the plastic, the trucks, the retailers? Why funnel your product down this expensive, narrow, screwed up distribution channel, when you can do it over the Net?

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"Doom was a watershed event on a par with the Atari 2600 because it changed the way video games circulate and reproduce ... Doom gave video games a way to proliferate in cyberspace ... Down the line, you can see a point where video games will be sold in electronic form and jettison their bodies entirely. Doom points the way. Doom is a fulcrum."
-- J.C. Herz, "Joystick Nation"

That was 1993. Fifteen million copies of the Doom demo were downloaded worldwide; id, Doom's publisher, sold more than 150,000 copies directly to consumers. Retail was the icing on the cake.

But then came the CD-ROM revolution, and software bloated. Computer games went from a few megabytes to a few hundred megs of data. At typical modem speeds, it takes forever to transmit that many bytes. No one's going to download 600 megs over the Internet.

So the success of StarCraft -- and of similar Net-capable CD-ROM games, like Age of Empires and Myth II -- is making online game people very nervous. They had hoped that online gaming was a way to break the tyranny and cruelty of the retail channel. After all, if you're playing online, why not get your software online too?

But StarCraft seems to say: The future of online is the future of retail. The future of online is retail sale plus free online play. This is the business model that works. Forget about charging for play, or by the month; that's a niche market at best, because the retail channel can move 1.6 million units. No online-only game reaches anything like those numbers.

And if that's true, all those analysts' reports saying that online gaming would one day be a $1 billion-plus market were wrong, not only about when it would happen, but about the very fact of it happening -- because online gaming is never going to be something different from PC gaming. It'll just be another way to play CD-ROM games -- and you'll pay the same way you always have, by handing a credit-card to an obnoxious sales clerk down at a mall store.

And the business models of Kesmai, Simutronics, MPath, the MSN Gaming Zone and Sony's The Station -- indeed, the business models of any online game operations that isn't counting on the retail channel -- are broken. They'll never fly.

This is the analysis that the game industry's pooh-bahs are just beginning to digest. Should they be afraid? Personally, I think there are some big holes in the argument.

First of all, the retail channel has a lot of experience promoting and marketing products; online-only operators are just starting to figure out how to reach potential customers, and are only gradually waking up to the fact that they have to start thinking like magazines rather than packaged-good companies. (Magazines are typically willing to spend an entire year's revenues from a customer to get a new customer, on the grounds that some portion will resubscribe, and they'll start making money in the second year.)

And second, online-only operators have a potentially compelling value proposition for consumers: Instead of spending $50 on an untried game that you may shelve within an hour, you spend nothing for a free trial and a modest amount by the month -- meaning you won't pay anything like $50 unless you decide you really, really like this game.

Those points suggest that the tide might turn once more in the future, and that online gaming isn't entirely doomed. But right now, the "retail sale plus free online play" model is unquestionably king. And anyone in online gaming has to think about the implications.

By Greg Costikyan

Greg Costikyan's 27th commercially published game, Fantasy War, recently launched on Sony's Station; he also recently completed a report on the future of online games for Good Reports.

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