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.
salon.com | April 21, 1999

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