State of the Space

From penguins to pirates, Metaverse to Metaplace, judging from investment and development alone, within the past year, virtual worlds and online games have gone from “new hotness” to “bubble,” and the gold rush has turned into a tsunami. With over 100 online games currently in development, it’s safe to say the online space is becoming a powerful force in the game industry, and whether or not any of these games reach WoW status (or even ship), the effect on the game industry as a whole is considerable.

The Escapist has been analyzing the state of the space, and here’s what we’ve found.

It’s impossible to look at the virtual world industry without mentioning the overshadowing nature of World of Warcraft. WoW is a vastly popular game, industry dominating in several markets and spawns more memes, articles and internet studies than EverQuest probably did back in its day. Now pushing aside the obvious, it’s time to take a look at what the rest of the industry is up to.

Contrary to media appearances, not everyone is playing WoW or making a small fortune in Second Life. Strategy Analytics estimates by the end of 2006 there were approximately 30 million subscriptions across all MMOGs worldwide. While the North American market gets a lot of media attention, analysts have learned there’s a lot to be learned from the 73 percent of the subscription market that the west has barely begun to touch – the Asia/Pacific market.

Despite the growing calls for alternative business models and experimental approaches of companies large and small in the virtual world space, the monthly subscription is currently king of the business models in the U.S./European market, providing 87 percent of market revenue.

The reliance on subscriptions remains a Western concept – 84 percent of online games in the Chinese market launched in 2006 can be classified as “free to play.” In this business model, game operators substitute “value-added services” for subscription fees. But business models are already changing. In Western markets, developers are taking tentative steps toward new revenue streams, although some still play it safe with a partial reliance on “premium” subscriptions. While some experts are advocates of micro transactions, others are not so convinced based on current attempts by game companies.

During the last calendar year, more than $1 billion have been invested in 35 virtual world companies by media and technology firms. This is not exactly great news for traditional virtual world designers; Disney, the top recipient (Club Penguin; $700 million), is using the money to attack new demographics traditional MMOGs don’t serve.

Companies like Trion World Network are working on cross-platform delivery, and Nokia has already made an early effort in the mobile market (Pocket Kingdom). While the console market has also taken steps into the MMOG space, the focus remains mostly on applications such as Xbox Live and social networking spaces like Sony’s Home. In the Eastern markets, 3-D synthetic worlds are gaining traction over games, and worldwide new applications for virtual world technology are being reported weekly.

The shape of MMOGs is also changing, as virtual worlds are becoming trendier. The audiences are becoming younger, and the way they’re spending money online is different than before. Virtual items are no longer an odd concept to people, and although a large segment of players are still visibly outspoken against them, the real-money trade (RMT) for virtual items market is estimated as being worth $1.82-$2.09 billion in 2007. Although it has been quick to catch on, RMT is still rife with problems, and users are still in search of better implementations. The China Internet Network Information Center (CNNIC) issued a report in spring 2007 stating 61 percent of gamers have had virtual assets stolen, and 77 percent feel the current online atmosphere is unsafe for virtual assets.

Of the big movers and shakers in the next few years, Germany is predicted to remain the top market for online gaming subscriptions in Europe, and in the short term the U.S. will remain the West’s largest market overall for online gaming. France is projected to give Germany a run for its money over the next five years, followed closely by Spain and Italy. The North American market is not expected to grow as quickly due to market saturation and slower broadband growth than other markets. In the Asia/Pacific markets, Japan is projected to pick up the pace to catch up with current leaders China and South Korea.

In regard to virtual property and services, the market is expected to match subscription revenue by 2012, including premium in-game experiences, direct sale of digital assets and processing player-to-player transactions. Digital distribution will also see substantial growth in this timeframe.

The market overall has room for growth, although not at the rapid rate many are projecting. The overall change will be slightly upward, but mostly due to declines in other traditional media, not because more people will be playing games. Inspired by the success of media darlings WoW and Second Life, many more MMOGs have already gone into development, with some scheduled to appear “in the next few years.” A majority of them will fail if they actually make it to market, and handful of them will explore new genres and succeed for what they are, but there will be a lot of crashing and burning along the way.

As a result, niche markets are becoming more necessary than ever. Aiming for the outskirts, rather than trying to be “the next best big thing for everybody super game of awesome,” will keep the industry growing in the long-term instead of trying to be “the next best big thing for everybody super game of awesome.”

Since persistent worlds will continue to present an interesting opportunity in the realm of entertainment, there’s never been a better time to experiment with ideas. It’s a big development world out there; what designers do with the virtual ones is truly limitless.

Nova Barlow is the Research Manager for The Escapist/TAP Interactive and likes to gaze into crystal balls on occasion. She is also a regular contributor to WarCry.