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Digital Distribution of Games Comes of Age

8 Jun, 2004 By: John Gaudiosi

While there has been much written about the illegal and legal digital distribution of music and movies online, the video game industry has quietly been implementing the digital distribution of video games over the past few years.

Rather than suing its consumers or squabbling over copyright issues, game-makers are looking at the broadband distribution of content, especially in the slow PC game space, as a new source of revenue for catalog content new and old.

The digital distribution of games has been around as a business model since the earliest days of PC gaming. In the early 1990s, shareware versions of PC games like Doom and Castle Wolfenstein were downloaded through dial-up modems to entice gamers to buy the rest of the game. About five years ago, streaming technology was introduced to the equation by companies like MediaStation and IntoNetworks, which offered subscription services to gamers. Experts say this technology was ahead of its time. In 2001, Trymedia partnered with Infogrames to create an online try-before-you-buy PC game model. The technology, called ActiveMARK, is now used for 50 percent of all game download transactions. Trymedia is the largest aggregator and distributor of downloadable games in the world, working with 14 of the top 20 game publishers, and has 500 games available on more than 3,000 Web sites.

Today, a number of game publishers are releasing some games exclusively through digital distribution, including Eidos' Singles: Flirt Up Your Life, an Adults Only-rated game that is available for online purchase through Deep Silver, a division of the Koch Media Group, on a variety of Web sites. A free playable demo is also available on hundreds of different game Web sites, which is the norm these days for any game. Taking things a step further, online game sites like Yahoo, MSN Games by Zone.com and AtomShockwave.com are already having success selling “deluxe down-loads” to casual gamers for about $20 per unit. In addition, Yahoo and others are offering games on demand for a subscription fee, offering a channel for renting PC games, which has been nearly impossible in traditional retail outlets that do well renting console games.

“Digital distribution of games is maturing, and consumers may be more open to renting and buying games delivered directly to their computers or connected consoles,” said Billy Pidgeon, video game analyst for Zelos Group.

For the PC industry, which has experienced a lull in recent years and has become a blockbuster franchise industry, there's simply not enough shelf space for games at retail. Retailers rely on console games to drive sales, and thus, dedicate more real estate to Xbox, PlayStation 2 and GameCube titles. That is why game publishers have embraced digital distribution. It opens a huge library of game titles to a new audience of gamers, especially in the growing occasional-gamer market space. In addition, the hefty size of games, which requires far more memory than either music or movies, has kept piracy to a minimum in this sector.

“Traditional and specialty retailers should plan and implement digital distribution models first for PC games and then for console games or they risk losing their customer base to game publishers, PC portals, broadband providers and console manufacturers,” said Pidgeon, who wrote a report on the subject last September called “Fast-Growing Games On Demand Sector Points to Industry's Mass Market Potential.”

“Digital distribution will begin to erode traditional retail distribution within 10 years,” he said.

Jim Adams, SVP of sales and marketing at P2P Distribution Services, forecasts that the digital distribution of PC games could lead to five-year market-share growth of 40 percent to 50 percent and a 10-year market share of 60 percent or more.

On the console side, Adams and other experts expect a much slower growth rate in the digital distribution of games sector. Adams forecasts a five-year market share of 20 percent and a 10-year market share of 30 percent for digitally distributed console games.

Experts agree that the online sector will create new opportunities for retailers and rentailers who take advantage of new technology. With the continued growth of broadband distribution, PC games can easily be tried for free, rented or bought online. Game publishers and retailers are already turning this into a new business model for PC games — which haven't worked as rentals before because they don't offer the plug-and-play functionality of console games.

“We're really in the infancy stage of digital distribution, but you need to have ubiquitous broadband access and hard-disc storage to make it compelling. The bottom line is that packaged games and the retail experience aren't going away,” said P.J. McNealy, video game analyst, American Research Technology.

Others, like video game analyst Simon Price of the International Development Group, don't believe that the digital distribution of games will have a major impact on the retail sector in the next five years.

“To the extent that digital distribution is a threat to retail, retailers might support digital distribution as a hedge against the possibility of their brick-and-mortar business declining,” Price said.

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