April 27, 2009 • DFC Intelligence is releasing a series of reports that deal with emerging models in the game industry, built around the opportunities provided by digital distribution and online game play. The most established of these areas are high-end subscription massively multiplayer online games (MMOGs). These long established products are now some of the most profitable segments in the entire game industry. However, the evolution of MMOGs has occurred outside what one normally defines as the traditional video game industry.

Video game development has traditionally been funded by the large publishers that have distribution relationships with retailers. These include such companies as Electronic Arts, Activision (now Activision Blizzard), THQ, Take-Two Interactive, Ubisoft, Atari/Infogrames, Sega, Capcom, Konami and several other players including the console manufacturers Microsoft, Nintendo, Sony. Starting with Ultima Online this was the original model for high-end MMOGs. Electronic Arts developed Ultima Online via its Origin Systems division and promoted the game heavily at retail.

In the early 21st century, retail focused publishers began to sour on the whole online game model, including MMOGs. MMOGs were too expensive and risky and the need to maintain the game as a service after it shipped was too much of a headache. Most publishers started to abandon the MMOG business. Electronic Arts had several high-profile MMOG failures, including The Sims Online, while most other publishers cancelled or sold off their MMOGs in development.

Without the large publishers, the MMOG space was left open to venture funded startups and Asian online game companies such as NCsoft. Companies like Turbine (Lord of the Rings, Dungeons & Dragons Online), Sulake (Habbo Hotel), Jagex (Runescape), CCP Games (EVE Online), Funcom (Anarchy Online, Age of Conan), Realtime Worlds (APB) and others were able to raise funding and launch their products outside the traditional retail publishing model.

The success of World of Warcraft changed the attitude of publishers. The traditional game publishers are struggling with a retail model that is increasingly broken as it depends almost entirely on a handful of large hits. To diversify, their offerings in an age of digital distribution, retail publishers need products like MMOGs that can generate large amounts of revenue over a period of years.

The traditional game publishers are getting back into the MMOG space. Most notable was Activision’s 2008 merger with MMOG developer Blizzard in a deal that arguably valued World of Warcraft at $8 billion. Other publishers like Electronic Arts are buying independent MMOG developers. In 2006, EA bought Dark Age of Camelot developer Mythic Entertainment, namely for the Warhammer Online game which launched in late 2008. In late 2008, struggling publisher Atari bought Cryptic Studios, an MMOG developer working on Star Trek Online and Champions Online. Other publishers like Ubisoft have expressed a desire to get back into the MMOG space they once ignored.

What is uncertain is whether the traditional retail publishers are too late to the online game party. Retail presence is important for major MMOGs, but not critical. Furthermore, MMOG developers can self-publish a title and simply use the distribution resources of publishers. This allows them to keep most of the revenue and profits, as the publisher/distributor only gets a share of the initial box sale. Funcom used this model for Age of Conan, with SCi/Eidos as a retail distributor. Turbine did the same with its games, using Atari, Codemasters and Midway. EVE Online’s original 2003 retail release by Simon & Schuster may have helped build awareness for the title, but it was CCP’s own online distribution which nutured the MMO to success. It took until 2009 before EVE Online got another retail distribution, after it had already built up a subscriber base of over 280,000 (Atari was the distributor).

The other major new player in the MMOG space are media companies looking to license their entertainment brands. Historically, these companies would license their brands to a traditional game publisher and let them handle development. This does not seem to be the model for the MMOG space as entertainment brands now seem more inclined to work directly with the developer and leave the retail focused game publishers out of the equation. Disney is developing its own MMOGs in-house, Viacom partnered with Nexon and acquired Internet companies like Neopets. Lego Universe and Marvel Entertainment both picked startup MMOG developer Gazillion Entertainment to develop their properties into MMOGs.

In short, it appears that, with the exception of Activision Blizzard, the MMOG space has left the traditional retail publishers out in the cold. Publishers who can adapt to the service-based possibilities of MMOGs and other online products, while keeping their retail strength, will be best positioned for success. However, it is a major question whether today’s publishers can make the leap to a service-oriented online business.

MMOGs are some of the most complicated and expensive games to develop. It is estimated that it would take a minimum of $30 million and three years to develop a high-end MMOG. The cost of developing and launching an MMOG is only the start. When a game is played online 24 hours a day/7 days a week, one must also consider the ongoing costs to continually present the game to the public, maintain and refresh it over time and provide customer service. Traditional game publishers and developers are simply not used to the ongoing service nature of the MMOG business. MMOG developers and operators specialize in maintaining an ongoing service.

For any online game, there are three main categories to this cost equation:

• Network Operations, which minimally include hardware and software, i.e. the servers, routers, operating system, databases, et al; bandwidth, or the capacity to send and receive data to and from players, and; the people necessary to keep that hardware and software running on a consistent, reliable basis.

• Game Operations, which include fixing bugs and modifying design flaws, adding features, designing and releasing new Add-Ons for the product and maintaining and adding to the infrastructure tools, such as in-game chat and messaging capabilities.

• Customer Service, which involves everything from telephone, email and Web technical and player support and relations to designing and running in-game events for the players.

The cost structure of MMOGs have changed quite a bit over the last several years. While bandwidth costs (network ops) have fallen, the game operations cost segment has risen. Customer service costs remain about the same. As MMOG player sophistication has risen, players have begun to expect more content for their subscription. The live development team must constantly add new content for the most hardcore players. This content includes small, generally free content releases as well as larger, generally charged-for expansion packs.

The cost of actually operating the game can vary greatly depending on a number of factors and choices. These include the hardware, software, host sites, bandwidth (which is generally a variable cost that rises as your data-transmission totals rise, not the flat-rate that many seem to believe it is), the number of network operators to watch it 24 hours a day, the number of people to man the phones and read and respond to emails, the size and structure of the crew of in-game CS representatives to handle problems and bugs, and the community-relations people.

Almost every MMOG launch has had some major problems. Even World of Warcraft, the fastest growing MMOG in history, had some problems that led Blizzard to temporarily stop selling the game at retail as it upgraded its back-end infrastructure. Some games continue to experience these problems several years after launch. The type of problems can be broken into 1) technical mistakes; 2) support mistakes and 3) community relations mistakes.

Most of the poor launches were the result of unstable technology that featured flaws any publisher would be embarrassed to ship in a solo-play retail product, and which could not handle the load of simultaneous users trying to access the game during the first few days or weeks of the launch. It is not that the development teams were inexperienced or unmindful of the technology per se; all of them understood perfectly that they weren’t stable enough for launch. Where their inexperience really hurt was in believing that the problems would be easy to fix and that the customers would wait patiently while this was done. Of course, there is also the pressure from management to get the product out the door so one can start seeing a return on investment. So they launched the games anyway, warts and all.

As history has shown the industry, it always take longer to fix the technical problems than originally thought and players are anything but patient. The first impression, and the most lasting, has been of technical incompetence.

Even under the best circumstances, publishers tend to underestimate the number of support staff that will be needed and the amount of training they will require. There is always more email and more in-game help petitions than anyone imagined there would be, and knowing how to deal with the unique customers that comprise the online gaming community is an acquired art. The staff starts out overwhelmed and has a tough time catching up. It can be done, but it is not easy and usually takes weeks or months. When combined with a series of technical mistakes, these problems are greatly magnified, until the whole structure falls apart and becomes ineffective.

If problems develop at the launch and continue for weeks, as has been the experience of the industry as a whole, relations between the team and the players can quickly break down to the point of open warfare between them. It takes a steady and experienced hand to keep outraged players at bay with one hand and get answers from the team with the other. What has more commonly happened is that, after a period of open warfare, the team simply stops communicating with the players except for the occasional set of patch notes or press release. Add all this inexperience up and you end up with a game in which the players have a lasting perception of professional incompetence and a team with contempt for the players who are paying the bills.

Companies with successful MMOGs have spent years grappling with these issues. The current MMOG industry did not explode overnight, but is instead the result of over thirty years of game design and development history. Next month we will take a more detailed look at that rich history, which is a far different evolution than the traditional retail publishing model.