Playing With the Pipes: Broadband's Untapped Potential

Electronic Gaming Business, May 21, 2003

Game publishers and even online game download farms and trailer services may be overlooking a very attractive marketing partner, high speed access ISPs. After years of slow but steady growth that never quite lived up to the hype, broadband will be in 86.1 million homes worldwide by the end of this year and 154.3 million by the end of 2005, says tech research firm eMarketer. But the good news for content providers such as game makers is that broadband in the U.S. needs compelling content and the ISPs need some key differentiators like games.

The McKinsey Group's recent report on broadband argues that users are upgrading their pipes mainly for faster general Internet access. No killer app had emerged for the medium, the key selling point to broaden reach beyond those who want their usual Web sites and email clients to load faster.

The next stage of broadband growth must rest on content, according to McKinsey: "Network operators, rather than striving to find new killer applications on their own, will have to collaborate with businesses in other fields to stimulate new content and applications. Such partnerships will probably involve the development of new business models to share revenues fairly."

All stats point to gaming being a core online activity that broadband ISPs will want to promote. According to Ipsos-Reid, 38% of Internet users say they have played a video game online, right behind music downloading (38%) and sent or received pictures or video (68%).

Bandwidth Hungry

We think a number of factors will drive ISPs to look for content partnerships and put gaming publishers in a good position to deal. First, broadband isn't a local monopoly anymore. As DSL services proliferate, cable ISPs gain a powerful new competitor in local markets, and content becomes one of the best places to differentiate them.

Second, unlike cable TV, high speed access has no premium pricing, no way to mine further revenue from the customer beyond the monthly fee. ISPs will be looking for specialized content that they can bundle and upsell.

Especially good for gaming is that most high speed access providers are experimenting with tiered pricing based on use, since often a small percentage of customers are responsible for a disproportionate amount of bandwidth usage. ISPs already know that online game play is a high bandwidth activity, and some even fear the amount of additional capacity gamers can demand. Under a tiered pricing model, however, gamers could become prized customers who do indeed pay more, exactly the customers ISPs will want.

U.S. broadband households will grow to 24.2 million this year, 30.3 million in 2004, and 36.5 million in 2005. The good news for game makers is that while the U.S. had 17.2 million broadband households in 2002, that still amounted to a penetration rate of only 15.9% of total households. U.S. penetration will hit 32.2% by 2005 with a total broadband audience, not just households, of 73 million people. There is room for real growth here, especially if consumers associate high speed access with specific content and services. Korean high speed penetration is approaching 50% of households, in large part because Koreans are among the heaviest users of online gaming in the world, one of the core applications Koreans associate with broadband.

McKinsey research put the percentage of online households already using broadband at 27%, with substantial room for growth. Of those already accessing the Internet, 22% are willing to upgrade.

Getting In Early

While Sony Online Entertainment told EGB that it had no co-marketing arrangements with broadband providers, the PS2 arm of the company has begun demonstrations of running AOL services and content via the PS2's online service. Surely AOL will be using PS2 connectivity as a marketing tool as it struggles to get its own subscriber base upgraded to the broadband ISP product.

Casual game and advergaming publisher WildTangent is already in place with Verizon, CableVision, and others providing the games channel at these ISPs' home pages. Wild Tangent shares revenues on demos that convert to sales. According to Mark Kelly, marketing manager, WildTangent, these same ISPs also buy full versions of the company's shareware games in bulk and offer them to subscribers as value adds to increase customer retention.

Broadband ISPs also seem ripe for partnering with online persistent world games such as Anarchy Online, Sims Online, or Planetside. In fact, according to sources at Disney Interactive, that company currently is shopping around a bundle of Disney's online broadband content, including the upcoming ToonTown online game, which broadband ISPs could wrap into their services and marketing. Other online persistent world games could offer ISP customers reduced pricing or multi-month free trials.

Clearly, broadband is here and in the home. But unlike previous media like cable TV and radio, this technology is just a big, fat dumb pipe. Once the cable and DSL providers are done selling the idea of faster email and snappier Web site performance, they need compelling content like gaming to make their case with customers.