Top of the Digital World

The videogames industry regularly seeks flattering figures which demonstrate the growth of games relative to other entertainment sectors. How often, for instance, have we heard various odd statistics being cited by games business luminaries, apparently demonstrating that videogames now create more revenue than cinema tickets, or specific sub-sets of DVD or music sales?

In general, these comparisons all fall down at a rather important hurdle - namely that they're all founded more on spin than on reality. Much as we'd like it if videogames could legitimately claim to be a bigger market than music or movies, that simply isn't the case. Pointing out that videogames are bigger than certain sub-sectors of those industries is like saying that your favourite sports team won their last match, as long as you don't count all the bits where they lost.

However, a new report this week from market research firm Strategy Analytics does reveal that in one sector, at least, videogames are genuinely more successful than other entertainment media. That sector is online - and the revelation that games are creating more revenues online than music or movies should turn heads, and stimulate debate, across the industry.

The importance of this report comes chiefly from the fact that it will be quite unexpected to many senior figures in the industry. For several years, a wide selection of videogames executives have opined either privately or publicly that digital revenues in this sector will be slow to mount up - and will, inevitably, trail revenues from music, if not movies.

The logic here is simple enough. After all, online music distribution - of the illegal variety - has long been more popular than online videogame piracy, simply due to the file sizes involved. As such, in theory, the basis for successful online distribution of music is more clear - the file sizes are small, the prices are low (under a dollar, in general) and the audience, clearly, is there.

In the four years since Apple launched the iTunes Music Store - by far the most popular online distributor of music - the service has sold 3 billion tracks. That's a solid achievement (enough to make iTunes into a top three distributor of music in the USA, behind only Best Buy and Wal-Mart), but still represents shy of 3 billion dollars of revenue in the entire lifetime of the store.

By contrast, Strategy Analytics reckons the online videogames market to have been worth 3.8 billion dollars in 2006 alone.

There are a number of reasons why videogames are making more money online than music. The first and most straightforward reason is that while music files may be smaller and easier to distribute, videogames players are generally younger and more technically savvy.

They are more prepared to do things like installing applications that slowly download games in the background or overnight, or to fix settings on their internet connections that enable peer to peer software like BitTorrent. Measures like these make file-size, if not irrelevant, then certainly less important than had first been assumed.

However, the real reason for the success of online gaming revenues lies not in the flexibility of its audience, but rather in the flexibility of the medium itself. Where the music and movie world is focused on very well established formats and products - buy a single, buy an album, buy a movie - videogames can span a huge range of different products.

Some of those products have proven more appropriate for the online market than others. Casual games, for example, have turned out to be hugely popular online; some with tiny file size footprints, some simply playing in a web browser with no file download involved at all. At the other end of the spectrum, a big-budget, AAA title like Half-Life 2 seems like a very traditional boxed title - but developer Valve has cleverly turned it into a modular product, full of optional game modes and add-ons which can be mixed and matched over a digital distribution service in a way that would never be possible in a boxed game.

Perhaps most importantly, however, videogames have demonstrated that they are ideally suited not just to being products - but also to being services.

Services, it could be argued, are where the real money exists online. Music and movie firms have experimented with service models for digital distribution - but by and large, consumers hate them. Services that demand a monthly payment to be able to continue playing music are deeply unpopular, for obvious reasons - and similarly, monthly charges for online "rental" of music and movies have thus far turned out to be something of a damp squib.

Games, however, justify their service charges by - well, by actually providing a tangible service. A large chunk of that 2006 revenue figure belongs to World of Warcraft, of course - with bites around the edges from plenty of other online services operated by publishers including NCsoft, Square Enix and Sony Online Entertainment.

As videogames, massively multiplayer titles are in their infancy to some degree - trapped in a cycle of carbon copy design decisions which alienate huge swathes of the potential audience. However, as a business model, they are pioneers on the digital frontier. Persistent worlds and the social interaction which goes on within them are unique to videogames as an entertainment medium, and go a long way to explaining why online consumers are voting with their wallets for this industry, rather than its rivals.

More than anything else, this news should encourage publishers to redouble their efforts in the online space. It's clear that digital distribution and service offerings are something which cannot be dismissed as tomorrow's challenges any more. These are now the challenges of today, in every way that matters. Online strategy is one of the key battlegrounds in which the winners and losers of the next five years are to be decided.