In for the skill- 2004-11-03

With skill games marked as the next big cash cow, can winning while having fun really be the way to make money from the mass market?

Spectacular growth, increased maturity and dramatic change have been the bywords for the skill gaming segment of the online gaming industry. In the past year there has been a large increase in the amount of content available to consumers, with the number and variety of games increasing significantly from last year.

There is no doubt skill-based products came into their own as a major source of revenue in 2004. First championed by sites such as RealArcade, Shockwave.com, Yahoo! Games, Pogo, and Microsoft’s MSN Zone, other online publishers have quickly followed their lead.

A nose for business

With this growth the segment began to attract the interest of the egaming sector. Increases in downloadable game sales, cash competition and new subscription models emerged to bring profits to those publishers smart enough to trim their staff, focus their marketing spend and finally make their games pay.

Already there have been signs of interest from egaming operators, with ukbetting and Golden Palace two of the bigger names to add skill games to their sites. Casino site Golden Palace signed a deal with software firm CES to tap into its SkillJam network of sites.

“Our key criteria in choosing a skill gaming partner was liquidity and player experience,” says Richard Rowe, chief executive of Golden Palace. SkillJam, an existing network of pay-per-play and subscription-based gaming sites, was bought by CES earlier this year. This link-up between a previously gambling-orientated firm and one of the leaders in the skill gaming sector is a sure sign of the way things are headed, according to Fay Hamilton, PR and promotions manager for research firm Screen Digest.

“We anticipate one of the major trends in online gaming will be increased commercial and corporate alliances with online gambling companies to tap into their user bases,” Hamilton says. She adds that while online skill gaming is predominantly a North American phenomenon, Europe is beginning to drive growth of the overall market.

But what are people playing? Interestingly, the report found the simpler games had the most potential. It discovered online card and puzzle games would generate revenues 1.5 times greater than those produced by the multi-player online video game sector by 2007.

According to Screen Digest, simple browser-based ‘tournament’ style games where users pay to enter is “the hottest sector” right now. Pay-per-play gaming was worth US$137m in 2003, and is forecast to grow at 40% a year with the market expected to be worth US$1.2bn by 2007. Most of these ‘pay per play’ games are written in Java, Flash or Shockwave, can be developed quickly and cheaply and have a far broader appeal than online video games.

But are Screen Digest’s projections erring on the hysterical? Patrick Smyth, president and director of CYOP Systems International, doesn’t think so.

“The comments are not premature when you consider two segments that have not been properly factored into the potential numbers. The first is the growth of console gaming, which is still trying to define its online role. With the adoption of universal broadband, players will be able to better compete online for more than just bragging rights, and video game publishers will build games more suited to cash tournaments. CYOP already has a system built specifically for this purpose.

“The second is the Asian market, which is not really understood. In China, people go to internet cafes and play online games on their spare time, and in South Korea great gamers are treated like rock stars!”

He points out almost everyone under 40 has played online, and a total of 58% of Asian internet users regularly play games online. Young people are enthusiastic followers of pro gaming. They watch games on TV, write fan mail and request autographs from pros.

And the number of internet users in the Asia-Pacific region is increasing at an unprecedented rate and is expected to surpass those in the US by 2005.

Smyth concludes: “This is where the value of skill games lies, and one of the main reasons for CYOP’s venture into Asia with Sina.com Games.”

Gil Arbel, vice-president for business development at Zone4Play Interactive Gaming, says, “We are looking for skill games to take a large portion from the online games market, specifically in North American where the play-for-cash legality of skill games will drive online gaming as happened with peer-to-peer. iTunes got the traction as will happen with skill games.”

For him, the true value of skill games on the internet is they capitalise on the basic need for people to prove they ‘know better’ and get paid for it. And Arbel forecasts trivia, card, tiles and word games will be the cash generators of the future.

Integration with online gambling

Although a somewhat predictable sideline, the pay-per-play distribution trend has been a promising sign of an integration of skill gaming with online gambling sites.

Pay-per-play gaming has clearly reached a stage where its size and proven business models have begun to register with gambling companies as both a long-term threat and an opportunity. Independently-conducted research by online gambling company Peak Entertainment found 55% of its sample customer base were aged between 40 and 59, with 47% of its online gamblers playing online skill games.

Skill games fall into a variety of categories and the main challenge for operators is the removal of chance from gameplay. Some games that feature chance can be brought under the legal definition of a skill-based game by simply presenting each player with an identical starting line-up, even if the line-up is selected at random.

This concept can be extended even to some traditional casino games. Poker can, for example, be turned into a skill game by presenting the same initial hand not to all the participants of the same table, but to one of the participants on all the other tables. In this scenario, winners and losers are determined by how they fare against the participants on the other tables who were dealt the same initial hand, rather than how they fared in relation to the other participants on their own table.

Future success is based upon the continuing growth of the market, including consumer acceptance of purchasing online, increased internet connectivity and better understood consumer characteristics. Product design and consumer behaviour are critical to success, as are factors such as replayability, low learning curve and addictiveness.

Customer segments

Women aged over 40 continued to be the driving force behind web and downloadable skill games in 2003. A recent AOL study found that even though men spend more time on the internet each week than women (23.2 vs 21.6 hours), female gamers aged over 40 spent the most hours per week playing online games (9.1 hours or 41% of their online time vs 6.1 hours for men). This demographic was also more likely to play online games every day than men or teens of either gender.
Screen Digest also attributes a large portion of skill games growth to the ‘bored housewife’ market. Nick Gibson, a games industry analyst and the author of the Screen Digest report, says: “Amazingly, every single one of the major casual games service providers reported this growth was being predominantly fuelled by middle-aged and female gamers.”

Females make up 65% of the growing market in skill-based ‘casual games’, which was estimated to be worth US$485m in 2003. Screen Digest forecasts the total online computer games market will be worth US$1bn in 2004 and reach US$2.5bn by 2007.

Let the games begin

For the US, skill games offer a legal avenue and revenue stream for games. In June, Connecticut-based LuckyGamer launched an online skill gaming destination for players to compete against each other across a number of popular casual game tournaments for cash prizes. As an operator of skill-based games, LuckyGamer is legal in almost every US state for players aged 18 and over. LuckyGamer’s initial offering includes seven games, based on popular parlour, classic board and classic video games: 9-ball pool, 8-ball pool, chess, backgammon, Sub Hunt, Chain Reactor and Quadrow. All can be played individually or as multi-player tournaments.

“Online games are the third most popular activity on the internet today,” says Rick Perrone, chief executive of LuckyGamer. “LuckyGamer’s suite of popular casual games, with a robust community network and a player ranking system, add up to make LuckyGamer a professional-level online tournament destination. Gamers of every skill level can compete to win prizes and cash, meet and make new friends and have lots of fun along the way.”

But, according to CYOP’s Patrick Smyth, this sector is still in its infancy and will evolve as the market matures. “For the moment, the simple Java games have been most successful with games such as solitaire, mah jong, snooker and golf. Arcade classics such as Tetris, Asteroids and Donkey Kong will be the next wave as Generation X sees the potential to play for money on an interactive platform.

“And the future lies with 3D game platforms such as Quake or NASCAR, adventure games such as Diablo, strategy games such as Command and Conquer and sports action games such as John Madden’s Football. Ultimately, top-selling mainstream games will be playable online for cash.”

Types of Games

Web-based and downloadable games are easily grouped into genres based around basic motivations to play.

• Action/arcade. Action games are fast-paced and require constant attention, coordination, and quick reflexes. They tend to require less strategic thinking than other genres.

• Board/card. These include – and are also called – ‘classic’ card and board games.

• Casino. The casino genre (separate from online gambling) is a mainstay of online games. Their ease of play and widely-known rules make them great entry-level games. Popular games include slots, blackjack and video poker.

• Puzzle. The puzzle genre dominates web-based games; in no other medium are they so popular. The distinction between ‘puzzle’ and ‘action puzzle’ can be arbitrary, but most people consider puzzle games to be free of time pressure whereas action puzzle games force the user to think on the run.

• Word. Quiet for the past several years, the word game genre started gaining momentum in 2003 with the launch of PopCap’s Bookworm game in May and then Atari’s Scrabble coming onto the scene in December. It is now considered one of the most prominent genres of web-based games.

• Strategy. Games of strategy, tactical squad games, war games and trading games are increasingly drawing appeal. These games face an intrinsic difficulty in that if the pace of the action slips, then the user will lose concentration and find something outside the game to click on.

• Pet management. This is not necessarily a true genre, yet virtual pet management has been rising in popularity over the past few years. Users create and raise a virtual pet, selecting various methods of care to mould the pet as desired.

• Advergame. Although more a business model than a genre, the advertisement game or advergame exploded in popularity last year. These games may contain broad, deep game play, or may be reduced to a single scenario and test of skill or knowledge. The simpler examples might even run inside a banner or pop-up ad, while fuller games are featured beside other web games on portals. Advergames seek to draw immediate attention to a brand. They are intended to achieve massive viral appeal or repeat play from a target audience, and the successful ones achieve both. Once the player engages, they have effectively clicked through an advertisement. Because they must load and play immediately, advergames are often developed in Flash with minimal assets.

Operator and publisher trends

• Innovation is king. Though there are definite advantages in associating with a brand, in general copycat ideas have a limited success and a diminishing return

• As the number of developers in this space has grown, so has new product availability. This looks set to continue

• As room for distribution channels is not unlimited, choose the right destinations for your market, be it mass or niche

• Visibility, branding and attentiveness to customer will make the most of any user base.

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