Online Gaming a Broadband Play -- and Maybe a Narrowband One as Well

Broadband ultimately should make online gaming even more compelling, but offline console-based games are heating up now.
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These virtuous cycles are great.

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.

I do a column on some emerging trend, and you respond with a bunch of new ways to play it. Some of these inspire new columns, which in turn generate more good responses, ad -- apparently -- infinitum.

My Nov. 5

column looking at broadband's winners, for instance, drew this from reader

Erik Blakkestad

:

Broadband is the final piece to the online gaming bonanza. ... It really doesn't take a lot of imagination to see where the multiplayer online gaming world is going. Wanna be a middle linebacker in a multiplayer "John Madden 2002" football game? Just log on. Wanna go vampire hunting in a multilevel dungeon with your online buds? Just log on. ... The online game revolution will coincide with a lot of other broadband-dependent advancements in music, video conferencing, etc.

As the father of a 6-year-old who would pretty much live in front of his computer screen if we let him, I saw the logic of this right away. So I made some calls and found that the optimistic take on broadband gaming goes like this:

Game files often run 500 megabytes or more, far too big to download with a 56K modem. But with cable modems and DSL (high-bandwidth Internet connections now becoming available in most parts of the U.S.), direct download of games might be feasible. This will both lower prices and spur a lot more impulse buying.

Meanwhile, "massively multiplayer" online gaming, where you log on and play against other people rather than the game itself, is getting hot. Already there are tournaments where players from around the world chase what's starting to look like real money. The sport's biggest name, Dennis Fong, a.k.a. Thresh, claims to have won more than $100,000 so far.

Here again, 56K is the limiting factor. There's a slight signal delay over a standard modem, says Peter Voelzke, an editor with online gaming site

Game Daily

. "A person

of equal skill who plays over a cable modem is going to win 99 times out of 100." But level the playing field with widespread high-bandwidth connections, and you've got a sports circuit that might rival tennis or golf in energy and prize money, while pumping up demand for software and game consoles.

And how about this, from a recent issue of

Electronic Gaming Monthly

magazine: "

Sony

(SNE) - Get Report

maker of the popular PlayStation game console has skipped over conventional modem technology, deciding instead to wait for broadband networking to catch on. In 2001 (or later), Sony will begin its e-distribution model, which includes network gaming, chat, email and shopping." Research just about any other video game company, and you'll find similar tidbits.

But here's where the story takes an unexpected turn. Since everyone points to

Activision

(ATVI) - Get Report

as the game maker with the most aggressive online strategy, I called CEO Robert Kotick, expecting some capstone quotes from the guy leading the charge to broadband. Instead, I got a bucket (OK, a tumbler) of cold water.

"It'll be five to seven years before

broadband starts to have a real impact," says Kotick. And even then, direct download won't be the main delivery system. "I have DSL in my house, and it would take me less time to run the New York Marathon than to download 600 megs." Meanwhile, game files keep getting bigger. "We're regularly shipping products with two or three CDs," implying one to two gigabytes. (One gigabyte equals 1,024 megabytes.)

He also notes that two-thirds of his company's software is played on game consoles rather than computers. And even the next-generation Internet-enabled consoles won't come with much storage. So you'll still have to buy and insert the disc to play online. DVD-ROMs (which hold about nine gigabytes) will therefore be the game delivery system of choice for years to come, and software retailers will survive after all. "There are 20,000 retail points of software distribution today. There will be 20,000 retail points seven years from now."

Online gaming, meanwhile, will boom whether broadband is ubiquitous or not. "'Quake III,' which we'll release sometime this year, is probably the most meaningful new multiplayer product ever," says Kotick. And Activision's upcoming "Star Trek" game will be a "massively persistent universe" that subscribers can enter and leave at will. Both, Kotick says, will play just fine with standard modems.

So is broadband the key to the gaming investment thesis or not? Here's a best-of-all-possible-worlds answer: In the short run, gaming will boom regardless, as Sony,

Sega

and

Nintendo

bring out a new generation of consoles and software companies churn out new titles. Sales are growing at rates of 20% to 30% for most of the leaders, and everyone expects this Christmas selling season to be the best ever.

Microsoft

(MSFT) - Get Report

, meanwhile, is developing a new console technology that will run a simplified version of Windows and will be licensed by PC makers. So expect a new slew of cheap machines to drive down prices and expand the market even further.

That's a mixed blessing for the console makers, who will be selling more units at declining prices, but great news for software companies. Which takes us back to the same recurring theme: Broadband's winners are the content guys. Besides Activision, you might want to check out game designers

Electronic Arts

(ERTS)

,

GT Interactive

(GTIS)

,

Take-Two Interactive

(TTWO) - Get Report

,

3DO

(THDO)

and

Acclaim Entertainment

(AKLM)

.

And last but not least is

Digital River

(DRIV) - Get Report

, which runs the online stores of some of the major software companies and is partnering with Activision to do something interesting: By combining its fulfillment capabilities with Activision's expertise in building online game environments, it's offering smaller software companies a quick way to take their hottest games online.

John Rubino, a former equity and bond analyst, writes a column on mutual funds for POV and is a frequent contributor to Individual Investor, Your Money and Consumers Digest. His first book, Main Street, Not Wall Street, was published by William Morrow in 1998. At time of publication, he had no position in any stocks mentioned. While Rubino cannot provide investment advice or recommendations, he invites your feedback at

rubinoja@yahoo.com.