Game of Survival

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Is the computer-game industry, like a precocious teenager, growing up too fast and starting to hang out with the wrong crowd? Could the Internet be a dynamic factor that will bring it back to its inventive roots? And who, exactly, is the future consumer?

I discussed these topics recently with game designer Jeff Sullivan. Sullivan and his partner, Bruce Onder, through their company

Digital Arcana

, have designed such critically acclaimed games as

Temujin

and

Spycraft

, the

Activision

product that involved the late

CIA

Director

William Colby

and former

KGB

head

Oleg Kalugin

.

Over the past nine months Sullivan has become concerned over what he calls the game industry's "very obvious trend toward becoming too much like the film industry too fast." It's a blockbuster mentality that concentrates on a very few hit games, which tend to be sequels or imitations of other hit titles.

Like the mainstream film industry, sales are driven by press coverage and promotion. More and more, according to Sullivan, the industry press is pushing toward big events, devoting disproportionate space to games that aren't even out yet. Worse, with 75% of the coverage going toward 10% of the titles, it has become difficult for smaller, innovative companies to get any attention.

This becomes exacerbated when they compete for shelf space in a limited number of megaoutlets. "The

CompUSAs

(CPU)

and

Best Buys

(BBY) - Get Report

," says Sullivan, "are looking for either a big product buy or a discount, which requires a big publisher." And the publisher must pour most of its advertising and promotion into those titles to ensure a hit.

While overall revenues are still going up, there is a danger that the innovation that gave birth to this industry is being stifled. "This is a departure from where we were even a few years ago," says Sullivan. "For an industry in its infancy to be emulating a relatively mature movie market whose business models are by no means all that healthy is a dangerous thing."

So how does the Internet effect all this? In terms of PC games, it serves mainly as an extension of the mainstream press, disseminating information and delivering free demos of big titles. But for a growing number of online-only entrepreneurs, it offers some intriguing possibilities.

As Sullivan points out, "It allows smaller companies to distribute a game without having to manufacture 500,000 CDs, put them in boxes and sell them in CompUSAs -- which they might not be able to do even if they were willing to spend the money."

The biggest challenge, not surprisingly, is getting people to start paying for what they have been getting for free. "Selling a product over the Internet is very difficult compared with selling a lifestyle or a service," Sullivan points out. "What you're paying for is match-up services, league structures, competition, community building. You're paying for the experience of playing the game, rather than the game itself. It seems like a semantic distinction, but it's a very big one."

Sullivan points to

Simutronics

, which makes

Gemstar 3

, and

Kesmai

as examples. Both started with

AOL

(AOL)

, where they were able to take advantage of a consumer base that was used to paying for content -- but both have since migrated to the Web.

Increasingly, successful online companies are looking for multiple revenue streams. Sullivan points to

MPlayer

, which has an annual subscription fee, along with banner advertising, merchandising at retailer levels and colicensing arrangements. "The bottom line," he says, "is that there still is no single revenue stream that is a guaranteed winner."

Finally, there is the question of growing the audience. Most manufacturers still aim at what they consider the "core gamer market" -- hardcore players who are technologically savvy and not intimidated by the substantially difficult set-up procedures that are required to play online. Their number is estimated at 2 million to 4 million, compared with an estimated 138 million who surf the Web. The big problem in bridging the gap between the core gamer audience and the mass market is that the core audience demands all the latest technological gadgets, which the mass audience may neither have nor want.

Sullivan sees a future in trying to broaden the audience with games that are innovative in the sense that they are entertaining and share a common experience, even if they don't contain all the latest bells and whistles. He points to

Deerhunter

by

Wizard Works

, which was technologically limited (it simulated deer hunting) but sold over half a million units, mostly at

Wal-Mart

(WMT) - Get Report

. Sports, in general, seems one area that links core gamers to a wider audience.

Finding that wider audience will be a key toward growth in the games industry. The question is will the industry shoot itself in the foot by adopting mass-marketing techniques for an audience that -- at least so far -- remains small and specialized?

Michael Katz is a novelist, screenwriter and producer who lives in Los Angeles. Previously he has worked as a banker and financial analyst.