Online Gaming For Fun And For Profit

There’s a thought-provoking article in this week’s Economist about the spectacular growth of online video games. The highlights:

[In 2002], Americans spent over $6.9 billion on games for a personal computer (PC) or a console (ie, a television-based unit such as Microsoft’s Xbox, Sony’s Playstation, or Nintendo’s Gamecube). Polls show that more than half of all Americans above the age of six play video games. Nor are the players all spotty teenagers: in 2002, 42% of console-game buyers and nearly two-thirds of PC-game buyers were over 36. A poll for the Entertainment Software Association said that 26% of all gamers are women: video gaming, it seems, is a more heavily female pastime than subscribing to The Economist print edition (just 8% of its subscribers are women). Young men dominate professional gaming, but that is bound to change, just as women broke into the previously male world of professional poker as the game became more popular and respectable.

We’re thrilled that the Economist is effectively validating a guilty pleasure of ours—we defy any of our readers to match our mad Halo skillz on a PC/mouse set-up, and we’ll gladly challenge some of you to some Rainbow Six action as soon as we pick up our copy—but (wearing our business hats for a moment), we were more intrigued by the Economist’s description of gaming for fun and for profit. Specifically, the Economist described something called “the World Cyber Games” that was held in Seoul, South Korea this summer, where video gamers competed for cash prizes and rewards:

On October 18th the fourth annual World Cyber Games (WCG) in Seoul ended with Germany victorious over 600 competitors from 55 countries. The German team will split a $350,000 purse stumped up by the South Korean government and by several corporations; Samsung alone spent $12m to back the tournament. The team had to beat a field of about 300,000 to qualify; Britain’s qualifying tournament saw about 10,000 people vying for 15 spots on the national team.

Reading about the popularity—and the size of the purse—of online gaming got us to thinking: how long will it be before Microsoft, Sony or Electronic Arts start holding online tournaments with significant prize money as a way to generate interest in their games? Imagine playing in a Madden online where the winner could garner cash (or other) prizes. Similarly, what about a basketball game that culminates every spring in an online tournament that parallels the NCAA’s march madness. Not only would such events further accelerate the growth of online gaming, they might provide marketers with another way to reach customers: e.g. Anheuser-Busch or Miller could sponsor the NCAA tourney as a way of reaching ever-so-hard to contact 21-34 year-old males. There’s already a huge number of individuals who attend LAN parties (events where sometimes as many as 128 users lug their computer gear to a rented space to play games in close proximity with one another over a lag-free LAN) where cash prizes—usually in the range of $500-$1500 are awarded, and it would seem to make sense for corporations to start sponsoring such activities. At the very least, it would certainly generate some buzz, if only because it would be so unusual (at first).

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The Thirty Threshold

We are professional observers--part social scientists, part marketers, part pop-culture voyeurs (frankly, it depends who you ask). And at the moment, we are captivated by Book of Ages:30 and their accompanying blog site "blog of ages". We are captivated not only because the authors of the book have created a multi-platform, grassroots marketing effort that is a bellwether for successful trade publishing in the years to come but also because the authors of Book of Ages:30 have launched a product that is designed around a straightforward, powerful human truth--"the thirteith birthday is perceived to be a liminal point both in ones personal development and in his/her transformation into adulthood". This common perception is laden with emotions, both positive and negative---and therein lies the success of Book Of Ages:30. For often when one has a niche product/service that is fueled by both perception and powerful emotion the cornerstone of a profitable brand is laid. Playing upon the "threshold" theme, Josh applies his BOA:30 filter to the recent news that Google is formulating plans to go public in a blog titled Googillionaires. In the blog, Josh Albertson suggests that the potentially $15 billion windfall to befall Google founders Larry Page and Sergey Brin is akin to another tech maverick's thirtieth birthday bonanza (we will keep you in suspense, check out Josh's blog). The BOA:30 sheds light on other 30th accomplishments and such as Edvard Munch's The Scream as well as insights into 30th shortcomings:

At 30, Harrison Ford was working as a carpenter, and neither Oprah nor Jane Austen had found fame.
Book Of Ages:30 is a fascinating "measuring stick" for those in or approaching their third decade of life. It also is seemingly a fascinating case study for building a grass roots brand. Time will tell.

Posted by Bradley Peacock | Permalink | Comments (1) | TrackBack

Hell Freezes Over For Apple, Part the Second

Yesterday we talked about the challenges Apple’s iTunes faced—razor thin margins, likely price competition due to the raft of new competitors entering the market—and briefly assessed the wisdom of Apple’s desire to use iTunes as a “Trojan horse” with which to spur iPod sales. (See this article for to hear the official Apple position on this decision.) Today, we’re going to subject the iPod to the same rigorous scrutiny and analysis, in order to argue that while the iPod is indisputably a cool product, it’s highly unlikely that it will be able to retain its present levels of profitability. We’re confident in this assumption for two reasons. First, Apple’s success in the market for MP3 players has attracted a wide array of large and small manufacturers who are gearing up to compete on the basis of cost, which will likely trigger a price war in this industry. Secondly, Apple no longer has the exclusive rights for the key resource fuelling the iPod’s success—an ultra-small, 1.8 inch hard-drive for Toshiba—a fact which will enable a variety of competitors to easily knock-off the iPod’s innovative design.

There are three main types of MP3 players available on the market: flash-based MP3 players, CD-based MP3 players and hard-drive based players. Flash-based MP3 players—like Creative’s Nomad Muvo NX
tend to be extremely small in size (think slightly smaller than an cigarette lighter) and fairly durable, making them ideal for, say, jogging or working out at the gym. However, their small size and durability comes with the tradeoff: these players typically can’t hold too much music (roughly 2.5 hours on a 128 MB player) and moreover, if you’re a hardcore audiophile, the sound quality of these devices tends to be closer to tape than to CD. They tend to be priced in the $100-$200 range. Although these devices have a future, their relative lack of functionality, and easy-to-replicate technology (most of these devices now run off of USB drives) mean that these devices will probably fall substantially in cost over the next year or two with competition, making it very difficult to generate profits selling these items.

CD-based MP3 players—such as the Panasonic SL-CT800 —are essentially MP3 players that are capable of playing MP3s directly off of a CD. Where’s the fun in that, you ask? MP3 CDs are advantageous inasmuch as they can contain as much as 720 MB worth of music in MP3 form—e.g. about 15 hours of music per disc—as opposed to conventional CDs, which play about 74 minutes. Secondly, MP3-based CDs are customizable, enabling users to create 15 hour mix tapes for themselves and their friends! The downside is that these devices tend to be large and cumbersome, with plenty of moveable and breakable parts—just like real CD players! Additionally, while 15 hours of music sounds like plenty of music, it isn’t enough to accommodate most users CD collections. Consequently, CD-based MP3 players aren’t a particularly compelling long-term product to manufacture.

The most popular segment of the MP3 market—and the market that the iPod dominates, with 31% market share—are hard drive based MP3 players. Hard drive based players have been around for a few years—ever since Creative launched the 6 GB Nomad Jukebox in the summer of 2000—and were initially appealing to hardcore music fans who needed a way to lug a large music collection around the world with them. (Early hard-drive based MP3 players could hold as much as 120 hours of music—a pretty impressive amount.) However, these early players sounded much cooler than they actually were—they suffered from atrociously short battery life (about 2.5hrs to 4hrs), were very large and bulky (making them inconvenient for travel or use on the go) were fairly fragile (if dropping a CD player was bad, imagine dropping a hard-drive!), and suffered from overly slow and cumbersome interfaces. Even despite these limitations, there was a fairly receptive market for a hard-drive based MP3 player, and a fair number of users shelled out $300-$500 for the early versions of these devices, eager to fill them up with MP3s from their collections and other unnamed online sources.

Apple was one of the first significantly big and reputable firms to see the possibilities of hard drive-based MP3 players. Recognizing the fact that there was a market willing to part with a significant chunk of change for what were then relatively mediocre products from the likes of Archos, Creative and Rio, Apple decided that it could capture substantial market share by launching a similarly priced, but well-designed product. Rather than using the conventional hard-drives that its other manufacturers like Archos or Creative used in their devices, Apple used an exclusive Toshiba-made hard-drive that was inifintely smaller, lighter and more power-efficient than anything then available on the market. This drive enabled Apple to create the iPod, which was “smaller than a deck of cards,” (meaning that it was easy to move) housed in a stylish white casing (making it a fashion accessory, rather than geek chic), and offered vastly longer battery-life (thereby giving credence to the claim that hard-drive based MP3 players really could let you take your entire music collection on the go). (If you’re interested in learning the whole design history of the iPod, has a great article on the subject here.)
At the same time as it was improving the hardware, Apple excelled on the software side, incorporating an extremely easy-to-use interface (interface design being one of Apple’s consistently strong points) for the iPod, and allowing the iPod to play Apple’s proprietary AAC music file format, which was far and away the best sounding digital music file-type available. All of these factors combined to ensure that the iPod was easily the best product to hit the market. And even better for Apple, it would be extremely difficult (at least initially) for competitors to copy, since Apple had managed to sign an exclusive deal with Toshiba to ensure it would be the only manufacturer to build MP3 players with the all important hard-drive which enabled the iPod to be another “insanely great” Apple product.

The rest, as they say, is history. The iPod was launched in the spring of 2001 (you can read a chronological history of the product here) and was an immediate hit. Since then, its importance to Apple has only increased: according to Apple’s most recent quarterly report (Oct 15 2003), the iPod contributed approximately $121m to Apple’s revenue in the 3rd quarter of 2003. Moreover, because Apple had exclusive rights to the Toshiba hard-drive that made the high-quality of the iPod possible, it could price the iPod at a premium far greater than competitors (a 20GB Creative Zen costs $242, compared to $388 for a 20GB iPod—you can compare them here– in other words, the iPod is about $150 more than an average MP3 player in the market), making it a disproportionately significant to Apple’s net income. (It’s estimated that the iPod contributed as much as 25% of Apple’s net income last quarter.)

While competitors couldn’t copy the style and features of the iPod at first, they eventually began to close the gap. Creative launched the aforementioned Zen a year or so ago, and has gradually been able to get it into an iPod-sized casing. Rio launched the ultra-light and small Nitrus, and although the device offered less storage than the iPod (1.5GB, or about 30 hours of music), it featured much longer battery life (up to about 10 hours). Meanwhile, high-end Japanese MP3 player and geek fetish object manufacturer iRiver recently launched a 15 GB player—the iHP-120—at the same price point as the 20GB iPod, but with one critical difference—its machine plays for a staggering 16 hours (as opposed to the iPod’s six), is more durable than the iPod, and simply looks damn cool. Thus, it looks increasingly likely that Apple may have created a market—generating awareness for the sophistication and usefulness of well-designed hard-drive based MP3 players—only to find itself competing in a price war with firms who’ve skillfully copied most of the benefits of the iPod. And a price war certainly seems to be what Apple’s competition desires: read this comment from Creative’s President, Craig McHugh: "We've been positioning our products to [cost] 30% less than a competitive iPod.”

Meanwhile, the device that facilitated the iPod’s creation—the Toshiba hard drive we mentioned earlier—is now off of its exclusivity deal. (Read this Business Week article for complete details.) meaning that the only uncopiable feature of the iPod is now publicly available to competitors. This fact appears to have motivated bigger players like Dell and Samsung to get in the marketplace—now that they can use Toshiba’s ultra-thin and small hard drive technology (Makes you wonder if Toshiba will capture all the value in this game, huh?) , they can create a machine to rival Apple’s and potentially dominate the competition given their—particularly so in Dell’s case—low-cost manufacturing capabilities.

Given the surge in competition and the loss of one of the key resource that’s driven the iPod’s profits for the last few years, Apple launched its online music store to help try and spur iPod sales. As we discussed yesterday, songs purchased via iTunes can only be played on iPods, and the goal of making iTunes iPod only primarily seems to be to provide the iPod with something that its competitors can’t copy. In short, what it seems Apple is trying to do is create barriers to entry—get so many people to buy iPods instead of competitors products, that those owners will be forced to go iTunes-only for their music fix online. Ideally, this will create a network effect, where each person buying a track on iTunes will be forced to purchase an iPod to play the song, and vice versa, to the point where Apple’s current market share in the MP3 market—31%—grows to the point where Apple has locked up the digital music market.

Accomplishing this goal—becoming the OS of digital music, in effect—requires two things: time and money. The problem for Apple is that it has an abundance of neither. Although Apple can pour a ton of money into a great advertising campaign in an attempt to build awareness, and hopefully send iPod sales into the stratosphere, in a few short weeks, Dell will be on the market with its iPod knockoff. Moreover, it’s unlikely that Microsoft will be willing to cede the opportunity to control digital file distribution—which would be the result of iPod winning the digital music game, thanks to the fact that iTunes sells downloads in Apple’s proprietary AAC format. While Apple has some cash on hand (about $3.4 billion in cash and cash equivalents, and another $2.6 billion in its remaining current assets), it has nowhere near the amount of cash Microsoft has ($42+ billion and counting), meaning that it would have a hard time spending its way to control of the market, something that Microsoft could easily do.

So what should Apple do? We’re not so certain if they can do anything, to be honest. While we’d love to see them win—we have to admit, that over the course of writing about Apple and the iPod for the last week or so, we’re really impressed with how cool the iPod is. (Does that mean we’d buy one right now? Probably not—we’re, uh, eagerly anticipating the price competition that will occur over the next few weeks to pick up an iPod at a more Apple-shareholder unfriendly price.) Some quick thoughts before we jet on out of here for the weekend: Apple could sell the manufacturing rights for the iPod to somebody who could make a go of it (e.g. Dell) in a price war, and try to sell as much as they possibly can at the lowest price as possible. While Apple would lose the short-term revenue from the iPod (which we’d guess is gone, anyways), they might get the long-term benefit of owning the digital standard for media files (which could be worth way more, anyways). However, this strategy of allowing a third-party to manufacture something was tried once before by Apple in the 90s with the Mac, and failed dismally—there’s probably some cultural resistance to doing this @ Apple. Secondly, Apple could sell the AAC format to Microsoft, and try and convince Microsoft to use the far-superior AAC format over WMA as the de facto file sharing device on the Windows OS. This would mean that Apple would forgo the long-term revenue from AAC, but could make its money as a manufacturer of superior, well-branded MP3 players. Although a deal with arch-enemy Microsoft seems unlikely, who knows? We kinda like the idea, and besides, hell’s already frozen over once.

Posted by Matt Percy | Permalink | Comments (1) | TrackBack

Subterranean Homesick Blues in Neo-Tokyo

Due to a lack of space to facilitate future growth, urban planners in Tokyo are creating plans to move Tokyo underground. A recent Newsweek article reveals (in almost slack-jawed copy, no less) that:

Forget concrete jungles. Think glass-and-steel icebergs – huge, complex, structures hidden largely beneath the surface. That, say urban planners in Tokyo, is the future of the city.

WITH 27 MILLION residents, Tokyo is both the world’s most populous metropolis and, in many places, one of its most densely packed. That leaves little room for further expansion; already the average commute time is 56 minutes, with some salarymen traveling like sardines on local trains for as long as two hours. The solution? Build down instead of up. “To me it’s obvious that, in Tokyo, we have no choice but to go underground,” says Nobuyuki Takahashi, an engineering professor at Waseda University. “We have been studying the possibilities of deep-underground space for nearly 20 years.”

An underground Tokyo certainly appeals to the inner-14 year old comic/science fiction geek that lurks deep inside our collective subconscious’—how could we read this and not be reminded of the Morlock storyline in The X-Men, or think of the cool BladeRunner-esque possibilities of a subterranean city? However, it should be noted that the possibility of subterranean cities is a little less prosaic than Newsweek would initially like us to imagine. Most of the rationale behind an underground city is less about moving living/work space underground (so much for the Matrix: Reloaded-esque Zion that we’d hoped to live in) than moving the “guts” of the city (e.g. freeways, roads, etc.) beneath the surface so as to create more green space for city residents. In short, the underground city will probably consist of “Big Dig”-esque projects designed to free urban denizens from smog and congestion, rather than to provide goth kids a dystopian world in which to hang out and be misunderstood in.

Perhaps the whole plan to move Tokyo underground is just another massive Japanese public works project run amok, but from an urban planning perspective, the prospect of seeing freeways and infrastructure move underground sounds pretty cool. Alternatively, maybe we’re just interested in this article thanks to movies like Lost in Translation which highlight how bizarre Westerners find Japanese culture. Or maybe it was this great series by Seth Stevenson in this week’s Slate about Japanese culture that spurred our sudden interest in Tokyo. Or maybe it was our friend Sam’s obsession with all things Japanese that has Tokyo engrained on the brain. Either way, we can’t help but think about the thrilling prospects of having plenty of green space in a city, while who knows what lurks beneath.

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Dell Will Rule The Consumer Electronics World, And Look Ugly Doing It

Yesterday, Dell confirmed what many technology analysts had long suspected: it plans to follow the trend established by PC manufacturers like Apple and Gateway, and begin manufacturing consumer electronics. (You can read the official Dell press release here; alternatively, you can peruse the general media’s take on the subject at Google News.) In short, Dell believes that its direct sales model will enable it to dominate the consumer electronics business the same way it has been able to dominate the PC business, and plans to launch new handhelds, an iPod-esque JukeBox player, an iTunes-like digital music download center, and an LCD TV model to help it do so. Assuming that these products prove successful, Dell CEO Michael Dell hinted that more consumer electronics would be forthcoming from the company.

The big question today, is whether or not Dell will be successful in its foray into the consumer electronics world. Our opinions on the matter are mixed—examining things from a strictly economic perspective, we expect Dell to eventually dominate the competition. However, after looking at Dell’s, uh, somewhat less than stylish product line--in particular, what’s up with the design on the “digital jukebox,” anyways--we’re also fairly certain that Dell’s eventual success in this business isn’t going to come as easily as it did in the PC industry.

Let’s start with the economic reasons that will enable Dell to dominate consumer electronics manufacturing. By now, we all know that Dell’s direct-to-customer business model works by “eliminating the middleman,” and allowing Dell to produce machines much more cost-effectively than its rivals, while selling them at the market price. These lower costs ensures that Dell’s margins are much better than its competitors on the whole. Moreover, Dell’s model has proved to be insanely difficult for its competitors to copy—as Gateway, Compaq, and HP have all found out at various points in the last ten years. Not only is Dell just much further down the learning curve when it comes to knowing how to make electronic devices as quickly as possible (it currently holds about 2.3 days of inventory, as opposed to its nearest competitor, HP, which is at 11-12 days of inventory), its cost structure is exceptionally hard for an established rival or new entrant to copy. For example, its rivals are all saddled with the high costs of maintaining relationships with dealers, resellers, mainstream retail channels, and partnerships. This means that should rivals try to copy Dell and go direct, Dell simply has to lower its prices to a point where its rivals lose money, but Dell still makes money (thanks to its lower prices). Since lower prices tend to result in more sales, Dell’s volume increases while its competitor’s losses mount in a scenario that resembles death by a thousand cuts for Dell’s rival.

Although consumer electronics is a tough business to be in—
featuring razor-thin margins, short product cycles, and intense price competition across the board—the nature of competition is highly similar to that of the PC industry. In particular, other consumer electronics manufacturers sell through retailers and resellers, and have yet to go direct in a big way thanks to the problem of channel conflict. From the outset, this means that incumbents in the consumer electronics industry have higher costs than Dell, since Dell is direct-only. Moreover, the types of consumer electronics products that Dell is initially manufacturing aren’t too different from those that it already makes—the LCD TV it will sell, for example, is really little more than a variation on an LCD monitor it already produces, while the hideously ugly digital jukebox it will make is nothing but a hard-drive with headphones. By avoiding—for the time being, at least— more complicated CE devices, such as 50” plasma TVs, for example—Dell’s costs will remain far lower than established consumer electronics manufacturers for the foreseeable future. These lower costs should allow it to gain substantial share at the expense of others: not only can price its products slightly lower than competitors in order to gain volume, should a price war occur, Dell should still be able to turn a profit, while its rivals will destroy wealth.

The biggest threat to Dell is if the superior brands, and better looking products produced by MP manufacturers like Apple, compensate buyers for the lower prices Dell will be able to offer. Although we hate to admit it—we’re inclined to paraphrase Steve Jobs’ famous comment about Microsoft, and boldly state that Dell has no sense of style—we don’t think that the better-looking, but more expensive, iPod will win against the cheaper but uglier Dell Digital Jukebox. Dell will win because it produces machines that are the equivalent of a Honda Civic: they’re not the prettiest products, but they tend to be very reliable and have minimal problems to boot. We’d guess that unless the Digital Jukebox violates Dell’s long-standing track record of producing pretty durable, and easy-to-use machines it will probably more than satisfy the demands of mainstream consumers and dominate the majority of the market. There will probably be a market for iPod at the higher ends of the MP3 player market—much as there’s a market for Apple’s computers in the upper echelons of the PC market. We’re wondering, however, how quickly Dell quickly could have overrun the consumer electronics market if it knew the meaning of the word “aesthetic.” In closing, we like Dell, but if Dell was a person, they’d be an all-achiever desperately in need of a Queer Eye for the Straight Guy makeover.

Posted by Matt Percy | Permalink | Comments (1) | TrackBack