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Video Game Console New Business Models

Has the increasingly powerful and multifaceted box-of-tricks that's connected to your television set already won the online "media center" race? Consider the following, then you decide.

In the current video game console cycle, each of the three devices -- Microsoft's Xbox 360, Sony's Playstation 3, and Nintendo's Wii -- is inherently capable of connecting to the Internet, and each has built-in storage for downloaded multimedia content.

In addition to primary traditional hardware and software sales, connected consoles now support three incremental growth business models: premium subscription fees, paid downloadable content (DLC), and a fledgling advertising market.

The revenue derived from online consoles is separate from online PC game revenue and from the traditional retail-driven videogame hardware and software revenue. "Gamers' use of connected consoles is expanding the business opportunities and cash flow for this console cycle," according to Billy Pidgeon, program manager, at IDC.

"This emerging sector has huge potential. Getting gamers online and enticing them to spend on content and services is crucial for vendors and publishers."

Revenue streams enabled by active online consoles in this cycle show the strongest growth in the sector and will not only determine the future success of the console vendors but also be crucial to the success of many third-party publishers.

I find it interesting that the primary gaming console players seems to have a more advanced sense of the ecosystem relationship between their delivery platforms and the upside value-added service revenue potential -- when compared to their peers within the personal computer category.

Apple being the obvious exception in this comparison, given their success with iTunes. Regardless, I would not consider Apple's "closed" ecosystem as the blueprint that others should follow. Moreover, Apple's constrained multimedia distribution model triumphed with the implicit -- while clearly unintentional -- cooperation of its "marketing challenged" PC competitors.

IDC's market study insights also include:

- Revenue derived strictly from connected consoles will grow from $981 million in 2007 to $10.5 billion in 2011. In 2007, online console revenue will be 2.5 percent of total global videogame market revenue, including console and handheld hardware and software revenue. By 2011, revenue from connected consoles will represent 18.6 percent of total market revenue.

- Although subscription revenue for premium online services and games will grow from $476 million in 2007 to over $2.4 billion in 2011, its share of online console revenue will decline from 48.5 percent in 2007 (already down from a high of 86.5 percent in 2006) to 23.2 percent by 2011.

- Downloadable content (DLC) consisting of games and game-related items, which at $35 million in 2006 represented a 13.5 percent market share of online console revenue, will become connected consoles' primary revenue source in 2007, growing from $493 million in 2007 to $7.2 billion in 2011. In 2011, game-centric DLC will make up 68.6 percent of online revenue.

- Advertising revenue from sponsored services, in-game ads, and product placement in connected consoles will reach $12 million in 2007, posting the first significant online console advertising spend. Ad revenue will grow to $858 million in 2011, with an 8.2 percent market share of online revenue.

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