The impact of technology in the gaming industry


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The impact of technology in the gaming industry

  1. 1. Coleman Fung Institute for Engineering Leadership Gaming-on-Demand IEOR 171 Technology Leadership Spring 2011 Project April 19, 2011Authors: Michael Chen, Hanrun Guo, Regine Labog, Jonathan Mui, Ma Than Than Thaik Instructor: Ikhlaq Sidhu
  2. 2. AbstractWith technology moving towards faster servers and faster networks, businesses have begun to shifttowards the cloud. The gaming industry is showing signs of movement in the direction of this trend.Computer hardware has finally reached the point where servers can store and run resource-intensivevideo games and transmit them across the Internet to low-end hardware that would be otherwiseincapable of playing the game itself. This is a new frontier pioneered, not by established industry leaders,but rather by young start-ups with a vision for the future. For the most part, the technology has alreadybeen proven. What’s left is to see where this technology will head and how much it will impact the currentindustry landscape.
  3. 3. Table of ContentsGAMING-­‐ON-­‐DEMAND  .........................................................................................................................................  1  ABSTRACT  ..............................................................................................................................................................  2  TABLE  OF  CONTENTS  ..........................................................................................................................................  3  INTRODUCTION  ....................................................................................................................................................  4  1.  HISTORY  OF  VIDEO  GAMES  ..........................................................................................................................  4  2.  THE  CURRENT  MARKET  ................................................................................................................................  6  PART  A:  GAMING-­‐ON-­‐DEMAND  .....................................................................................................................  10  1.  WHAT  IS  GAMING-­‐ON-­‐DEMAND?  .............................................................................................................  10  2.  BARRIERS  TO  SUCCESS  ...............................................................................................................................  11  3.  GAMING-­‐ON-­‐DEMAND’S  BUSINESS  MODEL  ..........................................................................................  15  4.  ADVANTAGES  .................................................................................................................................................  17  5.  DISADVANTAGES  ..........................................................................................................................................  20  6.  THE  FIVE  FORCES  MODEL  ..........................................................................................................................  21  CONCLUSION  .......................................................................................................................................................  25  ABOUT  UC  BERKELEY  CENTER  FOR  ENTREPRENEURSHIP  &  TECHNOLOGY  ................................  26   ..................................  26  ABOUT  THE  COLEMAN  FUNG  INSTITUTE  FOR  ENGINEERING  LEADERSHIP  
  4. 4. IntroductionThe growth of the video game industry has exploded in the past decade with the advent of superiorgraphics cards, a growing community of game developers, as well as an increased interaction betweenvideo games and the Internet. These new developments have set the stage for a new online service, whichliberates the user from conventional game consoles, called Gaming-on-Demand. Users can play high-end,graphics intensive video games on any computer or television with just an Internet connection.We hypothesize that Gaming-on-Demand will be a game changer that could take over a substantialmarket share of the video game industry and eliminate the need for console manufacturers and specialtygame stores.1. History of Video GamesBy definition, a video game is “an electronic game played by means of images on a video screen and often 1emphasizing fast action. ” With the invention of the "Cathode-Ray Tube Amusement Device” by Thomas 2T. Goldsmith Jr. and Estle Ray Mann , the video game industry has been around since 1947. Since then,there have been many changes technologically, socially, and economically. The first video games wereoften associated with arcade games, a single or multi-player coin-operated entertainment machine usuallyinstalled in public businesses. The greatest initial success, and what history may call the actual start ofthe industry, came with Atari’s Pong, the first video game to reach mainstream publicity. Since then,people have tried copying Pong’s success and developing the next big sensation.1.1. Changes in TechnologyWhile the earliest platforms may have been on large antique systems, (such as the cathode ray tube andmainframe computer), video game platforms with the help of better integrated circuits and othertechnologies have gone on to expand onto many others such as arcade, handheld, console, and PC.  Typically, an arcade platform is a specialized electronic device completely dedicated to a video game,usually placed in a publicly accessible area. A handheld platform is a lightweight and portable electronicdevice with its own screen, speaker and control system. A console platform is a dedicated system builtwith the main intention of playing video games; it is typically connected to a video and audio device and acontrol system. A PC platform is as its name implies: a personal computer capable of playing video gamesbut not necessarily built solely for that purpose. There are also many other electronic devices for whichvideo games have been made, including PDA’s, calculators, and mobile phones. These mobile devices arethe newest platform genre to enter the market.Another technological change, aside from hardware development, is the Internet. The Internet createdmany new opportunities for the video game industry, enabling features such as multi-player games forusers separated by a significant distance.Software and game development have changed since the start of video games as well. During the earlierstages of video gaming, the game designer was in charge of the whole production process: programming,graphics, and sounds. Game development didn’t fully mature to what it is today until later in the century.In 1977, the video game industry experienced its first crash due to an influx of obsolete consoles that sold1 "Video Game- Definition and More from the Free Merriam-Webster Dictionary." Dictionary and Thesaurus - Merriam-WebsterOnline. Web. 19 Apr. 2011. <>.2 Cohen, D. S. "Cathode-Ray Tube Amusement Device - The First Electronic Game." Classic Video Games -- Information aboutClassic Games, Classic Arcade Games, Classic Console Games, and Classic PC Games. Web. 19 Apr. 2011.<>.
  5. 5. 3at a loss . As a result, the market price for quality consoles was ruined. In 1983, the video game industrysuffered its second crash. This time it was due to poor game development. Developers were put onimpossibly short schedules, and games were not produced to an acceptable quality. It was even discoveredthat, sometimes, more game cartridges were made than consoles sold, as in the case of the game Pac-Manfor the Atari 2600. Since the two crashes, the industry, as well as the quality of its products, has matured.By the 1990’s, the industry was back on track. Nowadays, there are teams of people working on gameswith sufficient budgeting and resources, as well as very capable platforms for their games.1.2. Changes in SocietyWhen the first video game was developed, it was created purely as a past time for the guests of a lab’swaiting room. During the early stages of the industry when it was difficult to produce many games, theywere primarily geared towards the young male audience. However by 2010, the demographics became 4greatly diverse. To illustrate this, here are some statistics of 2010: 67% of American households played video games 60% of the gamers were male and 40% were female. 53% of all Americans over 18 play video games. 97% of all American teens play video games. 34: the average age of a gamer 12: average number of years a gamer has been playing video games 273.5 units of video games were sold in 2009 58% of online players are male, 42% are female 41% of Americans plan on buying a video game 8: average hours a week spent playing video games.Video games are growing to become a more accepted activity for the average person and are becoming anintegral part of American culture. Video games reach out to all parts of society, regardless of gender, age,or ability. While games were once only modeled towards the young male, it is now produced for all agesand generations. As the first generation of video game players grew older, they raised families with videogames and consoles in the household. This effect has multiplied the pool of gamers exponentially.Technology helped develop games that lowered the learning curve, allowing the young as well as the old toplay.1.3. Changes in EconomyThe video game industry has been steadily growing since its birth and has showed no sign of stopping.Despite the crashes in 1977 and 1983, it is contributing more and more to the nation’s economy. It isunlikely that the poor game development that caused these crashes will happen again due to preventativemeasures such as improved practices and increased funding for projects. The industry is growing at astrong rate as well; “(The) industry’s December 2009 sales alone reached $5.53 billion. By comparison, as3 "History of Home Video Game Consoles." Buzzle Web Portal: Intelligent Life on the Web. Web. 19 Apr. 2011.<>.4 "Essential Facts about the Computer and Video Game Industry." The ESA. Web. 19 Apr. 2011.<>.
  6. 6. 5recently as 1997, the industry generated $5.1 billion over the entire year” . The video game industrypossesses many opportunities, and history shows that it is here to stay.2. The Current Market2.1. EconomyFor the year 2010, the Global Domestic Product (GDP) of the United States was $14.72 trillion ($14.33 6trillion in 2009), with a GDP per capita of $47,400 and a five year growth rate of 1.4% . In that year, thevideo game industry was responsible for $4.9 billion of the nation’s GDP, with an average growth rate of 710.6% for the last five years . In comparison, the music industry’s contribution for 2009 was only $6.3 8billion, with a ten-year average growth rate of 8% . In 2011, the video game industry is expected to 9continue growing at a rate of about 8.3% for the next five years . All in all, while many other industriesmay be suffering from the recent economic turmoil, the video game industry remains strong even duringbad economic times. The music and movie industry lack the resilience of the video game industry, whichis expected to be grow steadily and become a strong contributor to the US economy. 2005 2006 2007 2008 2009Annual Sales (in billions of USD) $7.0 $7.4 $9.5 $11.7 $10.5Annual Percent Change N/A 5.7% 28.4% 23.2% -10.3%Annual Sales (in millions of units) 226.3 240.7 267.8 298.2 273.5Annual Percent Change N/A 6.4% 11.3% 11.4% -8.3%Sources:1 - 1: US Computer and Video Game Sales (2005-2009)2.2. BusinessesAs of today, there are various ways to acquire video games as well as their platforms. In July 2010, the 10NPD group estimated that 48% of PC game sales were downloads off the Internet . For the most part, itis not possible to buy from the original manufacturer and game developers. Instead, consumers purchasefrom authorized re-distributors. The most popular way of obtaining gaming merchandise includes buyingfrom general retailers or specialized stores via Internet or brick-and-mortar stores. Each of these re-distributors typically derives characteristics from four different genres.5 "The Entertainment Software Association - The Transformation of the Video Game Industry." The Entertainment SoftwareAssociation - Home Page. Web. 19 Apr. 2011. <>.6 "CIA - The World Factbook." Welcome to the CIA Web Site — Central Intelligence Agency. Web. 19 Apr. 2011.<>.7 Siwek, Stephen E. "Video Games in the 21st Century." Web. 19 Apr. 2011.<>.8 Goldman, David. "Musics Lost Decade: Sales Cut in Half in 2000s - Feb. 2, 2010." Business, Financial, Personal Finance News 02 Feb. 2010. Web. 19 Apr. 2011. <>.9 Thormahlen, Casey. "Video Games in the U.S." Mar. 2011. Web. 19 Apr. 2011.<>10 Martin, Joe. "Downloads account for 48 percent of PC game sales." bitgamer 22 Jul 2010: n. pag. Web. 19 Apr 2011.<>.
  7. 7. Brick-and-mortar: The traditional way to acquire games and their operating platforms would be to go to a local brick-and-mortar store such as BestBuy or Target, inside of which they would have a section for videos game related products already stocked and available for purchase. These stores are not entirely dependent on their sales of video games; instead they also produce revenue from other products.Online: Another version similar to these brick-and-mortar stores are online retailers, e-commerce stores. One of the biggest examples would be Amazon, where customers can buy from a huge selection of products and have it shipped to them from a warehouse not necessary close to the customer. They have the convenience of direct to home fast shipping.Specialty brick-and-mortar: There are also specialized businesses that only sell gaming products. GameStop is on such example of specialty brick-and-mortar store that primarily sells gaming products. Specialty brick- and-mortar stores largely depend on the video game industry for its revenue.Specialty Online: Gamefly is an example of a specialty merchant with the properties of an online retailer. Specialty online retailers operate like other online retailers in that they don’t store their inventory at locations local to the customer but instead hold larger warehouses that ship orders as they’re made. They are different from online retailers because their product selection is much more specific to a certain genre.Business can benefit from either brick-and-mortar and online stores or both. Having one does not restrictfrom incorporating the other model and benefits. Businesses have developed hybrid plans to takeadvantage of the many options. But for the purpose of this analysis, only these four scenarios will bediscussed.2.3. Business ModelsEvaluating the success of the four types of re-distributors helps predict the success of new businesses forthe video game market. Their business models and recent performance will be good indicators.Brick-and-mortar: These businesses are bound by the cost of having multiple storefronts in many locations. They also have the additional cost of employees. The headquarters decide what products will be sold at their stores. Most inventory is kept in stock at the store and is replenished frequently. Customers can purchase the items currently offered in the store instantly.
  8. 8. Online: The Internet commerce business differs from the brick-and-mortar businesses with the main difference that they do not have the cost of keeping a physical store site or the expense of hiring employees to run the store and the rent for the building. Instead, they use their websites as their storefronts and have a larger centralized back-end system to deal with product order and placements, and all other services that may have been offered in a physical store. Their products do not necessarily have to be available in a location near the customer or even available at all. Items are kept in better shipping locations and are moved once the orders are complete. Purchases are not delivered immediately to customers, as in the case for brick-and-mortar. Since these stores don’t have physical store site, they save the extra expense and avoid the opportunity cost that they otherwise would have had for holding inventory on-site.Specialty Brick-and-mortar: These businesses are very much the same as a typical brick-and-mortar with the exception of a much larger variety of video game products. They sometimes offer buy-back programs and sell used products.Specialty Online: Specialty Online companies such as Gamefly have a unique online business model that does more than just sell video games. Much like Netflix, Gamefly receives its main source of revenue comes from their subscription based rental service, (during which consumers have the option to purchase products after trying out the products). Their rental service is successful because like Netflix, they offer a back catalogue service. This means they rent out 6+ month old games, which are significantly cheaper than new releases more often and, consequently, have better life cycles 11 on their products and lower costs for obtaining and maintaining games Revenue Net Income ($ inCompany ($ in billions) Profit ($ in billions) Growth (Revenue) billions)*BestBuy (2009) 49.694 13.086 10.39% 1.317*Target (2009) 67.390 20.805 3.11% 2.920*Amazon (2010) 34.204 5.909 39.56% 1.152GameStop (2010) 9.4737 2.5397 4.36% 0.408GameFly (2009) 0.101 N/A 19.80% 0.0016* This reflects all departments (e.g. Amazon includes Books, Movies, etc.…)Sources: (See Footnotes)Figure 2: Financial Reports of Leading Game DistributorsWe can see from growth and data on these large, established businesses that the marketing is going wellfor them and there is still much opportunity to grow.11 Lee, Hower. ""CLIFF NOTES" S-1S (PART II): GAMEFLY." AGILEVC - LEE HOWER. 26 Feb 2010. Web. 19 Apr 2011.<>.
  9. 9. 2.4. Problems and OpportunitiesThe gaming industry of today is, surprisingly, still bound by brick-and-mortar store distribution systemdespite the leaps made in network technology. There are still many problems in the gaming industrytoday.Firstly, in order to play hot, newly released games, customers must either purchase the games in storeslike GameStop, or order the games online at distribution websites like GameFly and Amazon. It is aninconvenience for the customers who do not live close to these brick-and-mortar stores to purchasegames. Another inconvenience of brick-and-mortar stores is that they are not open all the time, everyday. These stores have limited open hours as well as a limited inventory, so customers are bound by thestore hours and even when they do not have the game in stock. If instead customers order their gamesonline, companies like GameFly can deliver the games to the gamers in a few days depending on thecustomer’s location. However, if gamers prefer the option to play the game right away, Gamefly will notbe satisfactory.Secondly, there are a variety of gaming consoles in the video game industry as of now. If a gamer wants toplay a PlayStation 3 game and a Wii game, he will have to buy both gaming consoles to do so. This is ahuge expense for gamers in middle-income families.Thirdly, the ability to play high-end games is hampered by a computer’s specifications. This meansgamers must upgrade their computers with new graphics cards and additional RAM because most of thenewly released and ground-breaking video games require more advanced processor, large memory, andprogressive graphic card. Fourthly, if players get stuck at a difficult part in a game, they have to try to get past it helplessly or toresearch and find out how they can move forward online. No current console allows players to see howother players tackle a part of the game or watch their friends play a game or vice verse. Last but not least, there are a lot of piracy issues in the current game industry. Game developers andpublishers lost millions of dollars every year due to piracy. So far, there is not a good solution to solve thepiracy problem.2.5. Where does Gaming-on-Demand fit in?Gaming-on-demand satisfies the needs of the market with its cross-platform functionality, on–demandgame delivery, instant upgrades, and availability to play from any location that can access the Internet.Some new start-up companies take advantage of this technology, such as OnLive, Gaikai, and OTOY, andthey lead the Gaming-on-Demand revolution for the video game industry.OnLive has developed a product that satisfies the needs of the current market. They have created anaffordable console that possesses cross-platform functionality and the ability to upgrade instantly. Itsgame service allows players to buy or play their games anytime and reduce the influence of distance fromgamers to brick-and-mortar stores. If a game is released, anyone, regardless of distance, can access itbecause the only requirement is an OnLive account. This instant game-delivery to its players, as well asthe multiple platforms players can use to access OnLive games, free the player from the boundaries thatproducts of the current market are offering.Gaikai has developed the technology to meet the needs of the video game industry. With Gaikai, playerscan obtain trial, hands-on experience before buying the games. This trial gameplay facilitates demos forthe latest games and will increase marketing capabilities leading to a boost in video game sales.
  10. 10. Part A: Gaming-on-Demand1. What is Gaming-on-Demand?Gaming-on-Demand is a cloud-based game service that allows users to stream games directly from theInternet. This eliminates the hassle of installing games and upgrading gaming devices so that a user canplay a newly released game. The games themselves are stored on servers owned by providers like OnLiveand streamed to a gamer via the Internet. This way, a user only needs a rapid Internet connection to startusing the service.1.1. OnLiveOnLive is a Gaming-on-Demand provider. OnLive is a service that does not require users to have aspecific platform but only requires their customers to install a software application on their computers toconnect to the severs in order to utilize their service. The games that OnLive provides are stored on itsserver and sent to its end users through broadband Internet.OnLives physical product consists of a wireless controller and a MicroConsole TV adaptor, which can be 12used to connect a television directly to the server . This allows a player to use OnLive with their TVinstead of their computer. In addition, OnLive is capable of running on either a Windows or Macoperating system.1.2. GaikaiGaikai is a game streaming service. Gaikai offers their customers the ability to play many PC and consolegame demos for free without the need of any installations or downloading of games or any additional 13software . It offers users the chance to try games on the browser before they actually make purchases. Inother words at the end of the free trial, consumers will have a choice to make a purchase from an online-store, local store, and etc. If the consumers choose to not purchase a game offered on Gaikai and butcontinue playing in the browser, Gaikai offers a pay-as-you-go plan so that the user can continue playingthe game. Gaikai profits from the developers for advertising their games and from the users if they chooseto play further using Gaikai’s services.1.3. OtoyOtoy is another Gaming-on-Demand provider. The company is still in the process of development. Thiscompany has not defined exactly how they would do the business yet, but they are aiming to provide thesame services as OnLive and Gaikai. In addition, Otoy is also planning to provide the service that could 14run on Mac, PC, Linux, iPhone, iPad and any mobile devices that has web browser12 Welcome to 13 Apr. 2011 <>.13 Gaikai Video Game Advertising Network | Play Video Games Online. 15 Apr. 2011 <>.14 "OTOY Launches Open Streaming in Q2 2010." OTOY. 18 Apr. 2011 <>.
  11. 11. 2. Barriers to Success2.1. Technological RequirementsFigure 3: The traditional client server architecture for gaming requires a powerful client machine to play games at maximumsettings. Communication with the server is minimal.The concept of online multiplayer gaming is not new. Online gaming has grown ever since consumerscould connect to the web faster than the old 56k modem would allow. The concept was simple and basedon a traditional client-server model. Clients would connect to a single server and could communicated toeach other through the Internet at that single point. Since clients were running a local copy of a game ontheir computer, they only needed to communicate a minimal amount of information (location, items,etc.…) to the server.Gaming-on-Demand’s multiplayer system introduces a whole new set of technological barriers. No longeris communication minimal. With Gaming-on-Demand, entire streams of high quality video are sent fromthe server to the client. Analysis of a Gaming-on-Demand system can be broken down into three sections:the client, the Internet connection, and the server.
  12. 12. Figure 4: With Gaming-on-Demand, there is no longer a need for a workhorse client machine. Even netbooks, tablets and mobiledevices will be able to handle streaming games.With a Gaming-on-Demand infrastructure, client requirements are more relaxed. All a user needs is amodern day computer capable of playing HD video. In the case of OnLive, client subscribers only requirelightweight client software regardless of the computational intensity of the game. Others, such as Gaikai,simply require a modern browser with the latest version of Adobe Flash. Whether the clients are on a Macor PC, they will all have the same experience. Barriers to entry for the client are minimal if not nil.The only real limitation on the client side is the Internet. Gaming-on-Demand services typicallyrecommend having 5Mbps of bandwidth to obtain the best user experience. Some services work down to2Mbps, although with less quality. Although bandwidth requirements seem high, they are actually not outof reach for the average US household. In the third quarter of 2010, the overall average connection speedin the US was 5.0Mbps. Surprisingly enough, the US ranked 12th in Average Mbps during this survey. Thepotential for adopting Gaming-on-Demand in these other developing economies and countries ispromising. This trend is only increasing as it has since 2008.
  13. 13. Figure 5: The graph above shows worldwide bandwidth speed over each quarter. Note that there is a general upward trend towardhigher bandwidth, especially in North America. []Server side requirements are more complex needing massive server farms specialized for graphicsprocessing. This is different from traditional server farms, which focus on CPU speed. It boils down to theability of graphic processors to compute matrix math more efficiently. Although server farm specifications 15are typically trade secrets, in an interview with , Gaikai explained that their demoservers utilized the latest Intel six-core processors along with the then cutting edge GTX 470s. Not onlydoes a Gaming-on-Demand service need high-end hardware, but it also requires cutting edge encodingalgorithms that are kept as trade secrets.Despite the excitement over this technology, there has also been deep skepticism. Richard Leadbetter points out several contentions about OnLive’s Gaming-on-Demand service. He arguesthat OnLive could not possibly offer the high quality gaming it claims at such large scales. However,several CTOs from large developer companies, like Electronic Arts, have taken a look at OnLive andbelieve that the technology is viable. They have even entered content agreements with OnLive in support.15 Crossley, Rob. “Gaikai’s reality check.” Develop 11 Jun 2010: Web. 17 Apr 2011. <>.
  14. 14. Second, he argues, OnLive counts on the datacenters to not only offer 720p, 60fps gameplay, but also toencode the video output so that the player can receive the visuals at a rate of 1.5MB/s for standarddefinition and 5MB/s for high definition (HD). To compare these statistics, YouTube has encoding farmsthat take a considerable amount of time to produce their current, offline 2MB/s, 30fps HD video. OnLiveclaims to do the encoding real-time through a PC plug-in card at 5MB/s on top of surround sound. 16However, in and MTVPlayerBlog interview with OnLive founder Steve Perlman, he notes that OnLivehas a good footing in the market due to the special, patented encoding techniques they use to deliverblazing fast games. Also, YouTube is not in the business of encoding video quickly. They are simply in thebusiness of serving rendered videos.Leadbetter later goes on to argue that latency will be a huge factor in OnLive’s success. This is very true.The amount of data transferred between the server and client is more using OnLive’s infrastructure thanthe typical client-server infrastructure. However what he ignores is whether that latency is relevant to theuser. Perlman noted in his interview that OnLive uses encoding technology and latency optimization toremove perceived latency, a very important difference. The server side difficulty won’t be focused so muchon the capability of supporting but rather on the cost to achieve such technical feats.2.2. Business BarriersAs a pioneer of Gaming-on-Demand, OnLive does not face the barriers of entry into an old market, butrather faces barriers of creating a whole new market. The gaming community is not a heterogeneous mixof players where one only plays a Wii one day or an Xbox. Instead, the gaming community partitions itsplayers by whichever medium (game console or computer) they choose to play, but with the occasionaloverlap when a game is available on two different consoles or if one player has two consoles or more.However, OnLive’s content partners are developers from a hodgepodge of different computer and consolegames and its market is, in effect, the whole gaming community. The biggest business barrier for Gaming-on-Demand is the ability to acquire hot content that can attract console and PC gamers.Due to Gaming-on-Demand’s recent entry into the video game industry, it only offers a limited selectionof video games in its library. OnLive’s lag prevents it from placing high-end PC games such as World ofWarcraft and Starcraft on its list of available games. In addition, the games that OnLive is releasing havebeen on the market for at least longer than two months. OnLive’s ability to stream any console game overthe Internet is limited by the exclusive contracts that popular game developers have with their respectiveconsole makers. For example, Nintendo has built its empire on the over 200 Mario Bros. games released 17in the past 15 years . It is unlikely that Nintendo will hand over any of those titles to its competitors inGaming-on-Demand. For Microsoft and Sony, creators of the Xbox and the PlayStation, even if Gaming-on-Demand were to acquire any of their games, it would be after a long legal battle that gives bothcompanies enough time to offer new services that could compete with Gaming-on-Demand. As of yet, 18OnLive has not been able to showcase any of the top 20 games sold in 2011 in any platform . Also, withthe start-ups already competing within Gaming-on-Demand (Gaikai and OnLive) for video game titles,Gaming-on-Demand will most likely be separated by its games just like Microsoft, Sony, and Nintendowere. With that, Gaming-on-Demand is less likely to overtake the console and PC market share and morelikely to create its own niche of gamers.Netflix parallels OnLive as a trailblazer for the Video-on-Demand platform and, although it offers instanttelevision from multiple stations, has a partnership with HBO/Starz. Gigaom has outlined Netflix’s 19approach to acquiring visual content for its Video-on-Demand services . First, Netflix takes proven,16 Totilo, Stephen. “OnLive Interview: Founder Says Console Makers Can’t Compete Until 2022.” Develop 24 Mar 2009. Web. 17Apr 2011. <>.17 "Mario." Wikipedia, the Free Encyclopedia. Web. 19 Apr. 2011. <>.18 Mazel, Jacob. "Top Selling Q1 2011 Games by Platform / Multiplatform & HW Trends - VGChartz." Video Games, Charts, Articles,News, Reviews, Community, Forums at The VGChartz Network. 9 Apr. 2011. Web. 19 Apr. 2011.<>.19 Lawler, Ryan. "Netflix’s Three-Pronged Approach to Content Acquisition." Gigaom 06 Apr 2011: n. pag. Web. 19 Apr 2011.<>.
  15. 15. popular content to attract mainstream users. Second, it acquires a large number of cheap titles, which itthen recommends to viewers based on their previous choices. Finally, Netflix finds projects that theybelieve will be a hit and signs them on before the price of the show increases. In comparison, OnLive hasdone the same and chosen hot new games like Assassin’s Creed by Ubisoft to lure mainstream gamers.OnLive then acquired lesser-known games, but from multiple genres, so that the mainstream playerswould find a reason to continue with the service. Finally, OnLive offered its Software Developer Kit and 20tools to independent game developers allowing them to easily distribute their games to a marketcomposed of either PC, Mac, or television (with the purchase of a MicroConsole). Normally, users have towait months before a game available on PC is available for Mac. Now, game developers can use OnLive asthe middleman to enable cross-platform functionality for their video games. This saves time for users whono longer have to wait for a game to be converted from one platform to another as well as resources forgame developers who can use it to focus on producing new games.Additionally, companies looking to get into the gaming-on-demand services will face tough legal 21opposition. OnLive recently received approval of a patent on gaming-on-demand at the end of 2010 .There will many legal proceedings, contracts, and law suits in gaming-on-demand as a result of thispatent. Recently, T5 Lab, a startup, claimed that they should own the patent because they applied for thispatent earlier than Perlman. Entry into the gaming-on-demand market will not be easy work for 22competing companies .3. Gaming-on-Demand’s Business Model3.1 Current Gaming-on-Demand’s Business ModelWith the rise of Gaming-on-Demand, companies have created various business models to earn revenue ontheir products.The trial game system allows users to try out the game prior to making a purchase. Gaikai has developed 23streaming technology that allows gamers to test play the game with just one click . It is currently workingwith other game developers and publishers to provide the instant gaming experience to its customers. Itskey feature is that players do not need to download or install any software to play the game. With Gaikai,gamers will no longer have to risk spending money before purchasing the game.Plans Rates ($)3-day Pass (one game) 2.99-6.995-day Pass (one game) 6.99-10.99Full PlayPass (one game) 9.99-59.99Subscription (40 games) 9.99/monthSources:1 - 6: The pricing model of OnLive20 "OnLive Offers Indie Game Developers a “Direct-To-Consumer” Channel on TV, PC and Mac." OnLive 15 Sep 2010: n. pag. Web.19 Apr 2011. <>.21 Takahashi, Dean. "Rivals Beware: OnLive Says It Has a Fundamental Patent on Cloud-based Games | VentureBeat." Tech News | Innovation News | Money News | VentureBeat. 14 Dec. 2010. Web. 18 Apr. 2011. < games/>.22 Takahashi, Dean. "Who Invented Cloud Gaming? T5 Labs Tangles with OnLive (exclusive) | VentureBeat." Tech News | Innovation News | Money News | VentureBeat. 15 Feb. 2011. Web. 18 Apr. 2011. <>.23 Gaikai. "What Is Gaikai? Video Game Lead-Gen Ad Platform, Play Games For Free." Gaikai Video Game Advertising Network | Play Video Games Online. Web. 17 Apr. 2011. <>.
  16. 16. Another model emphasizes is game rental or full game purchase a game. Players can purchase a 24“PlayPass” for any games available in the online game library . Companies, like OnLive, have developed anew way for gamers to purchase games. With three-day, five-day, and full play passes, gamers are allowedto access the game they bought for three, five and unlimited days. After they purchase a game, the gamedoes not install in the console but exists in the server. So the players actually do not buy the game, but buythe right to play the game. Compared to online game distributors like GameFly, OnLive does not deliverany games via discs to customers. With Gaming-on-demand, gamers no longer have to wait for theirgames for several days.Finally there is the pay-as-you-go subscription model where players have unlimited access to certaingames in the game library as long as they pay the subscription fee. OnLive provides a subscription optionfor their gamers. Different from “PlayPass”, the subscription model allows gamers to get access to morethan one game in a low price. It is currently doing a promotion where, with just $9.99, players can getunlimited access to forty games in the OnLive game library. Although the new released games do not gointo the subscription plan, players are still some popular games, like NBA 2K10.3.2 Gaming-on-Demand Value ChainBefore gaming-on-demand was introduced to gaming industry, the model of game industry value chainhad many hierarchical levels from development, production, to distribution. For the suppliers’ side, thereare component manufacturers, console manufacturers, and designers and developers. Publishers creategames and deliver to distributors, digital distributors, and Mobile Phone Operators. Distributors thendeliver to retailers, which in turn deliver to consumers. 25Figure 7: The Evolutionary Industry Value Chain Figure 8: Gaming-on-Demand value chainGaming-on-demand introduces significant changes in the game industry value chain. The value chainbecomes much more simple than before. Instead of having manufactures build consoles, they are replacedby components makers for servers. A gaming-on-demand company will act as the distributing entity.Consumers will not obtain access to games from traditional game distributors but rather directly fromgaming-on-demand services.24 OnLive. "Featured Games." Welcome to Web. 17 Apr. 2011. <>.25 Sheth, Romeen . "Evolutionary Value Chain." Video Game Industry 2008: n. pag. Web. 19 Apr 2011.<>.
  17. 17. 4. AdvantagesGaming-on-Demand’s new technology is gradually changing the game industry. This change has provideda lot of benefits to many people in the game industry as well as game players. It means that people in theindustry will be able to produce better games to fulfill the needs of their consumers and present betterquality game services to their clients. At the same time, gamers can also enhance their gameplayexperience.4.1. IndustryThe Gaming On-Demand model can prevent one of the greatest parasites to the video game industry - 26piracy . This means that it will be harder for gamers to copy games or hack consoles. Amount Lost (in billions) Worldwide (2004-2009) $41.5 Japan (2004-2009) $10.4 UK (2010) $2.31 Applied Materials Inc. 5,000–9,999 Sources: 27 1 - 28 2 - 1000-jobs-last-year/Figure 9: The amount loss due to piracyWith physical games distribution, customers could purchase or rent games and easily make illegal copies.These illegal copies can be redistributed to friends and family or even worse, sold. The illegal distributionof their games has had a significant effect on many game publishers. According to the table above, thereare significant amounts of monetary loss in the game industry. For example, between 2004-2009 totalloss in the game industry is $41.5 billions. Gaming-on-Demand can protect game publishers from piracy.Moreover, Gaming-on-Demand eliminates all the physical packaging and production so that gamecompanies and service providers to reduce their expenses, earn more revenue, and reduce environmentalwaste. For these reasons the industry may provide its game services at a lower price.Finally, Gaming-on-Demand actually enables game developers to have more control over old and newgames in the process of being developed. For instance, the game developers can release a demo version oftheir new game with a limited access time allowing their clients to try their new game and give them somefeedback quickly. This means game developers can get a better understanding of how to makeimprovements on their new games.26 "Games on Demand and Piracy." Games on Demand Reviews | Download Full PC Games | Metaboli. 16 Apr. 2011<>.27 "Gamasutra - News - CESA: Portable Piracy Cost Game Industry $41.5 Billion." Gamasutra - TheArt & Business of Making Games. 17 Apr. 2011 <>.28 "UK Video Game Piracy Caused £1.45B In Losses & 1,000 Jobs Last Year." CrunchGear. 17 Apr.2011 <>.
  18. 18. 4.2. User benefitsGaming on-Demand is not only beneficial to the game industry but also gamers as well. This serviceprovides many great opportunities to many players in terms of entertainment, timing, and finances. Firstof all, Gaming-on-Demand allows customers to purchase their favorite games without leaving home orwaiting in long lines. The service is available around the clock and not just during business hours. Imagineif you want to immediately purchase and play "Call of Duty: Black Ops,” but the retail stores are alreadyclosed. You can take advantage of Gaming-on-Demand by subscribing to it immediately, regardless of thetime of day. When it comes to Gaming-on-Demand, gamers will never have to worry about whether ornot the game they want is in stock.Another user benefit is users do not have to carry any physical game cartridges with them. They can justdownload their favorite games from a server to any operating computer systems as long as there is a 29reliable Internet connection or Wi-Fi . They will not have to worry about losing their games if theyencounter any computer malfunction. In addition, benefit is that Gaming-on-Demand stores a player’ssave file, which contains all their progress in a video game. This enables the player to log out of one deviceand play their game from another device at the spot where they left off. In addition, theGaming-on-Demand offers users the chance to try a game before they actually purchase the game. Thus,giving an opportunity of playing free-trials will help to guarantee customers’ satisfactions. Gaming on-Demand also provides the subscription plans which helps many gamers save large amounts of moneycompared to the amount they pay from buying and renting games from retail stores. For example, OnLiveoffers a monthly, unlimited subscription play for only $9.99.Another advantage of Gaming-on-Demand is the price point to the consumer. In 2009, 183,500,000 USAconsumers alone spent $25,290,000,000. This equates to approximately $138 per year spent on games.Country Money Spent # of playersUSA $25,290,000,000 183,500,000UK £3,780,000,000 31,3000,000Germany €3,650,000,000 35,500,000France €3,570,000,000 25,400,000Netherlands €590,000,000 9,300,000Belgium €570,000,000 4,700,000Sources:1 - 10: Worldwide expenditure on video games in 2009.29 "Gamasutra - Features - Sponsored Feature: Changing the Game - Experimental Cloud-Based Ray Tracing." Gamasutra - TheArt & Business of Making Games. 13 Apr. 2011<>.
  19. 19. A Gaming-on-Demand subscription service such as OnLive charges $9.99 a month for 40 games.Comparing typical Gaming-on-Demand subscription costs to average yearly spending, we see that there isapproximately $18 in savings per year. However, the savings do not stop there. Typically, the PChardware required to play comparable console games cost several hundred more than console systems. 30 Figure 11: Price comparison of video game hardwareWith Gaming-on-Demand, the cost of a comparable PC will significantly drop at or below the cost ofconsoles. PC upgrades may not even be necessary in this case. Most modern computers going as far backas 2005 are capable of running a Gaming-on-Demand service. Additionally, the cost of owning new gameswill be fewer.30 Campbell, Devon. "The True Price of PC Gaming." The Married Gamers. Gaming Angels, 03 Feb 2011. Web. 19 Apr 2011.<>.
  20. 20. 31 Figure 12: Price comparison of video game hardwareUnder a subscription based Gaming-on-Demand model, users can get the latest games at a fixed cost rate.They will not only be paying less for games on average, but also gain the added benefits of a wide selectionand new releases at no additional costs.5. Disadvantages5.1. Old versus NewThe clash between the console and PC gaming industry and Gaming-on-Demand is inevitable. As of now,the console leaders (Sony, Microsoft, Nintendo) have managed to coexist by offering games that are onlyavailable on their respective devices. However, OnLive could aggregate these games into one placewithout requiring a console. Traditional gaming companies will not allow Gaming-on-Demand to take themarket share so easily. They are still maintaining a dominant market position because Gaming-on-Demand is still in its early stages of development. For example, OnLive still lacks features such asachievements and voice chat for its platform. These are difficult to do with the fact that OnLive requiresall of its bandwidth for players to play the game.The MicroConsole is OnLive’s first attempts at entering the home entertainment system beyond a gamer’scomputer. As a cheap and basic model, the MicroConsole cannot compete with the special some of thespecial features that the PlayStation, Wii, and Xbox posses. The Nintendo Wii features multiple controllerdesigns such as the Wii Remote and Nunchuk that can combine to form the Wii Wheel and Wii Zapper.All these controllers are motion sensitive to the console. Additionally, the recommended 3-5Mbps of 32bandwidth is still prone to poor video streaming and multiple service interruptions .31 Campbell, Devon. "The True Price of PC Gaming." The Married Gamers. Gaming Angels, 03 Feb 2011. Web. 19 Apr 2011.<>.32 Newman, Jared. "OnLive MicroConsole Review: Future Imperfect." Technologizer 01 Dec 2010: n. pag. Web. 19 Apr 2011.<>.
  21. 21. 5.2. Denial of ServiceDenial of Service attacks can also be a huge hindrance to the Gaming-on-Demand service. Denial ofService is an attempt by a malicious entity to make a computer resource unavailable to intended users.Large web services such as Amazon, Google, or OnLive stand to lose out on a Denial of Service attack.Each minute their system is down equates to substantial losses. The profiteering hackers responsible forthese attacks seek to blackmail technology companies by threatening an attack unless payments are made.These hackers are able to accomplish such massive attacks through botnets. Botnets are a community ofcomputers maliciously hacked through virus, worms, malware, etc. that becomes slaves to a mastercontroller, in this case, the hacker.Gaming-on-Demand services will more susceptible to such an attack. Their services rely on highbandwidth. Crippling their servers will result in a loss of frame rates for the user, while crippling a servicesuch as Amazon only end up in a slower page load time. Any amount of down time will equate to a loss ofbusiness. Through, much has been done in terms of Internet security to curtail the effects of an attack. Itis still very much a real threat.On the flip side, clients become much more susceptible to Denial of Service attacks. With higherbandwidth needs, there is less remaining to buffer any Denial of Service attempts. A gamer that wishes tostifle their competitor would require fewer resources to affect the target due to the already highbandwidth.6. The Five Forces Model6.1. ComplementorsOnLive’s complementors are companies that offer OnLive service as part of their product package. Thecomplementors will include tablet suppliers such as Apple, Samsung and Microsoft; computer supplierslike Dell, HP, Acer; and mobile companies like Apple and Android. HTC has invested $4M in OnLive sothat the HTC Flyer, its new tablet, would be capable of playing high-level HD games through Gaming-on-Demand services. Another company, British Telecom, a UK-based network provider, has signed a dealwith OnLive to stream video games as part of BT’s high-end domestic broadband package. OnLive’sgaming services would benefit many network service-based companies that seek to add gaming to themusic and video entertainment that users already enjoy through their networks.6.2. CompetitorsIf Gaming-on-Demand successfully takes over the game market, games on DVD and SD cards, as well asconsoles, will become fossils in history. Gaming-on-Demand’s competitors are planning on eitherdeveloping popular games that will be unavailable on the cloud or entering the Gaming-on-Demandmarket themselves. The leaders of the console industry (Sony, Xbox, and Nintendo) will not give up theirhold on the gaming industry easily. Because Gaming-on-Demand costs much less than gaming onconsoles, customers will change their way of gaming if console companies do nothing to keep theircustomers. For these leading game companies, letting gaming-on-demand take over game industry willmean a huge loss of both their profits and reputation. In order to keep their customers, companies willmost likely create or ask developers and publishers to build exclusive games, such as World of Warcraftand Starcraft, which would not be available on gaming-on-demand services. This way, console companieswould be able to keep customers loyal and maintain a competitive advantage.
  22. 22. Figure 13: Wii, Xbox 360, PlayStation, Nintendo and PSP possess a large market share in video game industry. Losing in video 33 game market, these companies will suffer a huge loss.Large companies such as Microsoft will likely go into Gaming-on-Demand. Although Microsoft does nothave gaming-on-demand technology, it already possesses a great deal of cloud computing technology. Itwill be easier, though not easy, for them to enter gaming-on-demand in the future. Microsoft recently 34launched Games for Windows Marketplace, which allows users to download games from Internet .Notice that this is different from Gaming-on-Demand because the customers actually download the entiregame to play locally on their consoles or computers. Microsoft does not any Gaming-on-Demand serviceyet, but perhaps their games on demand is the first step forward toward Gaming-on-Demand.Another competitor, GameStop has recently purchased Kongregate, Impulse, and Spawn Labs, which 35indicates its movement from being a strictly brick-and-mortar store to a digital game store . According toVenturebeat, “Spawn Labs was a new start-up company, and it develops technology which allows playersto play games on home machines while they’re traveling with laptops. The game plays in a console andstreams its game to the laptop.” Learning from Blockbuster, GameStop is recently working closing withSpawn Labs to develop game streaming technology so that GameStop will not be the next Blockbuster ingame industry.As mentioned before, OnLive’s patent on Gaming-on-Demand will be a great barrier to entry for existingcompetitors.33 "Video Game Charts, Game Sales, Top Sellers, Game Data - VGChartz." Video Games, Charts, Articles, News, Reviews, Community, Forums at The VGChartz Network. Web. 18 Apr. 2011. <>.34 Takahashi, Dean. "Microsoft Launches Its Own Games-on-demand Online Market | VentureBeat." Tech News | Innovation News | Money News | VentureBeat. 22 Oct. 2010. Web. 18 Apr. 2011. < its-own-games-on-demand-online-market/>.35 Takahashi, Dean. "Retailer GameStop Buys Its Way into Digital Distribution of Games | VentureBeat." Tech News | Innovation News | Money News | VentureBeat. 31 Mar. 2011. Web. 18 Apr. 2011. < gamestop-buys-its-way-into-digital-distribution-of-games/>.
  23. 23. Total Money Spent per Platform Per Country Consoles PC Games (in Game Portals (in Mobile Devices (in MMOs (in billions) (in billions) billions) billions) billions)USA $15.14 $4.15 $2.78 $1.1 $2.12UK £2.39 0.74 0.27 0.19 0.19GER €1.54 €1.32 €0.43 €0.18 €0.18FR €2.43 €0.69 €0.19 €0.10 €0.16NL €0.31 €0.17 €0.05 €0.01 €0.05BE €0.31 €0.15 €0.06 €0.01 €0.04 36Source(s): © Newzoo Games Market Report 2010Figure 14: Amount of Money Spent per PlatformAccording to the data from Newzoo Games Market Report 2010, $15.14 billion dollars was spent onconsole gaming in the U.S. If we also take the profit in PC games and Mobile devices into account, therewill be an additional $5.2 billion dollars within reach for to gaming-on-demand. 37 Figure 15: Gaming-on-Demand consoles possess a large market share in every country .36 Takahashi, Dean. "Americans Spend $25.3B Each Year on Video Games | VentureBeat." Tech News | Innovation News | Money News | VentureBeat. 09 May 2010. Web. 17 Apr. 2011. < each-year-on-video-games/>.
  24. 24. Gaming-on-Demand will have a deep impact on the current market distribution. The consoles’ 68%market share will be most affected by Gaming-on-Demand. The remainder of the segment will alsoexperience a similar loss in market share.6.3. CustomersGaming-on-Demand offers a combination of PC and console games for its users. Therefore, its consumerbase is a combination of the PC gaming market as well as the video game console market. With the rise of 38“casual gamers ,” gaming has become so diversified that there is no longer a stereotype for the averagegamer. Now, the games being offered span a wide genre for various types of people. The consumersdictate what kind of games Gaming-on-Demand should offer in the market. Gaikai is an exceptionbecause they earn revenue by charging game developers who would like to advertise a free demo of theirgame for customers to try. However with a limited amount of capital, Gaming-on-Demand companiessuch as OnLive must be cautious about what types of games to invest in. If they are unable to attractenough of a customer base with the games they possess, their business model is unlikely to succeed.According to a study conducted by the Entertainment Software Association (ESA), the best selling videogame genres were Action and Sports, each accounting for 20% of the sales in 2009. For computer games,they were strategy games (35%) and family entertainment (18.7%). As for OnLive, out of the 46 gametitles it offers, the most popular genres were Action (22%) with Adventure (18%) and Puzzle (17%) at aclose second and third. Figure 10 displays the actual distribution of games based on data from the OnLive 39website . Figure 10: A visual description of OnLive’s game titles organized by genre.Computer games are ideal for multi-player role-playing and strategy games because of the keyboard andchat and audio capabilities. Consoles are ideal for Action and Sports because the controller is the perfectinterface to play the game. Dedicated, hard-core gamers normally make up those who play computersoftware, which allows more inputs, while groups that want to do a social activity together normally playconsole games. However, since Gaming-on-Demand connects players across the Internet and uses37 See Footnote 1438 Boyes, Emma. "GDC 08: Are Casual Games the Future? - News at GameSpot." GameSpot Is Your Go-to Source for VideoGame News, Reviews, and Entertainment. GameSpot UK, 18 Feb. 2008. Web. 19 Apr. 2011.<>.39 See Footnote 24
  25. 25. multiple platforms, OnLive does not need to emphasize any one genre. Interestingly, they have a wideoffering of Puzzle games that is not seen in PC or Video Games. It is not as often explored in PC or consolegaming, but it is very popular among casual gamers playing mobile applications. With the ability tofeature any genre thanks to Gaming-on-Demand’s cross-platform functionality, it can service a wide userbase from the console and PC markets as long as it can gain rights to the hot content that gamers would bewilling to buy.6.4 SuppliersAs more companies move towards cloud computing, many vendors are adjusting their product lines tocreate products just for the cloud. For companies relying on cloud computing, the CEO of Dell, MichaelDell, comments, “We created a whole new business just to build custom products for those customers.Now it’s a several-hundred-million-dollar business, and it will be a billion-dollar business in a couple of 40years. ”Gaming-on-Demand requires three components for their service: servers, CPUs, and graphics cards. IBM,Dell, and Hewlett-Packard are moving aggressively in that direction by providing products specifically forthe cloud. For Gaming-on-Demand, which will require reliable and fast servers for its users, thesecompanies will be vital for creating server farms like those at OnLive. Intel and AMD manufacture CPUswhile NVidia and ATI produce graphics cards. These suppliers specially make these off-the-shelf productsfor companies that require massive amounts of processing capabilities for their services.ConclusionThe video game industry has changed dramatically since its inception. We have gone from waitingrooms to consoles in a relatively short period. Despite the changes in venue, the purpose of videogames has always been the same - to entertain users. Gaming-on-Demand fulfills this essentialinvariant by facilitating easier access to this entertainment.. It truly alleviates the pain points ofconsumers. Not only can a user play a game anytime and virtually anywhere, but it also allows theuser to play at the best graphics settings with no difference in network performance. All of this isserved at a lower cost to the consumer. With a service such as OnLive, software installation is quickand easy. Other services such as Gaikai make the user experience even easier by utilizing softwarealready installed on most users’ computer. Although still in its infancy, these services offer a hugeleap over the brick-and-mortar businesses of yesterday. The video game industry is simply moving tomore direct channels of distribution. Whether it is through better graphics, multiplayer gaming, ornew user interfaces, a la Microsoft Kinect, the video game industry will always be in a state ofprogression. We are now at the beginning of the next progression: gaming-on-demand.40 King, Rachael. "How Cloud Computing Is Changing Business - Business - Bloomberg Businessweek -" -Breaking News, Science and Tech News, World News, US News, Local News- 4 Aug. 2008. Web. 19 Apr. 2011.<>.
  26. 26. About UC Berkeley Center for Entrepreneurship &TechnologyThe Center for Entrepreneurship & Technology (CET) is an academic center and industrypartnership within UC Berkeley’s College of Engineering. Its mission is to equip engineers andscientists with the skills to lead, innovate, and commercialize technology in the global economy.Through teaching, programs, network building and research interlaced with strong industryparticipation, the Center teaches entrepreneurship as it relates to individual venture creation andto innovation within existing entities. To learn more about CET, go to cet.berkeley.eduAbout The Coleman Fung Institute For EngineeringLeadershipThe Coleman Fung Institute for Engineering Leadership prepares engineers and scientists —from students to seasoned professionals — with the multidisciplinary skills to lead enterprises ofall scales, in industry, government and the nonprofit sector. Headquartered in UC BerkeleysCollege of Engineering and building on the foundation laid by the Colleges Center forEntrepreneurship & Technology, the Fung Institute combines leadership coursework intechnology innovation and management with intensive study in an area of industryspecialization. This integrated knowledge cultivates leaders who can make insightful decisionswith the confidence that comes from a synthesized understanding of technological, marketplaceand operational implications. To learn more about the Fung Institute, go