SAN FRANCISCO (CNN/Money) -
Los Angeles trades in its visage of glamour for geekiness this week as the Electronic Entertainment Exposition comes to town, bringing with it thousands of ardent gamers and the industry that nurses them.
In fact, with "The Matrix Reloaded" premiere scheduled for Thursday, Hollywood's geek-to-actor ratio might reach levels not seen since "Tron" made its debut.
And while the gamers duke it out with one another in various demo booths throughout the L.A. Convention Center, a couple of industry behemoths locked arms the day before the conference started.
Game publishing giant Electronic Arts (ERTS: Research, Estimates) planted its flag squarely in the Sony (SNE: Research, Estimates) camp, announcing that it will make its blockbuster sports games available only for the PlayStation 2 online service, and not for Microsoft's Xbox Live. EA will continue to make non-online games for both systems.
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The deal, first announced in the Wall Street Journal, is a short-term agreement, and none of the industry-watchers I spoke with thought the announcement was particularly important in the short term.
But the deal's long-term implications, and the issues it raises for the multibillion-dollar gaming industry, will help shape the sector for the foreseeable future. And investors who are concerned that EA's stellar run (except, so far, in the area of online games) will take a hit, now that the company has gone against Microsoft (MSFT: Research, Estimates), needn't worry. At least for now.
Here's what's at stake
Anyone who follows this sector knows that online games are stirring up plenty of excitement. Gamers love them because they add an entirely new dimension to the playing experience. And the industry loves them because they offer the possibility of recurring subscription revenue and valuable ongoing marketing and game-usage data.
But with just a couple of exceptions, online gaming is still in the "prospective" stage. EA's online division lost $157 million last year (which perhaps explains why the company will no longer break out its online results), and despite the heavy marketing push surrounding it, "The Sims Online" failed to reach the levels of participation that EA expected.
However, even if EA hasn't yet figured out how to engender widespread success with online gaming on its own, the company views its successful relationship with the console manufacturers as a Trojan horse that can help it crack the online gaming world. EA made a full third of its revenues last year selling games for the immensely popular Sony PlayStation 2 platform. Even the newer Xbox titles constituted 10 percent of EA's revenues.
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But it was Sony that spoke the language EA wanted to hear regarding online games: Sony allows EA to own the relationship with the online gaming customer. Sony's contribution to the EA partnership, essentially, is to agree to sell a $50 add-on adapter that allows PlayStation 2 users to play games online.
EA gets to use the infrastructure in which it invested so heavily and collect the revenue and marketing data. Microsoft, on the other hand, built out its own infrastructure (and service, called Xbox Live) and handles the billing and customer relationships.
Even though the Sony deal grants EA the terms it desires, it hardly guarantees success for the company's online game efforts. According to a recent Jupiter Media survey, 60 percent of console owners have no interest in connecting their consoles for online play.
"That's not said and done," cautions Jay Horwitz, an analyst with Jupiter. "It's still very early. People have little conception as to what it means to play online."
Of course, companies like EA, Microsoft, and Sony all have ideas about what it means to play online, and the potential upside it offers to their revenue models -- more subscription revenues, less reliance on seasonal swings and boffo hit titles.
By hitching its horse to the market leader that provides the most favorable terms, EA is making a safe, almost no-brainer business decision. And in the world of technology, it's a truly rare one that involves going against Microsoft.
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