SAN FRANCISCO (CNN/Money) -
Spend some time talking with fans of Microsoft's Xbox, Sony's PlayStation 2, or Nintendo's GameCube, and it won't be long before you hear the word "networked" or "online."
And for good reason: Sony and Microsoft are pushing hard to beef up the online offerings of their next-generation consoles, expected to premiere in the next few years.
If they're properly rolled out, and if consumers take to them as they have to PC-based networked games, online console games could provide a much needed revenue boost to the gaming sector.
Gaming, perhaps more than any other tech sector, is notoriously cyclical. Right now, the market is ebbing, which typically happens as the luster from the new consoles diminishes and no new products take their place. With recurring subscription revenue from online games (Microsoft's approach) or through online microtransactions (Sony's approach), these cycles could be somewhat tamed.
There's room for everyone at the party
But game console makers and publishers aren't the only ones that stand to benefit if online console gaming takes off. According to analyst and industry sources, games are one of the biggest drivers -- if not the biggest driver -- of broadband adoption.
Given that fact, national ISPs such as AOL, EarthLink, and Microsoft's MSN service are sitting on a tremendous opportunity to grow their broadband subscriber rolls.
You'd never guess it from looking at the number of cross-promotional partnerships, however. Right now there's a disconnect between the emerging gaming opportunity and the efforts of ISPs.
Rather than actively seeking partnerships above and beyond the cursory "compatibility" designation, many of these ISPs are sitting relatively idle.
One reason is that the market is still very new, with the consoles cycling through their 1.0 networked models. Another is that the market is still somewhat small. Research firm IDC estimates that online console gaming revenues were $29 million in 2003 and are expected to reach $226.4 million by 2007.
But I believe there's also a third reason: institutional inertia. Investors in ISP companies should look for more active promotional partnerships.
"You'd think ISPs would [actively promote and] partner with these gaming companies," says Schelley Olhava, a gaming analyst with IDC. "But they haven't."
The smaller players
None of the major ISPs has. But look to some of the nimbler, smaller companies, and you'll find some innovative arrangements.
One of the most compelling comes from Speakeasy, a privately held ISP in Seattle. Last year the company offered a free Microsoft Xbox to every customer who signed up for DSL and agreed to a contract with the company.
"It was the most successful broadband promotion we've ever had," says Edward Bender, Speakeasy's director of online gaming.
Previous partnerships between ISPs and content providers have proven successful.
A current example is the Yahoo/SBC promotion, whereby Yahoo gets a cut of revenue from people who sign up for SBC broadband Internet service through the portal. The deal already accounts for most of the $88 million in subscription revenue reported for Yahoo in the quarter ending March 31.
To be sure, the major ISPs are interested in online games as a possible driver for broadband growth.
"We believe very strongly in what we think will be the continued growth of online gaming in consoles," says Matthew Bromberg, general manager of games for AOL. "And the promise of a great gaming offering is a big driver for broadband adoption for those that don't have broadband."
At the E3 conference in 2003, AOL demonstrated a partnership with Sony that would lead to some AOL features -- such as chat and video feeds -- being incorporated into the PlayStation, but the product has yet to officially launch.
"We've found that online gaming and broadband are working symbiotically to spur each other's growth," says Victor Owens, a director of product marketing at EarthLink. EarthLink is listed as a "preferred ISP" with Xbox, and it has "structured a relationship" with both Xbox and Sony.
But right now, no ISP has jumped out of the gate to partner with a game console maker in a way that brands it as a gaming-friendly service.
That's a mistake, but also an opportunity for a forward-thinking ISP. Investors should watch for such an announcement as we move ever closer to the expected launch dates of the next-generation consoles.
"ISPs are looking to transform from being data and access providers to entertainment service providers, because consumers will more readily pay for entertainment than data," says P.J. McNealy, an analyst with American Technology Research in San Francisco. "The ISP partnerships will only grow bigger."
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