The Newest Addiction Sony, Sega, Microsoft, and Electronic Arts are betting that games played over the Internet will be the biggest thing since Monopoly.
By Marc Gunther

(FORTUNE Magazine) – Last month David Hoem, a 21-year-old student in San Jose, Calif., cashed out of a most unorthodox Internet investment. He sold a magician, a warrior, a thief, two houses, 120,000 pieces of gold, and all the armor, swords, and crossbows he had accumulated playing Ultima Online, a medieval role-playing game that unfolds in a two-dimensional fictional world called Britannia. Another aficionado paid him $510 after an auction on eBay, where players buy and sell the virtual property of Britannia every day. Prices can be steep--castles in the best locations, which come with skilled characters and magical spells, sell for $2,000 to $3,000. And you thought Internet stocks were overpriced.

Why do real people pay real dollars for fictional characters and digital real estate? They are captivated by the world of Ultima Online, where thousands of players assume fictional personas to pursue quests, slay dragons, engage in combat, and fall in love. Not even Richard Garriott, the 38-year-old Texan who created Ultima for game industry giant Electronic Arts, expected his world to develop an economy so robust that there would be a floating exchange rate between Britannia gold and U.S. dollars. "This has transcended virtual reality," Garriott says. "It has become as real as life." For thousands of addicts, the game they call UO has all but taken over their lives; the average player logs 17 hours a week. Says Hoem: "Sometimes I'd play the whole weekend--20 hours, 30 hours. It's all-consuming."

Like most addictions--think tobacco or gambling--Ultima is a lucrative business, albeit still a small one. More important, the game is a watershed in Internet entertainment, where up to now pioneers have found mostly frustration and red ink, and where the only real moneymaker has been pornography. Ultima has demonstrated that people--125,000 at last count--will pay for compelling online entertainment; fans shell out $40 to $70 to buy the game's software at retail, then pay $10 a month to play, on top of their Internet-access fees. With its steady subscription-revenue stream, the business is so profitable that giants Sony, Microsoft, and Sega Enterprises are building virtual worlds of their own. That's the best evidence that a big new business could be emerging. Says Dan Scherlis, CEO of Turbine Entertainment Software of Westwood, Mass., which builds games for Microsoft and Sega: "This is not a genre of game but a breakthrough new medium. It provides a completely new social, collaborative shared experience. We're basically in the Internet community business."

Games like Ultima are called "persistent worlds" because they unfold over time, even as individual players sign on and off. They offer enough complexity that gamers will pay to play despite an abundance of free games online. Sony's medieval fantasy, Everquest, was the first to offer 3-D graphics when it was unveiled in March; by June more than 100,000 players had subscribed. "We were profitable within a month," boasts Kelly Flock, president of 989 Studios, the Sony unit that created Everquest. This fall Microsoft will publish Asheron's Call, yet another world of swords and sorcery. Sega has equipped its new Dreamcast videogame console with a modem to enable Internet play; its first virtual world, Frontier, will be a vast science-fiction arena populated by thousands of creatures that grow and evolve.

To be sure, online games make up just a tiny fraction of the video- and computer-game industry, the fastest-growing segment of U.S. entertainment. Ultima generated only about $17 million in revenues in 1998, vs. $6.3 billion for the game industry as a whole, which grew 29% over 1997. (The big money was in sales and rentals of videogames for consoles made by Sony and Nintendo.) Even in the online world, the most popular games are not Ultima or Everquest but digital versions of card, board, and trivia games like backgammon. They can be played for free at sites like Microsoft's MSN Gaming Zone, which attracts up to 450,000 visits a day.

While free games generate traffic, though, it's pay-for-play games that are attracting investment, largely as a result of the UO phenomenon. Ultima's online success surprised even Electronic Arts and Origin Systems, an EA unit founded by Garriott that has published single-player PC versions of Ultima since 1982. "Six hundred years ago? Men in tights? Be a blacksmith?" says EA President John Riccitiello. "It was never a big franchise." Now EA, the $1.2-billion-a-year game industry leader, wants to grow online in a big way. It's taking Sim City, its bestselling strategy game, onto the Web, and is also developing a "hot-rod world" that will allow enthusiasts to act as drivers or mechanics, customize their cars, join hot-rodding clubs, and win virtual prize money by racing. Other companies are developing virtual worlds set in the Old West, on a World War II battlefield, and in outer space.

Clearly the UO experience isn't for everyone. The game's roots go back to Dungeons & Dragons, a 1970s game that used paper and dice and was popular with teens like Garriott, then a high school student in suburban Houston. D&D spawned both single-player PC adventure games like the original Ultima, which Garriott created in 1980, and text-based, noncommercial games known as multi-user domains, or MUDs, which were played on the Internet before the advent of the World Wide Web. But fans had to choose between playing alone on a computer with graphics or playing with others online in a drab, text-only environment. Not until Ultima Online's release could thousands share a visually rich, complex world like Britannia.

Once there, each player selects an avatar, settles on a job--career options include adventurer, warrior, healer, magician, bard, thief, tailor, fisherman, and blacksmith--and develops skills, such as weaving cloth, fighting monsters, or casting magical spells. "Although people play for different reasons, the essence of the appeal is to live out a fantasy," says consultant Amy Jo Kim, who has studied UO for her upcoming book, Community Building on the Web. Some enjoy the combat, others the status that goes with developing skills, still others the socializing via online chats that accompany the action. "Solving shared challenges brings total strangers together like nothing else on earth," explains Jeremy Young, 24, a California state government intern known as Rainman on UO. "The emotions shared are the same, be they in print, in pixels, or in the real world."

Player involvement goes deep. Britannia's weekly calendar of events (at lists battles and duels, weddings, a storytelling night, and a cockfight, all organized by players. Like any small city, this one has problems, including racism--for which players are instantly banned from the game--and crime. Emotional debates rage about online murder; some people want protection from players who kill and loot, while others say the danger adds excitement to UO. (Victims become ghosts and can be reborn to play again.) Garriott, who arbitrates such matters, has mixed feelings; as the rules now stand, those who kill more than once have a bounty placed on their heads, encouraging a rough vigilante justice. "UO is still the Wild West in many ways," he says. "We try to make laws that encourage good behavior, but we think it's reasonable for people to choose to be outlaws." Mindful of the criticism of violent games in the wake of the Littleton, Colo., shootings, Garriott says his games are designed to "reinforce positive values."

Born on the Fourth of July in 1971, the soft-spoken Garriott is an American original. Reading Tolkien's The Lord of the Rings helped spark his fascination with medieval worlds. His father, Owen Garriott, is a physicist and former astronaut who spent 60 days in space aboard Skylab II in 1974. (Richard would call him on a special phone for help with math homework. "At the time, it seemed normal," he says.) His mother, Helen Garriott, is an artist and teacher who served as Origin's art director when Richard and older brother Robert, who has an MBA from MIT, formed the company in 1982. By then, Richard had taught himself to program a computer, dropped out of college, created several bestselling games, and made a small fortune, which he's invested wisely to become one of Austin's richest tech millionaires. He and Robert sold Origin to EA for about $30 million in 1992.

Some years back, Garriott spent a bundle building a 4,500-square-foot hilltop house outside Austin, complete with dungeons, secret passageways, a moat, an indoor swimming pool with artificial rain effects, an observatory, and, in the backyard, a trampoline and a 1,150-foot-long suspension bridge. Every few years, aided by about 200 volunteers, he spends tens of thousands of dollars on elaborate special effects and opens up the place to kids as a haunted house for Halloween. (He's now building a new house, four times as big.) An amateur scientist, Garriott has tracked gorillas in Rwanda, canoed down the Amazon, hunted for meteorites in Antarctica, flown a MiG jet in Russia, and dived to view the Titanic in a submersible with his girlfriend, personal trainer Heather Smith.

His next challenge is to create a virtual world that will appeal to a mass market. That will require first breaking out of the swords-and-sorcery mold. It will mean finding new ways to market and distribute games so that they appeal to nongamers. Most of all, it will require making the worlds both easier to play and less time-consuming--more like an America Online chat room, say, than UO. That's tricky, Garriott concedes: "One of the hardest skills in our industry is the ability to add depth without adding complexity." In time, though, game developers believe they can design a complex immersive world that welcomes newcomers, much as the World Wide Web and AOL helped attract the masses to the Internet. Edward Lerner, president of Multitude, a game company in San Mateo, Calif., predicts that the use of familiar imagery will start the boom: "The three biggest online game five years from now will be Barbie Online, Star Wars Online, and Star Trek Online." Now there's a concept--put R2-D2 or Mr. Spock into a virtual world. Millions of fans will surely follow.