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Casual Games Providers Experiencing Growing Pains

July 12, 2006

SEATTLE, Washington — Anyone desperate for a break from crunching numbers, minding the kids or studying for exams knows how easy it can be to find distraction in the simple brain teasing of computer games like Sudoku, solitaire or mahjong.

And that’s exactly what online game services from companies such as RealNetworks Inc. and Electronic Arts Inc. are banking on. As more people get hooked on playing such “casual games” online, game providers are seeking out better ways to make money off the phenomenon.

“You’re seeing that there’s a big audience for it. The challenge has really been monetizing that audience and getting them to pay for it,” said David Cole, president of market research firm DFC Intelligence.

Casual games — generally defined as easy-to-learn, one-player games that you can play for five minutes or five hours — are alluring to companies in part because they tend to attract women and people over 35. That’s quite a different audience than the young men traditionally associated with video game consoles and other types of computer games.

The business also is attractive because, if the right sales model is found, companies say it can be highly profitable. That’s especially true for those who produce the games in-house, and then can easily — and cheaply — modify them for multiple countries and languages.

“There are a few things that are wonderful about the games business,” said Rob Glaser, chief executive of Seattle-based RealNetworks, whose casual games division represented 21 percent of the company’s overall revenue in the first quarter of this year.

But one big challenge is that many of the games are available for free. To make money, companies are trying out a number of ideas, including embedding advertising into free games, selling all-you-can-play memberships devoid of ads and using free trials to entice people to purchase downloadable versions.

“There’s been a lot of trying everything to see what tracks, to see what works — a lot of experimentation,” said Anita Frazier, an industry analyst with NPD Group.

Still, many expect the business of selling casual games online to only get stronger.

DFC Intelligence estimates that revenues from casual games worldwide will grow to $953 million this year, from $713 million last year, after steadily rising from $228 million in 2002.

But Frazier, with NPD Group, notes that online game sales have partly come at the expense of profits companies used to make selling games in retail stores.

Electronic Arts’ Pogo unit offers free casual games, a subscription service and downloads. Beatrice Spaine, senior director of Pogo marketing, said the business has been profitable because the company has been able to make money off different users in different ways.

For example, teens may be willing to sit through ads but unwilling to pay for a service, while an older woman may be more willing to pay the $35 per year subscription fee so she doesn’t have to wait for intermittent ads.

The advertising industry’s increased interest in online opportunities also has helped. A few years ago, Spaine said one big challenge was convincing advertisers that anyone but young men were playing its games. But in part because many of the sites’ users are women over age 35, the company has recently been able to sell ads for name brands like Dove soap, she said.

Still, Cole of DFC Intelligence notes that major brands targeting women are still primarily interested in traditional advertising, like in television and glossy magazines, rather than in online games.

“It’s still small potatoes when you look at what they can do in terms of mass advertising,” he said.

For now, RealNetworks’ Glaser said his company primarily gets money from people buying its subscription game service or purchasing downloads for about $20. But many in the industry estimate that only about 2 percent of free trial downloads are converted into purchases, so companies including RealNetworks are mixing advertising more deeply into free versions.

In one recent promotion on Electronic Arts’ Pogo service, a game where the user aims to eliminate rows of bubbles was tweaked to instead show rows of Oreo cookies, which would drop into a glass of milk when cleared.

RealNetworks recently started displaying ads during downloading and at regular intervals during game play, and the company also is considering letting people play trial versions longer if they consent to more advertising.

Glaser said RealNetworks increased the ads cautiously because it was wary of alienating users already loyal to a less ad-cluttered service.

“The idea is to do this in a way that sorts of adds to the ecology of the games business, rather than to do it in a way that either turns off consumers so they don’t download them or (takes) from existing revenue streams,” Glaser said.

Besides Electronic Arts and RealNetworks, the most popular online game sites are from Yahoo Inc., Microsoft Corp.’s MSN and Time Warner Inc.’s AOL, according to data from comScore MediaMetrix. As the business grows, a key challenge is keeping users from drifting off to other sites where similar games might be available.

Paul Thelen, chief executive of Big Fish Games Inc., uses mass mailings and other tactics to aggressively try to reach customers — and then employs regular e-mails and an optional toolbar to try to keep them.

“We call ourselves a marketing distribution company, and our product is games,” he said.

The tactic appears to be paying off. Privately held Big Fish said revenue for its game site grew to about $6 million in the second quarter ended June 30, from $1.16 million a year earlier. The four-year-old company broke even in the most recent quarter, Thelen said.




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