CABLE'S COOL TO HOT GAMES

It doesn’t sound possible. At least 300,000 people pony up $25 to $50 each for a game on compact disc. Then they pay an extra $10 a month to use that CD-ROM to go online and play the game with fellow fans.

Yet that’s exactly what Sony has done with its wildly popular EverQuest role-playing game. Throw in Electronic Arts’ Ultima Online with 200,000 participants and the other multiplayer "men in tights" games, and an estimated 1 million people in the United States are paying to play online monthly to a tune that Forrester Research projects will hit $1.6 billion this year.

Nothing better underscores the potential of the $20 billion-a-year interactive gaming business, a figure projected by DFC Intelligence to grow to $30 billion or more during the next five years.

Cable operators, so anxious to invade the video store and push into phone booths, have been taking a wait-and-see attitude toward the video game arcade, despite what looks like a rich revenue stream.

So why aren’t cable operators rushing to embrace what looks like a sure cash cow?

You’d think Time Warner Cable, for one, would be plunging into the creation of an interactive game channel.

After all, the MSO already knows how popular games can be. It tested interactive games on its Full Service Networks in Orlando, Fla., in 1995 and 1996 and helped create the ill-fated Sega Channel, which spokesman Mike Luftman says was ahead of its time.

Yet gaming is not even on its agenda for 2001.

"Interactive gaming is something that is very attractive to customers, but right now our focus is on our movies-on-demand business, which we’re in the process of launching," Luftman says. "We see the interactive gaming business as coming on a little later down the road."

Instead, Time Warner Cable is more than happy to let new parent America Online handle interactive gaming. It’s an area AOL itself has struggled with, turning its gaming channels over to Electronic Arts’ EA.com.

Gaming isn’t a complete no-brainer. Just ask Sega, which last week said it was slashing prices and phasing out production of its Dreamcast console in the face of overwhelming competition from PlayStation and the coming Xbox from Microsoft.

Sega also signed a deal last week with British set-top box maker Pace Micro Technology to create an on-demand system that would download game software to a hard disk in a unit that would also include a personal video recorder.

Andrew Wallace, Pace SVP-worldwide marketing, says the box was originally designed for cable, but the company decided to broaden its use to datacasting. So far, no MSO on either side of the Atlantic has shown interest in the box, which won’t be available for at least a year.

Nevertheless, many executives at computer manufacturers, Web sites and tech companies tout games as the shortest path to profitability.

Games have evolved into the strongest force pushing young consumers to the Internet, with 22 million Americans 18 and younger citing gaming as their chief reason for going online.

Advertising for online gaming Web sites alone will hit $150 million this year, The Yankee Group reports. Consumers bought 6.4 million video game consoles last Christmas season, just behind the VCR as the most sold electronic device.

"Gaming is the No. 2 most popular application for the PC" after general Internet use, says Michael Goodman, senior analyst for The Yankee Group.

Once gameplayers go online, a desire for better interactivity leads in an obvious direction — broadband, says Jeff Brown, spokesman for top game producer Electronic Arts.

"We think it’s coming. We think consumers will like it, and we think gaming will be the killer app that gets people to go for broadband," he says.

This despite Electronic Arts’ reluctance to put its eggs in the broadband basket, which it does not expect to grow as quickly as many others in the industry insist.

Electronic Arts does believe in online games at any speed. The company’s CEO John Riccitiello boasts that by this summer, online games that plunge players into cyberworlds where they can virtually exist, marry and die will "start to look like legitimate competition for TV."

While few naysayers expect the interactive gaming bubble to burst, experts have a hard time agreeing on where it will ultimately find a home — the personal computer, game consoles, online servers or interactive television.

For the moment, console games have surged to the fore, taking about 75% of the market, in part thanks to the push for Sony’s PlayStation 2 and hype over Microsoft’s upcoming Xbox and Nintendo’s GameCube, both of which are due later this year.

Consoles have a big advantage over the competition — people will pay for them. A recent report from Cahner’s In-Stat Group estimates sales of game consoles will nearly double by 2004, with online gaming posing little threat to the console-based gaming market.

"In most consumer homes you’re going to TV for entertainment and a PC for productivity," says David Cole of DFC Intelligence, adding that people are reluctant to shell out hundreds of dollars more for either just to play games.

"When you talk about hardware, game systems are the one area people are willing to spend money on," he says.

Console games will continue to lead the industry, but with an increasingly online component for role-playing games and multiplayer games. PCs will hold their own for more complicated, keyboard-oriented strategy games. The big question is whether interactive television will be a wallflower at the dance.

CABLE EYES I-GAMING

Does cable fit into the interactive gaming world?

The answer, depending on whom you talk to, is yes, no and maybe.

Most "interactive" television gaming in the United States so far has been virtual ITV — play along on the Internet while watching a TV program.

Buzztime, the barroom interactive trivia game that has had success on WebTV, was scheduled to begin a TV trial with AT&T Broadband in December. Buzztime president Ty Lam, however, says delays in Microsoft’s ITV software rollout, coupled with slow production of the DCT5000s and AT&T’s reorganization, has postponed trials with the MSO until late summer or early fall.

Keith Kennebeck, an analyst with Strategis Group, says MSOs should be expected to wade slowly into new area like games.

"Cable operators are an extremely conservative bunch, financially and strategically," he says. "A lot of time the cable industry reacts only if they see a real extreme threat, as they did with DBS and DSL."

Some experts say if cable could come up with a set-top box that could perform as well as a PlayStation 2, the price with today’s technology would be in the $500 range — an amount neither operators nor consumers are likely to accept.

The other option for cable operators to cash in on interactive gaming would be to upgrade hardware at the head-end, but that could be a back-seat priority to an industry that is already in the midst of upgrading its entire plant.

Even if operators choose not to push interactive TV gaming, they can at least keep a toe in the online market through high-speed services such as Excite @Home and Road Runner, says Kennebeck.

"High-speed Internet offering is key," he says. "And all the cable operators are doing the very best thing by promoting it."

Top-of-the-line console and online game developers are skeptical of ITV’s game potential.

"We’re not particularly focused on that," says Brown of Electronic Arts.

He questions whether viewers have any interest in playing elaborate games on television, which is primarily a passive entertainment medium.

"It’s like dogs that can fly, birds that can bark," Brown says. "I just don’t see the consumer buying into it."

Sega’s Marker is more diplomatic.

"Of course it would be beneficial for cable operators to encourage interactive gaming because it is an added revenue stream for them," she says. "Whether ITV does that as well is tough to say this early in the game."

For cable operators, there are practical concerns, even if they are intrigued by the possibilities. They have already committed themselves to rolling out VOD and are looking next to personal video recording technology and t-commerce possibilities, says The Yankee Group’s Goodman. That leaves scant energy and resources for the demands of interactive gaming.

There are technical concerns. The current crop of DCT 2000s, and even the long-awaited DCT 5000s, are unable to play in the same sandbox with the increasingly sophisticated game consoles.

"The Sonys and Nintendos, and now the Microsofts of the world, have such an advantage in that space, in manufacturing those consoles," Kennebeck says. "It’s really hard to compete with that."

Walter Maio, VP/director-advanced consumer research for Probe Research, points out another concern for operators.

Cable needs to guard one of its most precious assets — the clarity of its video feed, which could be undermined by lower-quality game video.

"They already have a tough row to hoe at this point, just to preserve, contain and keep their audience content," Maio says. "They don’t want to compromise their video quality at any point."

WHAT ABOUT EUROPE?

Even if gaming boosters are still ahead of the curve in the United States, interactive gaming on television is already a huge success — in Europe.

The research firm Datamonitor estimates 78 million Europeans will be playing games on interactive television by 2004. Leading the way are interactive game channels on digital TV platforms such as Two Way TV — backed by NTL and the Hilton Group — and PlayJam.

The ITV games aren’t as elaborate as platform games and are designed instead to work from the buttons on a remote control. PlayJam’s offerings include Push My Button, a quiz show-style game, and Forest Fire, in which the viewer tries to douse the virtual flames before it’s too late.

Liberate Technologies has been cutting its ITV teeth in Europe, where cable operators are ahead of their U.S. counterparts, says Pete Larsen, director of business development. American MSOs should pay attention to what’s happening on the other side of the Atlantic when it comes to interactive gaming, he says.

"NTL is offering three different game channels on their networks, and those game channels are the most popular services being offered on the NTL networks right now," Larsen says. "There is a 30% to 40% take rate to games, and of those people who play games, they are playing three to four times a week, and up to 80 minutes per session."

While he refrains from using the phrase "killer app," Larsen says, "Interactive gaming turns out to be a very big draw."

Based on those results, Liberate, which has pilot deals with Insight and Cablevision, has accelerated its game development. In January the company announced deals with six top ITV game developers, including Runecraft, which has access to Hasbro game titles.

Not everyone is willing to concede ITV must play second fiddle to consoles and PCs when it comes to rich media games and online interactivity, however.

Into Networks CEO Vincent Grosso, who headed AT&T’s interactive television unit in the early 1990s and later worked for NBC Interactive, says his company proves the sky’s the limit. Into Networks, partly owned by Adelphia, streams software exclusively for Road Runner and also serves Excite @Home.

Streaming software, including games, should be cable’s model, Grosso adds, and not just streaming through cable modem to a PC.

"There’s nothing that says you can’t do this through set-top boxes," he says. "The principles are basically the same."

While there are roadblocks — TV resolution and the fact game designers are not developing for ITV — Grosso says the key to success is instant engagement, or action as soon as the viewer clicks, which his company feels it can assure.

Into Network’s chief rival, Media Station with its online SelectPlay service, is another potential partner in ITV gaming. SelectPlay — which is carried by cable operators including Comcast and Time Warner Cable via Media Station’s deal with Excite @Home — offers downloadable gaming titles from top brands including Blizzard, Knowledge Adventure, Sierra, Atari, Humongous Entertainment, Microprose and Wizard Works. The company says more than 85% of its titles are provided by top-10 CD-ROM publishers.

The Yankee Group’s Goodman agrees that even the adolescent slice-and-dice gamers could be won over to interactive television.

"Into Networks already has a first-person shooter game, I believe," he says. "If you can attach a joystick to the TV, and you have a high-speed connection with a set-top box, there’s no reason you can’t play Doom or Quake 3 or something along those lines. As long as you have the software stream down to you, you’re good to go."

The mantra everyone in gaming must remember is that most players are technology-agnostic, Goodman says. While you may not see Sonic the Hedgehog or Super Mario Brothers going over to the set-top box any time soon, there is no reason cable should necessarily cede the high gaming ground to PCs and consoles.

"Gamers really could care less about the system itself," he says. "It really doesn’t matter. What matters is that games that come out on the console — that’s what people buy. Content is king."